23 April 1981 Income Tax Severed Letter RCT 85-339

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.

Dear XXX:

This is in reply to your letter of March 16, 1981.

You describe a situation where a partnership between an individual and a holding company intends to sell in an arm's length transaction its only significant asset, a rental property, for a consideration consisting of the assumption of the existing mortgage by the purchaser and the issue of a second mortgage. For estate planning purposes, it is proposed to wind up the partnership and have the holding company realize the capital gain and the on-going interest income. In order to achieve the desired results you consider three options which you describe in your letter as alternatives 1, 2 and 3. You request clarification of certain technical problems with respect to these alternative solutions.

In general, we do not give written opinions concerning proposed transactions, however, we will make the following comments with regard to the problems you have indicated.

We confirm that income, that is received by a partnership and that otherwise qualifies under section 61 for purchasing an income averaging annuity contract, is considered to retain its identity in the hands of the members of the partnership pursuant to paragraph 96(1)(f), (paragraphs 2 and 3 of Interpretation Bulletin IT-245), however, annuity contracts of the type you describe as "wrap-around" annuity may not be acceptable to the Department.

We confirm that the reserve described in subparagraph 40(1)(a)(iii) is available to a former member of a partnership in respect of his share of the receivable distributed to him or it on the winding up of the partnership.

It is not possible, in our view, for the individual partner to transfer his continuing partnership interest to the corporate partner under subsection 85(1) because subsection 98(5) does not apply to the situation you describe in alternative 1. In our opinion, the holding company would not carry on the business that was the business of the partnership. Consequently, the rules in subsection 98(2) would probably apply in the circumstances you have described in alternative 1.

Assuming the requirements stated in paragraph 12(b) of Interpretation Bulletin IT-152R are met the equity method of calculating the reserve under subparagraph 40(1)(a)(iii) would be available.

Provided the two partners jointly elect in prescribed form and within the time referred to in subsection 96(4) the rules in subsection 98(3) would apply to the dissolution of the partnership described in alternative 2. The rules of subsection 98(5) would not apply for the reason stated above.

Partnership liabilities assumed by the partners prior to dissolution will be regarded as a contribution of capital to the partnership by each partner prior to dissolution. Whether or not such liabilities have been assumed prior to dissolution depends on all the relevant facts. We are not prepared to confirm that liabilities assumed after dissolution will be considered contributions of capital to the partnership prior to dissolution.

We trust that we have been able to assist you.