Section 97

Subsection 97(1) - Contribution of property to partnership

Cases

Iberville Developments Limited v. Canada, 2020 FCA 115

issuance of partnership units on a drop-down is irrelevant to the ACB of the partnership interest

A corporate taxpayer having shopping centres with a cost amount and fair market value of $14M and $130M, respectively, contributes the properties under s. 97(2) to a newly-formed LP in consideration for boot of $14M and units with a FMV of $116M. This is a barter exchange so that on general principles, the cost of the units is $116M. S. 97(2)(b) provides that “immediately after” the disposition of the property to the LP, the elected amount of $14M minus the boot of $14M “shall be added” to the ACB of the partnership interest, so that such interest’s ACB is now increased by that amount (which, on these numbers, is nil). The shopping centres are shortly thereafter sold to third parties at a gain (reflecting their low rollover basis), with such gain (mostly, capital gain) allocated to the partners (mostly, to the taxpayer). Subsequently, the partnership is wound up, and the taxpayer realizes a capital loss of around $116M.

Noël CJ agreed with Boyle J below that transactions only somewhat more complex than this did not produce a double adjustment to the ACB of the units under general cost principles and under s. 97(2)(b), as described above. After noting (at para. 38) that such a double increase would represent “an absurd result,” Noël CJ stated (at para. 48):

[T]he appellant’s partnership interest had already been acquired when the shopping centres were transferred, thereby eliminating any possibility that, in addition to the subsection 97(2) adjustment, the partnership interest could be increased under section 54 by the “cost”, i.e. the fair market value, of the transferred property … .

In other words, the taxpayer only had a 100% partnership interest both before and after the drop-down transactions (“the Act tracks the partnership interest as a whole rather than as individual units” - para. 53), so that there was no cost for an increased partnership interest on the drop-downs (there was no such increase), and the only cost base adjustment to be made on the s. 97(2) drop-downs were under s. 97(2)(b).

What if no s. 97(2) election is made? He stated (at para. 50):

Upon transferring capital property to a partnership under subsection 97(1), a partner triggers the application of subparagraph 53(1)(e)(iv) which provides that the adjusted cost base of a partner’s partnership interest is increased by an amount commensurate with its contribution. The fact that the partner receives units in exchange for the properties is not relevant to the computation of the adjusted cost base of its partnership interest as Subdivisions C (capital gains) and J (partners and partnerships) do not recognize the issuance of new units in a partnership as a tax event or changes in the relative interest in a partnership as the acquisition of distinct property.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) - Paragraph 97(2)(b) the starting ACB of a partnership interest was determined exclusively under s. 97(2)(b) 445

See Also

Iberville Developments Limited v. The Queen, 2018 TCC 102, aff'd 2020 FCA 115

s. 97(1) establishes FMV cost for partner's interest

The taxpayer unsuccessfully argued that the initial cost of its interest in an LP was the fair market value of the property contributed by it to the LP and that the adjusted cost base of the property was further increased an instant later under s. 97(2)(b). Before rejecting this argument, Boyle J stated (at para. 63):

There is no suggestion that subsection 97(1) should apply in the circumstances described in subsection 97(2), and it is subsection 97(1) that would be the specific rule which would provide that a transferor partner’s cost of their partnership interest is fair market value. Subsection 97(1) appears to be a necessary part of the Act given that partnerships are not themselves persons under the Act, but are only required by section 96 to compute their income as if they were.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) the starting ACB of a partnership interest was determined exclusively under s. 97(2)(b) 659
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property only one interest in a partnership 167

Administrative Policy

Income Tax Regulation News, Release No. 3, 30 January, 1995 under "Use of a Partner's Assets by a Partnership"

When a partnership acquires the right to use the property of a partner for no rent, the partner will be deemed by s. 97(1) to dispose of that right for proceeds equal to its fair market value.

Subsection 97(2) - Rules if election by partners

Cases

Canada v. Oxford Properties Group Inc., 2018 FCA 30

object includes ultimate taxation of the deferred gain

When Oxford Properties was sold to an OMERS subsidiary, the purchaser first negotiated that Oxford would drop various properties down into LPs on a s. 97(2) rollover basis, with those partnership interests subsequently being bumped under s. 88(1)(d) (which, in 2001, did not prohibit bumping interests in partnerships holding appreciated buildings). After the acquisition, those bumped costs were then pushed down onto the cost of interests in property-specific LPs (which had been formed following the acquisition), by winding-up the upper-tier LPs under s. 98(3) and using the s. 98(3)(c) bump. After the three-year s. 69(11) period, some of the property-specific LPs were then sold to tax exempts.

Noël CJ reversed the findings of D’Arcy J that these transactions did not abuse ss. 97(2) and 100(1). Respecting s. 97(2), Noël CJ stated (at paras 59 and 73):

…[T]he object, spirit and purpose of subsections 97(2) and 97(4) is to track the tax attributes of depreciable property in order to ensure that deferred recapture and gains are subsequently taxed.

The question … is whether the fact that deferred gains and recapture will never be taxed frustrates the object, spirit and purpose of subsection 97(2). Given that the only reason why Parliament would preserve the tax attributes of property that is rolled into a partnership is to allow for the eventual taxation of the deferred gains and latent recapture, the answer must be in the affirmative.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) using the s. 88(1)(d) bump on newly-formed rental property LPs to avoid indirect recapture income under s. 100(1) was abusive 975
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) s. 88(1)(d) bump is intended to permit the transfer of ACB that otherwise would be lost to another property that is taxed in the same way 371
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) - Paragraph 98(3)(c) s. 98(3)(c) bump is intended to avoid gain realization where there has been no economic gain 267
Tax Topics - Income Tax Act - Section 69 - Subsection 69(11) 3-year time limitation in s. 69(11) did not establish safe harbor for avoidance of recapture on sale after that period 382
Tax Topics - Income Tax Act - Section 100 - Subsection 100(1) purpose is to ensure that latent recapture will be recognized on sale to tax exempt 254
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) GAAR question as to determining a provision’s object was subject to correctness standard 169
Tax Topics - Statutory Interpretation - Hansard, explanatory notes, etc. statement that amendment was for “clarification” was self-serving 209
Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 45(2) determination of whether amendment merely clarified requires review of pre-amendment state of law 146
Tax Topics - Income Tax Act - Section 245 - Subsection 245(2) consequential s. 245(2) adjustment must be scaled to the abuse 391

R & S Industries Inc. v. Canada (National Revenue), 2016 FC 275

drop-down agreement interpreted as preventing a re-allocation of boot to avoid gain

A transfer agreement for the drop-down under s. 97(2) of assets by the taxpayer (R&S) to a controlled LP specified that the elected amounts in a joint s. 97(2) election, and the respective portions of the Purchase Price allocated to the transferred assets, would be the minimum agreed amounts permitted under the Act, “provided …that in respect of the Goodwill, the elected amount shall, unless otherwise agreed be equal to $2,502,600.” The reasons for judgment are unclear, but CRA apparently reassessed on the basis that the T2059 election form effectively allocated non-equity consideration ("boot") in excessive amounts to the non-goodwill assets, so that gain was required to be recognized under the excess boot rule in s. 85(1)(b). R&S (which, by that time, apparently no longer had effective control of the LP) then sought to amend the election, apparently (although again this is unclear) to re-allocate this excess boot to the goodwill (which might have produced a better result as the stipulated $2.5M agreed amount presumably was above the goodwill’s cost amount).

When CRA rejected the request for an amended election, 15 months passed before R&S sought judicial review of this decision in the Federal Court. One of the grounds for refusing an extension of the normal 30-day deadline for this application was that the application lacked substantive merit. Diner J appears to have in effect interpreted the above clause, which fixed the elected amount for the goodwill at $2.5M “unless otherwise agreed,” as preventing the boot from being reallocated to the goodwill (although his reasons throughout referred to R&S's position as being that the amount allocated to goodwill should be increased rather than that the amount of boot allocated to goodwill should be increased). He stated (at paras. 54-55):

[I]t was entirely open to [CRA] to conclude that if the goodwill was not going to remain at $2,502,600, there needed to be agreement from the other parties. …[T]he words “provided however” in article 4(1)(a) provide a plain and clear meaning.

...[T]here appears nothing unreasonable in the Respondent’s conclusions, which found that (1) the Transfer Agreement requires that goodwill be fixed at a certain amount unless the parties agree otherwise; (2) the New T2059 does not fix the goodwill at that amount; and (3) therefore, it is in contravention of the Transfer Agreement and should not be accepted.

Locations of other summaries Wordcount
Tax Topics - Other Legislation/Constitution - Federal - Federal Courts Act - Section 18.1 - Subsection 18.1(2) extension not granted due to unexplained lengthy delay and lack of substantive merit 579

Canada v. Pinot Holdings Ltd., 99 DTC 5772 (FCA)

partnership not transparent re partnership borrowing to pay vendor partner

The taxpayer transferred land to a partnership for consideration of $13.5 million which was satisfied by that amount being paid by the partnership, out of new partnership borrowings in excess of that amount, in order to discharge a mortgage owing by the taxpayer prior to the transfer on the transferred land. The Court reversed a finding that, for purposes of applying s. 97(2), the taxpayer had received only $6.75 million because it remained liable qua partner for 50% of the new loan negotiated in the partnership's name. Noël J.A. stated (at p. 5778):

"The suggestion that for tax purposes amounts disbursed by a partnership from borrowed funds in the discharge of an obligation owed to one of its partners retain their character as loan proceeds is, in my view, wholly without foundation ... . It necessarily follows that the legal character of amounts paid by a partnership to a partner is a function of the obligation being discharged irrespective of how the payment is funded."

Locations of other summaries Wordcount
Tax Topics - General Concepts - Substance 92

Continental Bank Leasing Corp. v. The Queen, 96 DTC 6355 (FCA), rev'd 98 DTC 6501 (SCC)

no rollover because partnership not established

After the cancellation of an agreement for the sale of the shares of the taxpayer by its parent ("Continental Bank") to a third party ("Central Capital"), the taxpayer transferred, purportedly on a rollover basis pursuant to s. 97(2), the assets of its leasing business to a partnership in which two subsidiaries of Central Capital acquired a 1% partnership interest. Five days later, following a winding-up of the taxpayer into Continental Bank, Continental Bank sold its partnership interest to the two Central Capital subsidiaries.

Before concluding that no partnership, in fact, had been formed, Linden J.A. found that the distribution and sharing of profits attributed to the five-day period was not conclusive evidence of partnership, no business was conducted during the five-day period in the sense that no decisions were made by the parties, a formal servicing agreement between the supposed partnership and a third party for operating its leasing business was not signed until subsequently, and the object of the arrangement was to wind-up the business rather than carrying it on.

In any event, the supposed partnership was deemed to be dissolved ab initio by virtue of s. 34 of the Partnership Act and common law principles because the Continental Bank was prohibited from indirectly participating in a partnership by virtue of s. 174(2)(i) of the Bank Act.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Sham no sham if docs reflect legal reality 86
Tax Topics - General Concepts - Tax Avoidance no sham if docs reflect legal reality 86

Haro Pacific Enterprises Ltd. v. The Queen, 90 DTC 6583 (FCTD)

capital distribution part of consideration for land contribution

The taxpayer ("Haro") contributed real estate worth $1.9 million to a partnership and the other member ("B.C. Ltd.") contributed $950,000 in cash. Five days later, Haro withdrew $950,000 from the partnership pursuant to a clause in the partnership agreement which stated that "following the transfer of title to the lands by Haro ... Haro shall be entitled to demand and receive forthwith out of the property of the Partnership a Capital Repayment in cash for an amount equal to the amount contributed by B.C. Ltd.".

Reed J. held that it would be artificial in the extreme to characterize the facts any other way than that Haro had received both a partnership interest and the cash payment as consideration for the transfer of the lands, with the result that the agreed amount in the subsection 97(2) election filed jointly by Haro and B.C. Ltd. was deemed to be $950,000.

See Also

Iberville Developments Limited v. The Queen, 2018 TCC 102, aff'd 2020 FCA 115

the starting ACB of a partnership interest was determined exclusively under s. 97(2)(b)

In 2003 and 2004, the taxpayer (“Iberville”) contributed shopping centres worth $130M and with a cost base of $14M and received non‑share consideration or boot of $8.5M. Shortly thereafter, the partnership sold the shopping centres to unrelated third parties and realized capital gains of over $100M which were allocated to Iberville. It subsequently disposed of the partnership interest to an affiliate, and claimed a capital loss of $122M, which was not suspended because of the winding-up of the partnership shortly thereafter.

This claimed capital loss was based on the proposition that the adjusted cost base of its partnership interest had been increased not only by the s. 97(2) elected amount but also by the fair market value of the contributed property. In particular (para. 4):

At the time of the transfer, the rules in section 54 determined the cost of the partnership interest or increased partnership interest to be the fair market value of the transferred shopping centres, and immediately after that time paragraph 97(2)(b) added an amount equal to the elected amount less any boot.

In rejecting this interpretation, Boyle J first found that, consistently with the terms of the partnership agreement and the provisions of the Civil Code, the partnership had been formed earlier on the day before the time of the property contribution. He then stated (at paras. 54-56) respecting Iberville’s interest in the partnership:

It had already acquired that before the shopping centre transfers. There is therefore no possibility of a successful argument that the “cost” of the increase in their partnership interest should be captured under section 54 in addition to the subsection 97(2) adjustment.

The taxpayer’s position is that the “cost” being sought was the difference between the value of the shopping centres and the amount of the promissory notes received, reflected by the additional units in the Partnership received. Not only was this partnership not unitized, …subdivisions C and J dealing with capital gains and losses and partners and partnerships, respectively, do not recognize either (i) changes in the relative interest of a partnership as the acquisition of separate property nor (ii) the issuance of additional units in a partnership.

This is the reason for which this appeal must fail. Paragraph 97(2)(b) would apply in this same manner in this case regardless of whether the Partnership was unitized or not.

Boyle J further found, in the event that his interpretation was incorrect and Iberville instead first acquired an interest in the Partnership upon the transfer of the shopping centres, Iberville’s position nonetheless failed. He had noted earlier (at para. 6) counsel’s concession that “if the language of subsection 97(2) permits of any other reasonable interpretation [than as quoted above], the taxpayer should lose,” and then stated (at paras. 65-66):

It is not obvious from the language used in subsection 97(2), read in context, that there is a moment in time at which the transferor partner could recognize a cost under the section 54 definition of ACB that is not immediately after the partnership acquired the property. Section 97 uses the phrase “immediately after . . . the partnership . . . acquired the property” in subsection 97(1) … . It uses the phrase “immediately after the disposition” in subsection 97(2).

Similarly, paragraph 97(2)(c) which deals with the flow‑through of the character of taxable Canadian property if such property is transferred from a partner to a partnership on a taxable basis or on a rollover basis, applies “at any time that is within 60 months after the disposition”…. Just as the Appellant’s moment in time of the disposition not being after the disposition would lead to an absurd and presumably unintended result, so too would it similarly lead to an absurd and unintended opportunity to shed a property’s taxable Canadian property status by flowing it into a partnership.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 97 - Subsection 97(1) s. 97(1) establishes FMV cost for partner's interest 136
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property only one interest in a partnership 167

R & S Industries Inc. v. The Queen, 2017 TCC 75

taxpayer is not bound by the statement of boot set out in its s. 97(2) election form

The taxpayer (“R & S”) transferred its business to a limited partnership, with a joint s. 97(2) election being made. The Minister reassessed R & S to include substantial amounts in its income as a result of the transfer. A request by R & S and the partnership to file an amended election was denied by the Minister and the Federal Court denied their application for judicial review of this decision. R & S then appealed to the Tax Court and took the position in its pleadings that the allocation of consideration between partnership-interest and non-partnership interest consideration set out on the (T2059) election form did not reflect the actual agreed allocation. The Crown brought an application to quash the appeal on the ground that the Court lacked jurisdiction to hear the appeal.

In denying the Crown’s motion, Graham J stated (at paras. 10-12):

…[T]here is an important difference between the agreed amount and the key facts. The agreed amount is an amount selected by the parties to the transaction. Other than in accordance with the provisions of subsection 85(1), the agreed amount cannot be altered by the Minister. By contrast, the key facts are factual determinations. …[S]imply recording $X on the T2059 election form does not mean that the fair market value is $X. It simply means that the parties believe it to be $X. If the Minister disagrees with that valuation, the Minister is free to reassess… .[I]f… the taxpayer disagreed with the fair market value upon which the Minister had reassessed, the taxpayer could object to, and ultimately appeal from, the resulting reassessment. …

Other key facts, such as the allocation of consideration among transferred properties, are no different than fair market value. …

The Minister is bound by the agreed amount because it is something that the parties have elected. The Minister is not bound by the key facts because the facts are the facts. They exist independently from the election. So, if the Minister is not bound by the key facts stated in the election, why would the parties to the transaction be bound by them?

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 171 - Subsection 171(1) Tax Court had jurisdiction to consider change to description of consideration in s. 97(2) election form 190

Oxford Properties Group Inc. v. The Queen, 2016 TCC 204, rev'd 2018 FCA 30

purpose not to tax underlying recapture on subsequent LP unit sale

A corporation (“BPC”), which was mostly owned by a Canadian pension fund (“OMERS”), obtained the agreement of a predecessor of the taxpayer (“OPGI Amalco”) that, prior to BPC’s acquisition of OPGI Amalco, it or an OPGI Amalco subsidiary (“MRC Amalco”) would transfer various of its rental real estate properties (including the “Three Real Estate Properties”) on a s. 97(2) rollover basis to newly formed LPs (the “First Level LPs”). Following the acquisition on October 16, 2001 of OPGI Amalco by a subsidiary of BPC, the cost of the interests in the First Level LPs was bumped under s. 88(1)(d) on an amalgamation which formed the taxpayer. In 2004, the First Level LPs transferred the Three Real Estate Properties to respective newly-formed LPs (the “Second Level LPs”) on a s. 97(2) rollover basis and the First Level LPs were wound–up, thereby permitting the high ACB in their units to be pushed down onto the cost of the interests in the Second Level LPs under s. 98(3)(c). The taxpayer then sold its interests in the Second Level LPs, somewhat after the three-year period referenced in s. 69(11), to entities that were exempt from Part I tax.

In finding that the use of the s. 97(2) rollovers in these transactions was not abusive, D’Arcy J stated (at paras 187, 188,193 and 194):

…[I]t is not the purpose of subsection 97(2) to tax the partners, when they dispose of their partnership interest, on the potential recapture or capital gain relating to the property of the partnerships, including the Three Real Estate Properties. The Act treats the sale of the partnership interest as a sale of nondepreciable property. The partnership’s assets are taxed at the partnership level on the basis of their attributes at the time of the sale.

In short, it is not one of the purposes of subsection 97(2) to tax the subsequent sale of an interest in a partnership on the basis of the nature of the property held by the partnership.

Parliament…made the positive decision to limit the application of subsection 69(11) to transfers to tax-exempt entities that occur within the three-year period [in s. 69(11).] In my view, it is reasonable to conclude that Parliament was of the view that transfers after this three-year period did not abuse subsection 97(2).

For the foregoing reasons, I have concluded that the Oxford Transactions did not achieve an outcome subsection 97(2) was intended to prevent, did not defeat its underlying rationale and did not circumvent subsection 97(2) in a manner that frustrated or defeated its object, spirit or purpose.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) no abuse in using 88(1)(d) bump to avoid s. 100 after 3-year s. 69(11) period 557
Tax Topics - Income Tax Act - Section 248 - Subsection 248(10) subsequent sale part of series as it utilized the benefit of previous LP packaging transactions 383
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) - Paragraph 88(1)(d) purpose: to push down ACB of shares of sub to qualifying non-depreciable property 489
Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 45(2) subsequent amendment shed light on scope of previous version 107
Tax Topics - Income Tax Act - Section 100 - Subsection 100(1) S. 100 operates only on outside basis gain 290
Tax Topics - Income Tax Act - Section 69 - Subsection 69(11) Parliament provided safe harbour for sales after 3 years 204
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) - Paragraph 98(3)(c) purpose: to preserve high outside basis through push down 293

Ceco Operations Ltd. v. The Queen, 2006 DTC 3006, 2006 TCC 256

partnership subscription for taxpayer affiliate pref shares not boot

The taxpayer transferred assets of a business to a partnership in what was intended to be an s. 97(2) rollover transactions in consideration for cash, promissory notes and assumption of debt ("boot") totalling an amount less than the cost amount of the transferred assets, and a Class "F" partnership interest stipulated to have a value equal to the balance of the purchase price. The partnership used cash (derived in part from a third party who had subscribed for ¾ of the equity in the partnership) to subscribe for preferred shares of a sister company of the taxpayer ("Holdings"), with Holdings in turn using the proceeds to subscribe for preferred shares of holding companies ("Holdcos") for the various indirect individual shareholders of the taxpayer. A "back-flow preventor" clause in the Partnership Agreement provided that in the event that the partnership received any payments in respect of preferred securities held by the partnership, the partnership would make distributions to the holders of Class F units equalling such payments received.

In finding that the $18.7 million payment made by the Partnership to Holdings ostensibly as consideration for preference shares of Holdings was not additional consideration to the taxpayer for the business assets transferred by it to the Partnership, Bonner J. noted (at p. 3012) that the Crown had admitted in its pleadings that the Class F units received by the taxpayer together with the boot was equal to the fair market value of the transferred assets. Accordingly there was "no room for even a penny of additional consideration when the legal form of the transaction governed".

Vantem Holdings Ltd. v. The Queen, 98 DTC 1335 (TCC)

capital withdrawal in substance boot

The taxpayer borrowed money from a bank, contributed the borrowed money and a shopping centre to a partnership in consideration for the assumption of indebtedness and the issuance of debt and a partnership interest. The partnership then made a distribution of capital to the taxpayer in the form of cash and the issuance of a mortgage, with the taxpayer using the cash to pay off the bank loan.

In finding that s. 85(1)(b) should be applied to increase the consideration deemed to be received by the taxpayer to an amount above that initially elected, Bell TCJ. stated (at p. 1339):

"The withdrawal of approximately 2/3 of the capital account at the time of asset transfer followed 38 days later by the withdrawal of the balance is inconsistent with the concept of a true capital account. The form of the entire transaction does not conceal its substance."

MDS Health Group Ltd. v. The Queen, 96 DTC 1324 (TCC), aff'd 97 DTC 5009 (FCA)

subsequent capital distribution was boot

The taxpayer contributed technology valued at U.S. $3 million to a newly-formed partnership between it and an arm's length Canadian corporation ("P-E Canada"), P-E Canada contributed U.S. $1.5 million to the partnership and five days later, the taxpayer was paid U.S. $1.5 million by the partnership pursuant to a clause in the partnership agreement entitling it to "an initial distribution by way of return of capital of $1,500,000 immediately after the making of the initial contributions". (The agreement provided for an equal sharing of all other distributions.)

The distribution to the taxpayer was found to be part of the consideration for the contribution of property made by it to the partnership. Although the taxpayer's counsel relied on a clause in the partnership agreement requiring each partner to contribute capital of U.S. $500,000 in each of the partnership's first three fiscal years, this continuing obligation was characterized as relating to the additional funding by each party of R&D expenditures rather than as a liability of the taxpayer to recontribute the amount it had withdrawn, allegedly on a temporary basis.

Administrative Policy

December 2014 CTF Roundtable, Q. 6

no challenge of "immediately after"

Transactions which entailed the formation on a rollover basis of a Canadian partnership followed immediately by the admission of a non-resident partnership were found to be an abuse of ss. 100(1) and (1.4) without comment being made on the "immediately after" requirement in s. 97(2).

See detailed summary under s. 100(1) and 2014 CTF Conference

.

2014 Ruling 2013-0505431R3 - XXXXXXXXXX

s. 97(2) applicable to contribution (no equity consideration)

In connection with an extensive reorganization, Pubco will transfer its undivided interest in a royalty to a partnership (Partnership D) mostly owned by it as a contribution to its capital, with a s. 97(2) election being made. Ruling that with the requisite filings, s. 97(2) will apply to such contribution. See more detailed summary under s. 55(3)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(3) - Paragraph 55(3)(a) public trading in dividend recipient does not engage exclusion in s. 55(2)(a)(iv) 848
Tax Topics - Income Tax Act - Section 66.2 - Subsection 66.2(5) - Canadian development expense - Paragraph (e) transfer of roylaty from partly-owned partnership 464
Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) delay in filing articles of dissolution 55

4 July 2012 External T.I. 2011-0429601E5 F - Roulement et société de personnes

partnership is taxpayer for purposes of s. 97(2), which might be used with s. 98(3)

In order to merge two partnerships (in this case, two partnerships each owned as to 95% and 5% by a husband and wife, respectively, should s. 97(2) be utilized before s. 98(3), or should those provisions be applied in the reverse order? CRA stated:

[A] partnership would generally be considered a taxpayer for the purposes of the subsection 97(2) rollover and could therefore rely on that subsection to the extent that the conditions set out therein are satisfied.

In general, the use of subsection 97(2) followed by the use of subsection 98(3) is not impossible. …

[T]wo partnerships may achieve a certain form of merger, if each of them distributes all of its property to its partners, in accordance with paragraph 98(3), and if each partner subsequently invests the property so received in a new partnership in accordance with subsection 97(2).

Finally, partnerships may invest property in a new partnership and make an election under subsection 97(2). Thus, two partnerships may join together to form a new partnership if each of them makes an election under subsection 97(2) by filing Form T2059. In such cases, the interests of the members of the original partnerships are their individual interests in the new partnership to which the property was transferred.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) two partnerships potentially could be merged by using s. 97(2) followed by s. 98(3), or the reverse 107

29 July 2009 External T.I. 2008-0297011E5 F - Conversion de participations dans une SNC

s. 97(2) rollover not available if new partnerships interests exchanged for old interests are not in totality substantially distinguishable

A partnership has several members, some of whom hold partnership interests which participate in both income and capital of the partnership. The partnership agreement will be amended to provide for the issuance of two partnership interests: the first, to provide for participation only in income; and the second, to provide for participation only in capital. Would there be a disposition where an existing interest is converted or split up into a capital and income interest?

After noting that s. 97(2) permits a taxpayer to dispose of property on a tax-free basis to a partnership if, among other things, the taxpayer is a member of the partnership immediately following the disposition, CRA stated:

[T]here would be a disposition of the initial interest if the interests in income and in capital received in consideration had rights and characteristics sufficiently different to be distinguishable from those of the initial interest. …

It should be noted that the totality of the interests of a partner held in a partnership constitute a single property of the partner and represent its interest in the partnership for purposes of the Act. It is possible for a partnership to issue units with different rights whether to a taxpayer who will become a partner as a result of its contribution to the partnership or to a taxpayer who is already a partner. Where a partner's interest in a partnership is converted into a share of income and a share of capital, it is necessary to determine whether the partner's rights, following the conversion, are sufficiently different to be clearly distinguishable from the original interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition no disposition if new partnerships interests exchanged for old interests that in totality are not substantially distinguishable 213
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1.01) s. 96(1.01) inapplicable where only income interest and not capital interest disposed of 139
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) where only income interest and not capital interest in a partnership disposed of, there is part disposition of partnership interest with resulting reduced ACB for remainder interest 163

3 December 2003 External T.I. 2003-0046015 - Amalgamation and Sub. 97(2) Election

election filed by Amalco

Where a predecessor corporation made a transfer to a partnership described in s. 97(2), the amalgamated corporation can file the s. 97(2) election in respect of the transfer.

9 June 2003 External T.I. 2003-0004835 - WHETHER A PARTNERSHIP IS A PERSON

In a s. 97(2) transfer, the partnership is not considered a person related to the taxpayer solely because the taxpayer is a majority interest partner. Therefore, assuming that the taxpayer is not a corporation controlled by the partnership, and there is no intention to confer any benefit on the other partners, s. 85(1)(e.2) would not apply to the transfer.

2001 Ruling 2001-0070943 - PARTNERSHIP INTEREST PENSION CORP.

A corporation ("Company A") disposed of a real estate property to a limited partnership in consideration for partnership interest and the assumption of indebtedness, and thereafter was lent money pursuant to an interest-bearing note by the partnership. The Agency noted that no s. 97(2) ruling had been requested and stated that:

"It would be a question of fact as to whether the Note ... would constitute proceeds of disposition received by Company A for purposes of subsection 97(2) ..."

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 253.1 48
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) exercise price respected as the proceeds of property subject to NAL option 57

17 November 1999 External T.I. 9901265 - 97(1) AND A RESERVE

"[W]here an individual transfers property to a partnership under subsection 97(2) of the Act and receives, in addition to a partnership interest as consideration, a promissory note payable over, say, five years, the agreed amount would include the note and this amount would be deemed to be the proceeds for the individual and the cost to the partnership. In such a situation, where a gain has been triggered, i.e., the agreed amount exceeds the adjusted cost base of the property transferred, the transferor will be entitled to claim a reserve under paragraph 40(1)(a) of the Act if the note taken back is received as a 'conditional payment'."

1999 Ruling 9932263 - PARTNERSHIP REORGANIZATION

transferor may be partnership

A partnership that is a member of a partnership may elect under s. 97(2).

7 February 1997 External T.I. 9702245 - TRANSFER OF PROPERTY

Pending the completion of a review of the matter, the administrative position on s. 85(1)(b) described at the 1996 Corporate Management Tax Conference, Q. 7, will not be extended to transfers of property under s. 97(2).

24 August 1992 T.I. (Tax Window, No. 23, p. 13, ¶2125)

Where a corporation converts a capital property to inventory and transfers it to a partnership under s. 97(2), RC will apply its policy in IT-218R, paragraph 15 at the time of the transfer of the real estate to the partnership, and not when the partnership eventually disposes of the real estate.

89 C.R. - Q.36

Where an election under s. 97(2) is made indicating that a particular property is capital property, the election will not be considered invalid by reason of RC subsequently determining that the property is inventory.

87 C.R. - Q.5

It is a question of fact whether there is a Canadian partnership immediately after the transaction.

IT-338R "Partnership Interests - Effects on Adjusted Cost Base Resulting from the Admission or Retirement of a Partner"

IT-457R "Election by Professionals to Exclude Work in Progress from Income" under "Transfers of Work in Progress"

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) 136

Articles

M. O'Brien, "The 97(2) Rollover - Basic Rules and New Developments", Business Vehicles, Vol IV, No. 2, 1998, p. 186.

McMullen, "Tax Considerations in the Reorganization of Partnerships", 1994 Corporate Management Tax Conference Report, c. 6.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(21) 0

Bernstein, "Partnership Versus Joint Company", Tax Profile, March 13, 1990

Discussions of deferred extraction of "boot" from the partnership in light of RC positions on GAAR and partial dispositions; and of partnership mergers.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 85 - Subsection 85(2) 28

Accounting Pronouncements

CICA Emerging Issues Committee, EIC-28 "Accounting for Assets Contributed to a Joint Venture"

Paragraph 97(2)(b)

Cases

Iberville Developments Limited v. Canada, 2020 FCA 115

the starting ACB of a partnership interest was determined exclusively under s. 97(2)(b)

The taxpayer (“Iberville”), on three occasions in 2003 and 2004, contributed shopping centres worth $130M to a newly-formed partnership in consideration for promissory notes approximating the $14M cost amount of the contributed properties and for units of the partnership. After each contribution, the partnership sold the contributed properties to arm’s-length purchasers, and allocated capital gains and business income of $100M and $16M, respectively, to Iberville.

Iberville took the position that the cost of the units received by it equaled the net fair market value of the property contributed in exchange therefor, and that this initial ACB was increased immediately thereafter by the amount (contributed cost amount minus boot) referred to in s. 97(2)(b)i). Accordingly, it took the position that when the partnership was wound up in 2008, it realized a large allowable capital loss.

After noting (at para. 38) that “increasing the adjusted cost base of the partnership interest by both the fair market value of the transferred properties and the elected amount gives rise to an absurd result,” Noël CJ stated (at para. 48):

The Tax Court judge [found] … that the transfers, including the first, occurred after the partnership had been created. Specifically, the appellant’s partnership interest had already been acquired when the shopping centres were transferred, thereby eliminating any possibility that, in addition to the subsection 97(2) adjustment, the partnership interest could be increased under section 54 by the “cost”, i.e. the fair market value, of the transferred property … .

He went on to state (at paras 52, 53 and 54):

The Tax Court judge was correct in determining that section 54 was not applicable when the appellant, an existing partner, made the election under subsection 97(2). This construction is in line with the statutory language, gives effect to the intent of Parliament and avoids the absurd result advocated by the appellant.

As well, the Tax Court judge correctly held that the Act tracks the partnership interest as a whole rather than as individual units in “subdivision C dealing with capital gains and capital losses or in subdivision J dealing with partnerships” … . Indeed, upon a partial disposition by a partner of its partnership interest, the Act provides that the adjusted cost base of the part disposed of will be “the portion of the adjusted cost base to the taxpayer at that time of the whole property that can reasonably be regarded as attributable to that part” (subsection 43(1)).

Given the Tax Court judge’s unchallenged finding that the partnership interest had already been acquired by the appellant when the first transfer was made on December 15, 2003, this suffices to dispose of the appeal.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 97 - Subsection 97(1) issuance of partnership units on a drop-down is irrelevant to the ACB of the partnership interest 470

Subsection 97(3) - Election not available — section 88

Administrative Policy

16 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 19, ¶1051)

Where a corporation disposes of property at a loss to a partnership which is owned by its controlling shareholder and his spouse, s. 97(3) will deny a capital loss to the corporation, but because the corporation is not a partner there is no partnership interest to which the stop-loss can be added.