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This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation]
Mr. A, Mr. B and Mr. C carry on a business as partners in partnership ABC, which has a June 30 fiscal period end. They wish to form a partnership with Mr. D. Mr. A, Mr. B and Mr. C will avail themselves of the provisions of subsections 98(3) and 97(2) of the Act and thus transfer their undivided interests in the property to the new partnership ABCD. Have Mr. A, Mr. B and Mr. C ceased carrying on the business for the purposes of subsection 34.1(8) of the Act given that partnership ABC has ceased to exist?
Position:
We would be prepared to accept that subsection 34.1(1) of the Act does not apply in such a situation, provided that the dissolution of ABC and the creation of the new partnership are not motivated by tax considerations.
Reasons:
Subsection 34.1(1) of the Act applies at the partner level and not at the partnership level. According to the relevant partnership legislation and case law, the business is carried on by the partners and not by the partnership. Therefore, there are arguments that if the business carried on by the partners in the new partnership is the same business carried on in the old partnership, subsection 34.1(8) of the Act would not apply and the partners would be required to estimate their income from the new partnership in accordance with subsection 34.1(1) of the Act.
However, there are also arguments that subsections 34.1(1) and (8) of the Act should be interpreted in light of section 249.1 of the Act, which defines the carrying on of a business. According to the wording of subsection 249.1(1) of the Act, the carrying on of a business appears to be at the partnership level. Under this interpretation, the business would cease to exist at the time the partnership ceases to exist, with the result that subsection 34.1(8) of the Act would render subsection 34.1(1) of the Act inapplicable in the present situation.
XXXXXXXXXX 2001-010781
Mario Gingras, CGA
May 17, 2002
Dear Mr. Gingras
Subject: Request for Technical Interpretation
Application of subsection 34.1(8) of the Income Tax Act
This is in response to your letter of October 29, 2001, in which you requested our opinion on the above subject. We apologize for the delay in responding to your request.
THE FACTS
Partnership ABC ("ABC"), of which Mr. A, Mr. B and Mr. C are partners, has a June 30 fiscal period end in each year. In order to maintain this fiscal period end, a valid election was filed by each of the partners in accordance with paragraph 249.1(4)(a) of the Income Tax Act (the "Act").
On November 1, 2001, ABC was wound-up in accordance with the rules in subsection 98(3). As part of the winding-up, each of the former partners was allocated an undivided share of each of the assets of the wound-up partnership. ABC ceased to exist in accordance with the laws applicable in its jurisdiction. Pursuant to subsection 99(1), the winding-up of ABC resulted in a fiscal period end immediately prior to the winding-up, i.e. on October 31, 2001.
Immediately thereafter, Mr. A, Mr. B and Mr. C transferred their undivided share of the property received to a new partnership whose partners were Mr. A, Mr. B, Mr. C and Mr. D. The latter obtained an initial interest in the new partnership in consideration for a nominal sum of money. An election under subsection 97(2) was made by each of the transferors.
The new partnership now carries on a business with the same activities as those previously carried on by ABC, in the same physical location, with the same employees, but under a different company name. The fiscal period end of the new partnership will be June 30, and an election under paragraph 249.1(4)(a) will be filed by the partners.
QUESTION
You would like our opinion as to whether subsection 34.1(8) will apply to this situation so that Mr. A, Mr. B and Mr. C will not have to estimate their business income from the new partnership for the period from November 1 to December 31, 2001.
OUR COMMENTS
As stated in paragraph 22 of Information Circular 70-6R4 dated January 29, 2001, it is the practice of our Directorate not to issue written opinions regarding proposed transactions otherwise than by way of advance income tax rulings. Furthermore, when it comes to whether a completed transaction has received appropriate tax treatment, that determination rests first with our Tax Services Offices following their review of all facts and documents, which is usually performed as part of an audit engagement. However, we can offer the following general comments, which may not fully apply to the situation you have submitted to us.
A partnership is deemed to be a separate person for the purposes of computing its income or loss under paragraph 96(1)(a). However, paragraph 96(1)(d) provides that section 34.1 is not to be taken into account in computing the partnership's income or loss. Once the income or loss has been calculated at the partnership level, paragraphs 96(1)(f) and (g) provide for the allocation of the income or loss among the partners.
Subsection 34.1(1) applies to an individual who carries on a business in a taxation year with a fiscal period that begins in the year and ends after the end of the year and who has made an election under subsection 249.1(4) in respect of that business. Where such an individual carries on a business within a partnership, the calculation provided for in subsection 34.1(1) is therefore made at the level of the member and not at the level of the partnership.
Pursuant to subsection 34.1(8), no additional amount is required to be included in computing an individual's income from a business for a taxation year where, among other things, the individual ceases to carry on the business in the year.
Paragraph 2 of Interpretation Bulletin IT-90 states that: "Generally speaking, a partnership is the relation that subsists between persons carrying on business in common with a view to profit". Article 2186 of the Civil Code of Québec provides that:
“A contract of partnership is a contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share any resulting pecuniary profits. …”
In Percival Samuel Robinson Trust v. The Queen, 98 DTC 6065, the judges of the Federal Court of Appeal had to determine whether a trust, as a limited partner, was carrying on an active business. Referring to various statutes of the Province of Manitoba, including The Partnership Act, Justice Stone stated in his analysis:
Whether a partnership be limited or general under the Manitoba statute, it must consist of "persons carrying on business in common, with a view of profit". It is, therefore, the persons which comprise the partnership that carry on the business rather than the limited partnership itself.
In light of the foregoing, there are arguments to be made for asking, in the present situation, whether Mr. A, Mr. B and Mr. C ceased to personally carry on the business they were carrying on as partners in ABC at the time ABC ceased to exist on October 31, 2001, or whether they are still carrying on that same business as partners in the new partnership. The question of whether it is the same business is a question of fact that can only be resolved after a complete analysis of all the facts relating to a particular situation. Interpretation Bulletin IT-206R sets out certain criteria for making such a determination. According to this interpretation, if the partners of ABC continue to carry on the same business as partners of the new partnership, subsection 34.1(8) would not apply and the partners would have to estimate their income from the business in accordance with subsection 34.1(1).
However, there are also arguments that subsections 34.1(1) and (8) must be interpreted in light of the provisions set out in section 249.1. More specifically, subsection 249.1(1) provides that a fiscal period of a partnership means the period for which the partnership’s accounts in respect of the business are made up for the purpose of making an assessment under the Act. This provision therefore appears to situate the business at the level of the partnership for the purposes of determining its fiscal period. Under this interpretation, the business would cease to exist at the time the partnership ceases to exist, so that subsection 34.1(8) would apply, thereby rendering subsection 34.1(1) inapplicable.
In our view, both interpretations are defensible, but we would be prepared to accept that the partners of ABC would not apply subsection 34.1(1) for their 2001 taxation year if the dissolution of ABC and the creation of the new partnership were not motivated solely by tax considerations. If such a transaction were carried out in order to circumvent the application of subsection 34.1(1), we would then apply the first interpretation above or the general anti-avoidance rule, as the case may be. It should also be noted that if the conditions of subsection 98(6) had been satisfied, the new partnership would have been deemed to be a continuation of the former partnership, so that subsection 34.1(1) would continue to apply to the partners.
Finally, if subsection 34.1(1) did not apply, the partners could elect under subsection 34.1(2) to include a portion of the new partnership's business income in 2001.
These comments are not advance income tax rulings and do not bind the Canada Customs and Revenue Agency with respect to any particular factual situation.
We hope you find these comments of assistance.
Best regards,
Ghislaine Landry, CGA
Manager
Individual, Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
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