7 April 1991 Income Tax Severed Letter - Whether contributions of property to a partnership are subject to sales tax

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: Partnership and Sales Tax

A. Problem

Pursuant to a partnership agreement, A contributes property worth $2,000,000 and B contributes cash of $2,000,000. A and B are equal partners. As described in the Appendix, B is required to pay a 6% sales tax on B's share of the property contributed by A. The following questions have been posed:

• 1. Can the sales tax paid by B be added to the partnership's cost of acquiring the property?
• 2. Will the sales tax paid by B be considered an additional capital contribution to the partnership and be added to the ACB of B's partnership interest?

B. B.C. Social Service Tax

The sales tax is imposed under subsection 2(1) of the Social Service Tax Act (the "SSTA") on all purchases of tangible personal property for consumption or use by the purchaser. For purposes of the SSTA, where the purchaser is a partnership, the individual partners rather than the partnership are liable for the tax to the extent that each partner is considered to have acquired an interest in the property. The sales tax is payable on the actual value of the property.

C. The SSTA and the Income Tax Act (the "ITA")

The SSTA and the ITA differ in their treatment of a partnership. The SSTA does not recognize the partnership as an entity capable of owning property; it considers that the partners have a proprietary interest in the partnership assets. Under the ITA, the partnership calculates its income as if it were a separate person (paragraph 96(1)(a)) and each partnership activity including ownership of property is considered to be carried on by the partnership as a separate person (paragraph 96(1)(c)).

D. Conclusion

The cost of property to a person is, generally, the fair market value of what is given up to acquire the property. To this amount may be added outlays, like legal expenses, that were incidental to the acquisition of the property. If the partnership were liable under the SSTA for the sales tax and the sales tax was paid by the partnership, then the amount of the sales tax paid would be added to the cost of the property acquired by the partnership.

However, if the partnership agreement provided that the partnership pay the individual partner's liability on the acquisition of the property, the amount so paid would not form part of the cost of the property to the partnership since it is not consideration for the acquisition of the property. The payment of the tax by the partnership would be a payment of a personal liability of partner B and would be considered a distribution of property by the partnership to partner B.

In order for there to be an increase in the ACB of B's partnership interest, B would have to make a contribution of property to the partnership. A contribution would be made when a partner contributed cash to the partnership or paid a liability of the partnership. In this situation the liability for sales tax in respect of the transfer of the property is a liability of the partner, not the partnership. Therefore, the payment of the liability by the partner would not be a payment of a partnership liability and would not constitute a contribution of property for the purposes of subparagraph 53(1)(e)(iv).

If the parties restructured the transactions, their goal would appear achievable. If A sold a 50% interest in equipment to B, the sales tax paid by B would be added to his cost of the equipment. Then, if both A and B contributed their interests in the equipment to the partnership, the cost of the equipment to the partnership would include the tax paid by partner B.