Partnership Interests

Commentary

Sales of partnership interests

Although at common law a partnership is a relationship among the partners according each partner an interest in the partnership property (Boyd, Fuller's Contract, Seven Miles), a partnership interest nonetheless is a property of the partner which for purposes of the Act is separate from the interest in the partnership property which it represents, so that a disposition of that partnership interest may be on capital account even where the partnership property is inventory (Strauss, see also Lane).

A sale of a partnership interest normally will occur on capital account (Walchuk), even where the partner did not have any capital invested in the partnership (Laferriere). However, a partnership interest potentially may not be held as capital property where the intention of the taxpayer was to enhance the value of the partnership business so as to sell the taxpayer's partnership interest at a profit (Walchuk), or (consistently with the Fraser line of cases) where disposition of the partnership interest was an alternative means for effectively disposing of the interest which it represented in land inventory of the partnership (Von Haymann).

Surrenders of partnership interests

In the absence of s. 96(1.1) applying, an amount paid to a partner upon that taxpayer's withdrawal from a partnership typically will be characterized as a capital receipt paid for the surrender of the partner's partnership interest rather than as a distribution of income of the partnership in respect of which the taxpayer should be allocated a share of the income of the partnership (Delesalle, Poulin, Blauer cf. Sedgwick).

Reorganization transactions

Consistently with reorganization transactions involving other types of property (see Hickman Motors), it has been found that the acquisition of a partnership interest from an affiliated person in a reorganization transaction, followed by an immediate sale of the partnership interest for consideration presumably equal to its fair market value at the time of such acquisition, is not a trading transaction (i.e., not a transaction that would motivate a trader) - so that the sale occurs on capital account (Continental Bank). This is consistent with the broader proposition that the determination as to whether a transaction produces a gain so as to potentially be viewed as an adventure in the nature of trade should have regard to whether the transaction resulted in a gain from a commercial perspective, rather than having regard to whether a gain was deemed to arise under the provisions of the Act ("Adventure" determined on commercial principles?).

Allocation of partnership capital gains

Under s. 96(1)(c) the determination of the capital gains of a partnership is made as if the partnership were a separate person, and under s. 96(1)(f) any capital gains so determined are then allocated to the partners in accordance with their respective shares (usually determined in accordance with the terms of the partnership agreement unless s. 103 applies to produce a different result). Accordingly, the question of the character (as to ordinary income or capital gains) of partnership income allocated to the partners is determined at the partnership level so that a gain realized by the partnership is either all realized on capital account or all realized on income account.

Notwithstanding this analysis, CRA has made comments (29 November 2011 T.I. 2011-0424591M4) that suggest that, at least in the case of a carried interest, the treatment of amounts allocated to a partner as on income account or capital account will turn on the particular circumstances of the partner rather than on whether the amount was or was not realized by the partnership on capital account.

Cases

Continental Bank of Canada v. Canada, 98 DTC 6501, [1998] 2 S.C.R. 358

acquisition of rollover asset and immediate resale for same FMV not a trading transaction

The taxpayer's subsidiary ("Leasing") transferred leasing assets to a partnership between Leasing and two subsidiaries of a third party that was interested in acquiring those assets ("CCM" and "693396") in consideration for a partnership interest, an election was filed under s. 97(2), the taxpayer (the "Bank") acquired the partnership interest of Leasing on a winding-up of Leasing pursuant to s. 88(1) and the Bank sold the partnership interest to 693396 and an affiliate of 693396.

In finding that the gain realized by the Bank on the sale of the partnership interest was a capital gain, McLachlin J. noted (at para. 16) that "none of the circumstances indicate that the Bank's acquisition and subsequent disposition of Leasing's partnership interest was a speculative trading venture".

Delesalle v. The Queen, 85 DTC 5613, [1986] 1 CTC 58 (FCTD)

partnership interest buyback not distribution

It was found that a sum of $103,111 paid by a partnership to a retiring partner was consideration for the buying back of his partnership interest rather than an allocation to him of partnership income, including his interest in unbilled work in progress. The sum accordingly was a capital receipt in his hands and not deductible in computing the partnership's income.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1.1) departing partner required to agree to the s. 96(1.1) allocation 263
Tax Topics - Statutory Interpretation - Absurdities 35

Laferrière v. The Queen, [1985] 2 CTC 190 (FCTD), aff'd 94 DTC 6423 (FCA)

partnership interest sale by non-capital partner

The sale by the appellant of his partnership interest to the two senior partners of the firm was a capital transaction to the appellant. It was irrelevant that the appellant had not contributed capital to the partnership.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1.1) 151

Lane v. The Queen, 78 DTC 6535, [1978] CTC 795 (FCTD), aff'd 86 DTC 6568, [1986] 2 CTC (FCA)

partnership interest distinct from partnership property

Under the partnership law of Alberta and other provinces, no partner has any right to take any portion of the partnership property and call it his. A disposition by a member of a partnership of his shares in the partnership accordingly is not a disposition of a share in particular assets held, as a group, by the particular members.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 100 disposition of partnership interest not disposition of underlying property 59
Tax Topics - Income Tax Act - Section 96 18

The Queen v. Poulin, 76 DTC 6381, [1976] CTC 620 (FCTD)

The sum of $20,000, which the taxpayer negotiated for and was paid following his withdrawal from a partnership with two other lawyers was held to be a capital sum in light inter alia of the facts that (1) "in the absence of any partnership agreement there was no provision for allocation of profits on the termination of it" and (2) it was a round sum which was not strictly based on the profits or accounts receivable of the partnership.

Blauer v. MNR, 71 DTC 5113, [1971] CTC 154 (F.C.T.A.), briefly aff'd 75 DTC 5076, [1975] CTC 112 (SCC)

The taxpayer (a professional engineer) agreed to form a special partnership with two individuals carrying on business as professional engineers in order to be consulting engineers for the Ville Marie project in Montreal. $75,000 (expressed to be "compensation for loss of goodwill") which the taxpayer received in settlement of an action which he brought when he learned that his two partners were also working on two other large projects was a capital outlay (71 DTC 5094) and, therefore, a capital receipt to the taxpayer.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Payment & Receipt post-dated cheque 20

Minister of National Revenue v. Sedgwick, 63 DTC 1378, [1963] CTC 571, [1964] S.C.R. 177

After the Toronto Stock Exchange required the termination of what was styled as a loan agreement, but which in fact was a partnership agreement, under which five parties (the "Creditors") including the taxpayer received a share of the profits earned by another individual ("Purcell") in connection with his purchase of a seat on the Toronto Stock Exchange, they entered into an agreement which provided for the payment to the Creditors of the sum of $550,000, of which $300,000 was described as "the share of the Creditors in the net profits of the business for the fiscal year ending March 31, 1956". Martland J. held that the taxpayer's share of the sum of $300,000 received by him was income of the partnership which was allocated to him, rather than a non-taxable capital receipt.

MNR v. Strauss, 60 DTC 1060, [1960] CTC 86 (Ex Ct)

The taxpayer, who sold 1/2 of his partnership interest 6 months after he and several other individuals formed the partnership for the purpose of acquiring land inventory for sale in a housing development, thereby realized a capital gain. Because the land inventory could not be disposed of without the consent of all the partners, and each partner's rights was not a right to dispose of the land but a right to participate in profits, and the interest itself was not acquired with a speculative intention, his interest was capital property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 98

See Also

Walchuk v. The Queen, 2003 DTC 2184, 2004 TCC 42

Before going on to find that a loss realized by a stockbroker on the insolvency of a partnership carrying on a restaurant business in Greece was on capital account, Miller J. stated (at p. 2188) that "to overcome the normal status of a partnership unit as capital property is a more onerous task than doing likewise for shares, simply due to the nature of the structure", and noted that there was no evidence of conduct that was more consistent with the intention of the taxpayer being to enhance the value of the business with a view to resale at a profit, rather than carrying on the business with a view to profit.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 18 - Subsection 18(1) - Paragraph 18(1)(b) - Capital Loss v. Loss partnership unit normally capital property 111

Von Haymann v. The Queen, 2001 DTC 203 (TCC)

The taxpayer used borrowed money to acquire an interest in a limited partnership which, in turn, held an interest in an apartment complex that generated significant losses. The Minister denied losses claimed by the taxpayer on the basis that he had no reasonable expectation of profit. Before directing the reversal of the reassessment, Bowie TCJ indicated his disagreement with the submission of the Crown that the taxpayer had purchased his interest in order to produce a capital gain, found that the taxpayer was motivated in his purchase of his interest in the partnership by both the possibility of income in the long run and the possibility of reselling the property at a profit once the real estate market recovered, and found that any profit on resale would be on income account.

Administrative Policy

29 November 2011 Ministerial Correspondence 2011-0424591M4 - Carried Interest

Respecting a question on the taxation in Canada of carried interests, the Directorate stated:

"Carried interest" is a term often used to describe an arrangment in which a manager of a financial partnership, such as a hedge fund, private equity fund, or venture capital fund, receives an equity participation in the fund in eschange for his or her services. Determining whether a gain or loss from such activities will be taxed as either an income gain or loss or as a capital gain or loss is ultimately a question of fact that can be determined only on a case-by-case basis. Generally, the gains and losses of a taxpayer who is a trader or dealer or who carries on a business of trading in securities are taxed as an income gain or loss. The factors considered in making such a determination are discussed in Interpretation Bulletin IT-479R....