7 September 1989 Ministerial Letter 57948 F - Application to Partnerships Section 54.2

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Subject:  Application to Partnerships Section 54.2

Sections of The Act

54.2, 110.6(2.1), 110.6(14)(f)

Type of Referral

General Enquiry from 19(1)

Facts

All or substantially all of the assets of a limited partnership (LP) are used in an active business carried on in Canada.

The LP subsequently transfers all of its assets to a Canadian small business corporation (as defined in subsection 248(1)) pursuant to subsection 85(2).  Immediately thereafter the shares of the corporation are sold to an arm's length purchaser.

On the assumption that section 54.2 would deem the shares to be capital property, the resulting capital gain on disposition of the shares would be flowed out to the partners under paragraph 96(1)(f) and each member of the partnership would claim the enhanced capital gains exemption under subsection 110.6(2.1)

Problem

Section 54.2 which deems certain shares to be capital property, would appear not to apply to the shares in the situation described above, because that section refers to a person and paragraph 1 of IT-90 states that a partnership is not a person.

21(1)(b)

21(1)(b)

If section 54.2 was intended to apply to a partnership the wording of the section could have made reference to a "person or partnership".  For example, Paragraph 110.6(14)(f), which was enacted in the same Bill as was section 54.2, makes reference to a "person or partnership" which could indicate that a distinction was intended between these two provisions (i.e. 54.2 would not apply to a partnership while 110.6(14)(f) would so apply).

Recommendation

We see 3 possible resolutions to this problem:

1.

2.     21(1)(a)

3.

21(1)(a)

Effect of Decision

Assuming that the above recommendation is accepted, it will necessitate further communication with Current Amendments and Regulations Division, and the Department of Finance to resolve our differences.

for DirectorSmall Business and General DivisionSpecialty Rulings DirectorateLegislative and IntergovernmentalAffairs Branch