Section 101 - Disposition of farmland by partnership

Subsection 101(1)


Mitchell Sherman, Kenneth Saddington, "100 1 Damnations!", Corporate Finance, Volume XVIII, No. 3, 2012, p. 2126

… First it does not actually require the partnership to have a latent income gain – a partnership which owns only depreciable property is subject to subsection 100(1) even if no capital cost allowance has been claimed. In this respect, it operates to convert "future" recapture into an increased taxable capital gain. Second, the application of subsection 100(1) 8is one-sided – it provides no depreciable step-up to the partnership in the hands of the purchaser. Third, although colloquially thought of as an anti-avoidance rule, it requires no anti-avoidance intention. The provision will apply even where the Tax Exempt covenants to own the income asset in perpetuity. Fourth, the application of subsection 100(1) does not give rise to income, but rather to an increased taxable capital gain (against which, for example, capital losses may be used). Fifth, the application of subsection 100(1) is based on the quantum of the capital gain inherent in the partnership interest. There is no necessary corollary between this amount and the underlying income gains; …

… The Amendments … do nothing to address the inconsistent application of the provision noted above.

… A taxpayer that disposes of a partnership interest to an entity other than a Prohibited Acquirer – a taxable Canadian corporation, for example – may be concerned that subsection 100(1) will ultimately apply to it if the corporation sells the interest to a Prohibited Acquirer within a relatively short time frame. Arguable, the corporation's independent decision to on-sell the partnership interest should negate any serious concern, but the brevity of any time gap is often difficult to overcome. The seller may, therefore, desire contractual protection in the form of covenants limiting the ability of the purchaser to sell the partnership interest to a Prohibited Acquirer for a certain period of time. Such covenants will certainly be commercially undesirable to potential purchasers of partnership interests. …

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Tax Topics - Income Tax Act - Section 100 - Subsection 100(1) 328