7 November 1991 Income Tax Severed Letter - Dissolution as a Result of Amalgamation of Partnerhsip Business Carried on as Sole Proprietorship

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: XXX
Subsection 98(5) of the Income Tax Act (the "Act")

We are responding to a letter from XXX (the "taxpayer's representative") dated March 21, 1991, regarding subsection 98(5) of the Act, which letter was attached to your memorandum to Head Office, Audit Applications Division, dated April 19, 1991. The Audit Applications Division has requested that we address the issues raised in the letter. We are responding directly to you instead of to the taxpayer's representative since their queries refer to completed transactions. XXX has been made aware of this procedure and is expecting to receive a reply to their letter directly from Calgary District Office.

We are enclosing the taxpayer's representative's original letter that you forwarded to Head Office Audit as well as a copy of a subsequent representation provided to us by XXX

Facts

XXX

Issue

Does subsection 98(5) apply on the dissolution of the Partnership as a result of the amalgamation of XXX

Discussion

In the opinion of the taxpayer's representative, the result of the decision in The Queen v. Guaranty Properties Limited, [[1990] 2 C.T.C. 94] 90 DTC 6363 is that the "new" corporation deeming rule in paragraph 87(2)(a) is solely for the purpose of determining year-ends. Further, it is his view that an amalgamated corporation should be treated as a continuation of the amalgamating corporations such that the test in subsection 98(5) would be satisfied in that the amalgamating corporation was a former partner.

In our view there are two questions to be answered in order to determine whether subsection 98(5) applies:

• 1. Was Amalco a member of the partnership before the partnership ceased to exist (the "particular time")?
• 2. If Amalco was a member of the partnership before the particular time, can it be said that "... one, but not more than one, of the persons who were, immediately before the particular time, members of the partnership carries on by himself the business that was the business of the partnership."?

The answer to the first question can only be determined after a complete review of the decision of the Federal Court of Appeal in Guaranty Properties. The department has not yet completed this review, so we are unable, at this time to address the first question. However, it is our view that, whatever the effect of the Guaranty Properties decision on the first question, subsection 98(5) does not apply in this situation. If the response to the first question is no, it is clear that subsection 98(5) is not applicable to Amalco. On the other hand, even on the assumption that the response to the first question is yes, i.e. if Amalco was a member of the partnership before the partnership ceased to exist, Amalco would be considered to be all of the persons who were, immediately before the partnership ceased to exist, members of the partnership. Since the provision requires that Amalco be one, but not more than one of the members at that time, the requirements of subsection 98(5) are not met.

We have discussed our position based on the above-noted assumption with the taxpayer's representative who provided us with his arguments, set out in his letter dated May 29, 1991, as to why he feels our position is untenable.

The Representative's Arguments

The main arguments used by the taxpayer's representative can be summarized in the following quotes:

"Assuming continuation, you are concerned that subsection 98(5) may not be applicable because for subsection 98(5) to apply, "one, but not more than one" of the former partners must carry on the business of the partnership. ... Our first observation is that if subsection 98(5) is deficient in providing a "rollover" in these circumstances, subsection 98(2) is equally deficient in prescribing a disposition of the assets of the Partnership for proceeds equal to fair market value. The reason is that Amalco was not "a member" of the Partnership but was all the members of the Partnership."

Our Reasoning

Whether there has been a disposition by the partnership of property to which the provisions of subsection 98(2) apply is, in our view, independent of the question of whether subsection 98(5) provides a "rollover".

In our view, under the assumption that Amalco is a continuation of each predecessor corporation for tax purposes, Amalco would have been, immediately before the disposition of property of the partnership to Amalco on the amalgamation, a member of the Partnership. The fact that, under this assumption, Amalco would have been more than one member because more than one of its predecessors was a member is, in our view, of no consequence because subsection 98(2) does not require that the disposition be to one, but not more than one member; rather the provision is not qualified in this manner.

Under the assumption that Amalco is not a continuation of each predecessor for tax purposes, it is our opinion that paragraph 69(1)(b) deems the partnership to have disposed of its property to Amalco for fair market value proceeds for the following reasons:

• (a) There has been a disposition of the property of the Partnership to Amalco:

Subsection 96(1) provides the rules for computation of income of a partner and provides inter alia that such income shall be computed as if the partnership were a separate person and each partnership activity (including the ownership of property) were carried on by the partnership as a separate person. [underlining mine] Since there must be two or more principals carrying on a business for a partnership to exist, the partnership necessarily ceases to exist when all of the predecessor corporations are amalgamated to form Amalco, since only one principal (Amalco) would then carry on the former business of the partnership. What was formerly property owned by the partnership would, as a result of the amalgamation, become property of Amalco, and therefore, in the usual sense of the word, a disposition of such property has taken place.

The position that there has been a disposition of property by the partnership is supported by Gordon E. Cooper's article "The Incorporation of Professionals" in the 1978 Jan-Feb edition of the Canadian Tax Journal

"If the partnership cannot endure when the interests are acquired by a single purchaser, it must therefore have terminated immediately before the transfer ... On a strict interpretation of the law, the transferors could find that the disposition of their interests is regarded as triggering a dissolution of the partnership, a deemed disposition of the partnership asset to the partners at fair market value, and a deemed disposition of their partnership interests at fair market value."

Mr. Cooper says that his conclusion is supported by the rule enunciated in paragraph 98(5)(g) of the Act. [without the rule in 98(5)(g) that deems a proprietor to have acquired partnership interests, the proprietor would have acquired property that was property of the partnership.]

• (b) It would seem to be quite clear that, as a question of fact, the Partnership and Amalco did not deal at arm's length with respect to the disposition referred to above. In view of the fact that Amalco is the corporation formed on the amalgamation of all of the related members of the Partnership, Amalco and the Partnership can not be said to have separate interests with respect to the disposition. Amalco and the Partnership can be said not to have dealt at arm's length notwithstanding that they did not coexist (see Special Risks Holdings Inc. v. The Queen [[1986] 1 C.T.C. 201] 86 DTC 6035).

Conclusion

The provisions of subsection 98(5) cannot be applied to the dissolution of XXX It is our view that, upon the amalgamation, the Partnership disposed of its property for deemed proceeds of disposition equal to the fair market value of such property.

Should you have any questions regarding our comments, please contact Mark Symes at (613) 957-2091.