Subsection 98(1) - Disposition of partnership property
Cases
Bow River Pipelines Ltd. v. Canada, 2000 DTC 6090 (FCA)
A wholly-owned subsidiary of the taxpayer was wound-up into the taxpayer, as a result of which the taxpayer became the assignee of the subsidiary's 99.99% limited partnership interest in a resource partnership together with the shares of the general partner holding a 0.01% general partnership interest. On the following day, the general partner corporation was dissolved and all the Canadian resource properties of the former partnership were conveyed to the taxpayer.
The Trial Judge apparently had found that because the taxpayer had not become a substitute limited partner in the partnership but instead had the status only of an assignee of a limited partnership interest, the partnership dissolved at the time of the assignment of limited partnership interest to the taxpayer. Rothstein J.A. found that, under s. 98(1)(a), the partnership was deemed not to have ceased to exist until a transfer of legal title to the property of the partnership to the taxpayer, rather than at the time the taxpayer had an equitable right to the receipt of such property. Accordingly, the partnership did not cease to exist until the time of distribution.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 54 - Adjusted Cost Base | 78 |
See Also
Osfc Holdings Ltd. v. R., 99 DTC 1044, [1999] FTR 33266, [1999] 3 CTC 2649, aff'd 2001 DTC 5471, 2001 FCA 260
A trust company ("Standard") formed a partnership between itself and a wholly-owned subsidiary, transferred a mortgage portfolio to the partnership and then sold its partnership interest to an arm's-length purchaser. In finding that substantial changes made to the partnership agreement at the insistence of the purchaser did not result in the dissolution of the partnership and its replacement by a fresh partnership, Bowie TCJ. stated (at para. 32) that a partnership's:
"essence is the business itself. Here it is clear that the same business was to be carried on after the sale to the Appellant as had been carried on before. I find that the partnership survived the amendment of the agreement and the sale of Standard's interest."
Howatt v. MNR, 89 DTC 215, [1989] 1 CTC 2325 (TCC)
The taxpayer ceased to be in partnership with his two brothers in December 1978, when a dispute arose and he was asked to leave, notwithstanding that he remained in possession of the partnership farm until March 1978, when he received a capital sum in full settlement of his partnership interest. He did not receive any income from the partnership in 1979. Brulé, J. held that the taxpayer was not required to include any share of the income of the partnership for the 3-month period ended on March 31, 1978, the date on which the partnership was alleged by the Minister to have terminated.
A. Akman & Sons (Fla) Inc. v. Chipman (1987), 38 BLR 185 (Man QB)
A real estate development partnership was terminated by the statement of the plaintiff that it wished to terminate the partnership and that it would not be paying its share of a balloon payment coming due on a mortgage secured on the partnership property, notwithstanding that a termination agreement was not concluded until later. (Partnership Act (S.M. 1965), s. 35(1)(c)).
Darke v. MNR, 76 DTC 6468, [1976] CTC 734 (FCTD)
An agreement whereby one of the three partners of a partnership sold his undivided 1/3 interest in the partnership assets to the other two partners was held to entail the termination of that partnership and the formation of a new partnership "albeit with purposes similar to the first partnership and with some assets which had been the assets of the first partnership."
Simpson v. The Queen, 76 DTC 6350, [1976] CTC 600 (FCTD)
A partnership described by Addy, J. as consisting of a firm of chartered accountants ("Riddell Stead") and three individuals was found to have terminated when the three individuals withdrew.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(l) | 41 |
Marksim Storage Ltd. v. MNR, 73 DTC 158, [1973] CTC 2185 (T.R.B.), rev'd 76 DTC 6401, [1976] CTC 665 (FCTD)
The sale by two of the four partners of a partnership that had realized a taxable gain of their partnership interests to a third-party purchaser did not dissolve the partnership, with the result that the selling partners were not subject to tax of their share of that gain. Mr. Cardin stated (pp. 161-162):
"I do not see any legal reason why the remaining partners cannot continue the partnership with the purchasers of the old partners' interests if it is their declared intention to do so as in the case in the present instance and, in my opinion, the Partnerships Act of Ontario at sections 32 and 33 provides for such a contingency."
Dolente v. MNR, 65 DTC 179 (TAB)
Mr. Fordham found that the assignment by two of the three partners of a partnership of their interests to a third party did not result in the dissolution of the partnership in light of the failure of the Partnership Act (Ontario) to include such an event as a cause for dissolution and after quoting a statement from Pollock's Law of Partnership in regard to The Partnership Act, 1890 (England) that:
"'Since the Act it seems that the assignment of a partner's share does not in any case work a dissolution of itself, or give the other partners an absolute right to have the partnership dissolved.'"
In addition, the continuing partner executed the assignment agreement, which provided that the partnership "shall not hereby for any purpose whatsoever be deemed to be terminated".
Alvarez v. Daly (1964), 48 WWR 611 (BCSC)
The past dealings of partners in a medical partnership of more than 20 members and other terms of the partnership agreement permitted Wootton J. to imply a term in the partnership agreement that the partnership was not to be dissolved at the instance of less than a majority of the partners.
Tait v. Winsby, [1943] 1 DLR 81 (PC)
A partnership of two individuals was found to have been formed for a single adventure (namely, the exploitation of some mining claims) in light of the lack of any reference in the partnership agreement to the provision of further capital or to the term of the partnership arrangement, and in light of the unsavoury character of one of the partner's with whom, therefore, the other would not have wanted an indefinite relationship. The partnership, therefore, was terminated when the mining claims were transferred to a company in consideration for shares.
Administrative Policy
26 January 2015 External T.I. 2014-0545051E5 - Subsections 98(1) and 98.1(1)
In confirming a "concern" to this effect, CRA stated:
[P]aragraph 98(1)(a) would only deem a person who was a partner at the time the partnership ceased to exist not to have ceased to be a partner and thus would not apply to a former partner.
CRA then noted that s. 98.1 "may be applicable to a former partner who continues to have a residual interest in the partnership," and that in such circumstances generally "the former partner's partnership interest becomes a residual interest and the former partner is generally deemed not to have disposed of the interest until that specified time" (the later of its residual entitlement to partnership property being fully satisfied and the end of the dissolution year).
8 May 2014 External T.I. 2014-0522771E5 - Whether a partnership has ceased to exist
Partner A sold his 50% partnership interest in a Quebec general partnership (the "Partnership") operating a grocery business in the province of Quebec to Partner B (also a Canadian-resident individual). The Partnership immediately disposed of all of its properties to a taxable Canadian corporation (the "Corporation") of which Partner B was the sole shareholder in consideration for the issuance of promissory notes and common shares (and elected under s. 85(2)) but with title to all assets staying the name of the Partnership. Partner B filed for dissolution of the Partnership under the Civil Code of Quebec (the "CCQ") more than 60 days after such disposition.
After indicating that "a partnership would generally cease to exist if there are no longer at least two partners carrying on the business…[and] the…CCQ…also contemplates a minimum of two persons as partners," CRA noted that s. 98(1) would deem the partnership to have not ceased to exist until all partnership property had been distributed.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 85 - Subsection 85(3) | winding-up of affairs of partnership with one partner when constructive distribution | 211 |
16 March 2012 External T.I. 2011-0423191E5 F - Disposition d'une participation dans une SP
Where on a winding-up of a partnership on a non-rollover basis, a member receives properties of the partnership with a fair market value lower than the adjusted cost base of the member's interest (held as capital property) then provided that the partnership is dissolved under the applicable provincial law and all property of the partnership has been distributed, the member can claim a capital loss on the disposition of the member's interest equal to the ACB of that interest as reduced by the fair market value of the property distributed on the interest.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition - Paragraph (b) - Subparagraph (b)(i) | disposition of partnership interest even though no proceeds received | 102 |
31 January 1994 External T.I. 9328595 F - Wind-Up of a Partnership
If the property of a partnership is not distributed at the time it ceases to exist, s. 98(1) will deem the partnership not to have ceased to exist until such time as all the partnership property has been distributed. In such case, unless an election is made under s. 99(2), the partnership's fiscal period will be deemed to have ended immediately before the time the partnership ceased to exist and on the subsequent distribution of partnership property there will be another fiscal period termination.
30 May 1991 T.I. (Tax Window, No. 3, p. 21, ¶1269)
The capital gain referred to in s. 98(1)(c) must be brought into income at the end of the fiscal period after the partnership actually ceased to exist. All the property of the partnership need not have been distributed in order for s. 98(1)(c) to apply.
88 C.R. - Q.19
The deemed gain arising under s. 98(1)(c) from the disposition of a partnership interest with a negative ACB will be realized at the end of the first fiscal period ending after the partnership in fact ceased to exist.
88 C.R. - Q.20
Where a partnership is in receivership, property held for distribution to creditors is considered to be "partnership property" until it is so distributed.
Articles
Jack Bernstein, "Real Estate Breakups", Tax Profile, Vol. 6, No. 1, January 2000, p. 1
Includes discussion of techniques for effecting the economic equivalent of the division of assets of partnership.
Fien, "Causes and Effects of the Dissolution and Winding-up of Partnership", 1981 Conference Report, p. 497.
Paragraph 98(1)(a)
Administrative Policy
30 May 1991 Ministerial Correspondence 903074 F - Paragraph 98(1)(c)
In commenting on the time of disposition referred to in s. 98(1)(c) as contrasted to the time that a partnership ceases to exist as described in s. 98(1)(a) and the time of distribution of property of the partnership to its members, the Department stated.
By virtue of subsection 99(1) of the Act the fiscal period of a partnership is deemed to end when the partnership actually ceases to exist even if subsection 98(1) of the Act deems the partnership not to have ceased to exist by virtue of incomplete distributions of partnership assets. …[P]roperty distributions after cessation of the partnership means that the partnership will have at least another fiscal year end until distribution of all the assets is completed. …
Subsection 98(1) will not apply where, the affairs of a partnership are wound up at any time during its usual fiscal period and all of the partnership's property is distributed prior to, or concurrently with, the winding-up. In such a case, the winding-up of the partnership automatically brings the fiscal period to an end.
Paragraph 98(1)(b)
See Also
Canadian Home Publishers Inc. v. Parker, 2019 ONCA 314
The members of a limited partnership that operated a magazine were an individual who, decades earlier, had provided all the capital before the partnership became quite profitable, and the general partner corporation, whose shareholder was the ex-wife of the limited partner. She managed the magazine. Their relationship had become acrimonious. There was no written limited partnership agreement, but their oral agreement was that profits were to be shared on a 50-50 basis, but with there being no oral agreement on what would happen on a partnership dissolution.
It was agreed before the Court of Appeal that the partnership had dissolved on the death of the limited partner. At issue was whether his estate was entitled to 50% of the net residual partnership assets, or the much smaller sum representing a return of his capital contributions.
Nordheimer JA quoted s. 24 of the Limited Partnerships Act (Ontario), which provided that “unless the partnership agreement or a subsequent agreement provides otherwise,” on a partnership dissolution the residual assets were to go to the general partner excepting for the payment to the limited partner of its contributions and share of undistributed profits. In finding that the estate was not entitled to a 50% share of the residual assets, Nordheimer JA stated (at para. 25):
A limited partner enjoys protection from the liabilities of the limited partnership, unlike a partner in an ordinary partnership. In return for that protection, the limited partner is restricted to the receipt of two things under the LPA: one is their share of the profits and the other is the return of their contribution (see LPA, s. 11). A limited partner has no broader right to participate in the upside of the limited partnership, just as the limited partner has no broader obligation to suffer or contribute in the downside.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Other Legislation/Constitution - Ontario - Limited Partnerships Act - Section 24 | a limited partner on dissolution can only receive a return of its capital contributions, where s. 24 not overridden | 219 |
Paragraph 98(1)(c)
Administrative Policy
9 August 2017 External T.I. 2017-0709351E5 - Interaction between subsections 98(1) and 116(5)
Does s. 116(5) apply where a non-resident partner of a partnership, whose interest in the partnership is taxable Canadian property, is deemed under s. 98(1) to have realized a gain from a disposition of the partnership interest on the dissolution of the partnership? CRA responded:
Subsection 116(5) … imposes a tax liability on a purchaser who acquires any “taxable Canadian property” from a non-resident person. Paragraph 98(1)(c) … does not deem the partnership interest to be disposed to a purchaser. In particular, absent a specific deeming rule, the partnership itself will not be considered to be a purchaser of the partnership interest. Accordingly … subsection 116(5) … will not apply to a cessation of a partnership subject to paragraph 98(1)(c)… .
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 116 - Subsection 116(5) | gain from negative partnership interest ACB not subject to s. 116(5) | 101 |
Subsection 98(2) - Deemed proceeds
See Also
Mihelakos v. R., 97 DTC 1450, [1997] 3 C.T.C. 2975 (TCC)
A transaction that was documented in a confusing fashion was characterized as representing a sale by the taxpayer of his 1/2 interest in a partnership to purchasing partners, rather than a dissolution of the partnership followed by an asset sale. Hamlyn TCJ. applied (at p. 1453) the principle that "when documents are ambiguous or do not explain the whole transaction, the Court may look to other evidence as to what the parties intended".
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Evidence | 73 |
Administrative Policy
2 November 2023 APFF Financial Strategies and Instruments Roundtable Q. 5, 2023-0978561C6 F - Partnership – distribution of a life insurance police
Regarding the situation where a partnership held, was the beneficiary of, and paid the premiums for 10 years on, three policies on the lives of each of the three individuals who were its partners and then, pursuant to the partnership agreement, transferred the applicable policy to one of the partners on such withdrawal of “Individual C” from the partnership, CRA indicated:
[W]here the conditions of subsection 98(2) are satisfied, we are generally of the view that subsection 98(2) would override subsection 148(7) so that the partnership's proceeds of disposition of the life insurance policy would be the FMV of the policy.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 148 - Subsection 148(7) | s. 98(2) generally prevails over s. 148(7) | 103 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(35) | holding of policy by partnership prior to its distribution to partner does not count towards the latter’s holding period | 113 |
27 March 2018 Internal T.I. 2015-0592551I7 - Excluded property status of partnership interest
On the winding-up of an Icelandic partnership, it disposed of all its loans for cash, distributed most of its cash to its two partners, made a final cash distribution and some time later it was formally dissolved under Icelandic law. The Directorate indicated that it was unnecessary for it to pass on whether the partners disposed of their partnership interests on the final distribution date under s. 98(2), or whether the disposition occurred on the formal dissolution date.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Excluded Property | partnership interests no longer were excluded property on dissolution given prior disposition of s. 95(2)(a)(ii) loans | 551 |
| Tax Topics - Income Tax Regulations - Regulation 5908 - Subsection 5908(10) | partnership interests no longer were excluded property on dissolution given prior disposition of s. 95(2)(a)(ii) loans/potential qualification of partnership interest under para. (c) ignored | 297 |
| Tax Topics - Income Tax Regulations - Regulation 5903 - Subsection 5903(5) - Paragraph 5903(5)(b) | foreign affiliate parent cannot carry back FAPLs generated by wound-up foreign affiliate | 389 |
| Tax Topics - Income Tax Act - Section 96 | Icelandic Sameignarfelag was partnership | 198 |
| Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(f.14) | once partnership interests were no longer excluded property, the components of their ACB calculation was to be translated at the rates when those components first arose | 254 |
External T.I. 14 July 1999 T.I. 9917685
A Partnership which is held 30% and 70% by FA1 and FA, respectively (which are wholly-owned by Canco) is dissolved on a rollover basis undnr the tax laws of Country X. CRA stated:
[S]ubsection 98(2) would apply on the dissolution of Partnership. Therefore capital gains of Partnership and the adjusted cost base of the property transferred to FA1 and FA2 would be determined on the basis that Partnership's capital property was disposed of to FA1 and FA2 at its fair market value. … As property is distributed to FA1 and FA2 on the dissolution on a rollover basis under the tax law of Country X, there would be no "earnings" created as a result of the wind-up of FA1 and FA2.
21 May 1991 Memorandum (Tax Window, No. 3, p. 22, ¶1256)
Where new partners are found to contribute cash to a partnership which has encountered cash flow problems, and the capital accounts of the old partners are increased to recognize the fair market value of the assets, the increase in the capital accounts of the old partners should be taken as an indication that a new partnership was formed, with the result that a Canadian partner would have disposed of its interest in the old partnership, and s. 98(2) would deem the old partnership to have disposed of its property to its partners.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | 93 |
IT-457R "Election by Professionals to Exclude Work in Progress from Income" under "Meaning of 'Work in Progress'"
Unless s. 85(3), 98(3) or 98(5) applies, a transfer of property (including work in progress of a professional practice subject to an election under s. 34) from a partnership to a partner or all partners is deemed to have been made at fair market value. RC will not object if additional income arising to the partnership from such a transfer is allocated to the withdrawing partner.
Subsection 98(3) - Rules applicable if partnership ceases to exist
Administrative Policy
29 September 2022 External T.I. 2021-0882411E5 - Partnership wind-up - life insurance
Where a partnership holding an exempt life insurance policy on the life of individual partners is wound up as described in s. 98(3) or 98(5), can the distribution on the winding-up of the policy occur on a rollover basis as may be permitted under those provisions, or are its proceeds of disposition determined under s. 148(7)? CRA responded:
[W]here a Canadian partnership that owns an interest in an exempt life insurance policy ceases to exist and all the requirements of subsection 98(3) or 98(5), as the case may be, are otherwise met, it is our general view that those provisions would take precedence over subsection 148(7) such that there would be a tax-deferred rollover of the exempt life insurance policy.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 148 - Subsection 148(7) | the s. 98(3) or (5) rollover provisions can apply to a distribution on the partnership winding-up of a life insurance policy | 170 |
| Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) | s. 98(5) precludes a gain under s. 148(7) | 122 |
2021 Ruling 2021-0895071R3 F - Partnership Reorganization
Background
Fund LP (a Canadian partnership) holds investments including the “Rollover Shares” (with accrued gains) and “Non-Rollover Shares” (which may have accrued losses), both of Pubco (a listed Canadian public corporation), as well as other investments (the “Other Investments”) and has no debt. Its general partner (General Partner LP) has Bco (a CCPC owned by Individuals A and B) as its general partner and the families of A and B as limited partners. Aco, a CCPC owned by A, is one of the limited partners (and not a majority interest partner) of Fund LP. Bco is also the general partner of Carry LP, whose limited partners are A and B and their families. The carry limited partnership interest in Fund LP commences to be entitled to a percentage of distributable proceeds, once the other limited partners have received a return of their contributed capital and a preferred return thereon.
Fund LP had granted call options on the shares of Pubco (a listed Canadian public corporation) to Pco. These options are currently in the money.
Proposed transactions
- Fund LP will dispose of shares on the stock exchanges in order to generate proceeds sufficient to distribute the amount of the contributed capital and preferred return thereon, such that Carry LP and the other limited partners will now be entitled to share in future distributions on a pro rata basis.
- Fund LP will transfer the Rollover Shares and Other Investments on a s. 97(2) rollover basis to a new LP (New LP – formed by General Partner LP as general partner and Fund LP as limited partner, and) in consideration for units of New LP, with similar terms to Fund LP, except that distributions are solely in proportion to the number of units held. As a result of the transfer of the Rollover Shares, New LP will become a party to the option agreements with Pco.
- Within 30 days of 2 above, Fund LP will be wound up such that its partners will receive undivided interests in all its property (essentially, the Non-Rollover Shares and the units of New LP) based on their previous unitholdings in Fund LP. A joint election under s. 98(3) will be filed.
- Particular partners may bump their undivided interest in Non-Rollover Shares pursuant to a designation under s. 98(3)(c).
-
Pursuant to a partition agreement, each of the former partners will receive a pro rata fraction of each Non-Rollover Share and each New LP Unit.
- The other former partners will sell their respective fractions of Non-Rollover Shares to Carry LP for cash consideration equaling the FMV thereof.
Rulings
Re: application of s. 97(2) to Fund LP wind-up; s. 248(21) deeming there to be no disposition on the partition; and non-application of s. 245(2).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.3) | refusal to rule where shares received on LP s. 98(3) wind-up immediately sold to Carry LP owned by owners of former general partner | 345 |
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.12) | no s. 40(3.12) ruling given re loss on fund LP wind-up | 380 |
7 October 2021 APFF Roundtable Q. 11, 2021-0901011C6 F - Application of subsection 98(3)
Mr. A and Mr. B carried on business in a general partnership, whose most important asset (as to 85% of the total value) was goodwill. The partnership is wound up in reliance on s. 98(3) so that each receives a pro rata portion of the assets. Mr. A transfers his pro rata portion on a s. 85(1) rollover basis to a newly-incorporated wholly-owned corporation (A Inc.) and A Inc. then purchases the pro rata portion of the assets held by Mr. B.
After indicating that s. 98(5) likely would not apply, and turning to the application of s. 98(3) (including having regard to the difficulty of sharing goodwill) or s. 98(5), CRA stated:
[The provisions of subsection 98(3) could apply in the hypothetical situation described above with respect to the distribution to Mr. A and Mr. B of an undivided interest in each of AB's properties, provided that the conditions set out therein are satisfied.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) | a post-wind up drop down transaction would preclude the application of s. 98(5) | 200 |
2017 Ruling 2016-0660321R3 - Reorg of REIT to simplify multi-tier structure
Following the acquisition by a mutual fund trust (the “Fund”) of the limited partner units in, and the shares of the general partner (“GP II”) of, a limited partnership (“Opco Partnership”), Opco Partnership ins transferred to and wound-up into Partnership as follows:
- Fund will contribute its Opco Partnership Units and its shares of GP II to Partnership, giving rise to a credit to its capital account, with a joint s. 97(2) election being filed.
- Opco Partnership will be wound-up under s. 98(3), with each former partner receiving an undivided interest in each distributed property.
- GP II will sell its undivided interest in each property to Partnership for fair market value consideration and then will be wound up.
Rulings re application of s. 98(3).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 132.2 - Subsection 132.2(1) - Qualifying Exchange | use of the s.132.2 merger and a renunciation of most of the units otherwise issuable on the merger in order to eliminate a REIT corporate subsidiary held through an LP and a sub-trust | 1006 |
| Tax Topics - Income Tax Act - Section 107.4 - Subsection 107.4(2) - Paragraph 107.4(2)(a) | s. 107.4 transfer of sub-trust’s assets to sister MFT trust | 460 |
| Tax Topics - Income Tax Act - Section 246 - Subsection 246(1) | no taxable benefit where wholly-owned partnership renounces the right to have consideration paid for the redemption of its shares in its limited partner (a mutual fund corporation) | 325 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | no disposition of partnership interests or property on conversion of general to limited partnership or adding right of renunciation of a MFT unitholder | 165 |
| Tax Topics - Income Tax Act - Section 132.2 - Subsection 132.2(3) - Paragraph 132.2(3)(g) - Subaragraph 132.2(3)(g)(vi) - Clause 132.2(3)(g)(vi)(C) - Subclause 132.2(3)(g)(vi)(C)(I) | renunciation by subsidiary partnership of transferee MFT of units that otherwise would be issuable on the redemption of its incestuous holding in transferor MFC | 245 |
10 October 2014 APFF Roundtable Q. 23, 2014-0538171C6 F - 2014 APFF Roundtable, Q. 23 - Winding-up of a partnership
The s. 98(5) rollover is not available where one partnership is wound up into another. What are the consequences of a partnership (SENC) ceasing to exist under the Civil Code as a result of the acquisition by a single partner (which was an SENC itself) of all interests in the first partnership, so that all the first partnership's property became property of the second? CRA responded (TaxInterpretations translation):
One of the conditions stipulated in subsection 98(3) is that all the property of the partnership has been distributed to persons who were its partners immediately before its winding-up. …[S]uch condition is not satisfied [here] because the other partners would not receive any property of the partnership on its winding-up.
6 October 2014 External T.I. 2014-0540611E5 - subsection 98(3) election
Will an election under s. 98(3) be valid and apply to all of a partnership's properties (which were distributed in accordance with the s. 98(3) requirements) if the election was filed in prescribed form but failed to include a particular property of the partnership? CRA responded:
Subsection 98(3)… contemplates an election "in respect of the property". …[T]he reference to "the property" is a reference to the phrase "all the partnership property" earlier in the preamble… . Accordingly, an election under subsection 98(3)… is not valid unless the election is made in respect of all of the property of the partnership.
The election under subsection 98(3)… is not among the elections listed in [Reg.] 600… . Accordingly, there is no discretion to permit an amended election under subsection 98(3)… .
4 July 2012 External T.I. 2011-0429601E5 F - Roulement et société de personnes
In order to merge two partnerships (in this case, two partnerships each owned as to 955 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:
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).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) | partnership is taxpayer for purposes of s. 97(2), which might be used with s. 98(3) | 209 |
16 November 2009 External T.I. 2009-0317591E5 - FX gains/losses when partners assume ptnshp debt
Foreign exchange gains or losses generally can be recognized where foreign-currency denominated debt obligations of a partnership are assumed by the former partners on the dissolution of the partnership in accordance with s. 98(3).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) | FX gain or loss recognized on FX debt assumption on s. 98(3) wind-up | 100 |
2003 Ruling 2003-0033363 - PARTNERSHIP WIND-UP
Background
Five professional corporations (Aco, Bco, Cco, Dco, and Eco - each wholly-owned by a doctor) are partners in the Partnership, which provides professional services at a privately owned clinic. The Partnership's assets consist solely of cash, accounts receivable, work-in-progress ("wip") and goodwill. The Partnership Agreement does not deal with the sharing of profits or losses. However, there is an understanding amongst the Partners that each Partner is entitled to share in the profits of the Partnership based on a formula which takes into account that Partners' contributions to the Partnership.
Proposed transactions
The Partnership will wind-up its operations and cease to exist by distributing its property to each of the partners. On the winding-up each of the Partners will receive an undivided interest in the Partnership's property such that each Partner's undivided interest in a particular property will be equal to that Partner's undivided interest in every other property. The percentage interest in each property will be equal to the percentage of capital that the former partner had as a percentage of total capital of the former partnership immediately before the dissolution. A joint s. 98(3)election will be made.
Each of the former partners of the Partnership will then enter into a contract to acquire a divided interest in the former Partnership's goodwill. In order for the division to be legally enforceable between the parties, each former partner will sign a non-solicitation agreement with respect to the patients that may follow a particular former partner after the wind-up of the Partnership. The goodwill received by each former partner will be equal in value to the percentage of capital that the former partner had as a percentage of total capital of the former partnership immediately before the dissolution.
Each of Aco, Bco, Cco, Dco and Eco will enter into a contractual arrangement with Opco whereby Opco will be able to utilize the goodwill and related assets of each corporation. The fee that will be received by each party under the licensing arrangement will be a negotiated fee. Each of the former partners of the Partnership will enter into a contract for services with Opco.
Rulings
Including re application of s. 98(3) and s. 248(21).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(21) | partition of goodwill following s. 98(3) wind-up of professional partnership | 211 |
28 October 2002 External T.I. 2002-0134785 F - Partitioning of Shares
A partnership, holding 25 investments in public companies and mutual fund trust (MFT) units, was dissolved such that each CCPC received a pro rata undivided interest in each such investment and with an s. 98(3) election being made for this to occur on a rollover basis, following which there was a partition (such that each CCPC now held divided interests in each of the 25 investments corresponding to their previous undivided interests therein. Regarding the availability of s. 98(3), CCRA indicated that s. 98(3) would not permit a partner to receive a whole investment or a divided interest in such property on the distribution, so that, for instance, the CCPCs could not receive a divided interest in each share.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(21) | s. 248(21) could apply to partitioning a share if the corporation could issue fractional shares on the partition satisfying the FMV test, and similarly for partitioning MFT units (viewed as a single property) | 301 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Property | interest in trust is a single property even if held as units | 90 |
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(20) | s. 248(20) might apply if a partition results in the issuance of whole shares | 177 |
5 September 2002 External T.I. 2002-0147315 - PARTNERSHIP AS A PARTNER & 98 (3)
Can s. 98(3) be used where one (or all) of the partners in the particular partnership are themselves partnerships? CRA responded:
Subsection 102(2) of the Act provides that a reference to a person or a taxpayer who is a member of a particular partnership shall include a reference to another partnership that is a member of the particular partnership. Accordingly, it is our view that subsection 98(3) of the Act may apply even though one or all of the members of the particular partnership are partnerships. As regards the requirement in that subsection that the particular partnership be a Canadian partnership at the time the partnership is wound up, we will consider a member of the partnership which is a partnership all the members of which are resident in Canada at such time to be a member resident in Canada
2000 Ruling 2000-0028423 - partnership dissolution under 98(3)
S. 98(3) would apply to the winding-up of a partnership notwithstanding that the general partner (which was entitled to 0.01% of income of the partnership) had a 0% undivided interest in each property of the partnership on its cessation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv) | 38 | |
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv) | 82 | |
| Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate | capital property retained that character on s. 98(3) wind-up | 43 |
93 CPTJ - Q.13
RC will not depart from the requirement that each former partner receive an appropriate undivided interest in each property distributed on the dissolution of the partnership.
The cost to a former partner of an undivided interest in a particular Canadian resource property is nil in light of the definition of cost amount.
18 May 1990 T.I. (October 1990 Access Letter, ¶1470)
The s. 98(3) election is not available when the partners received a divided part of the property of the partnership.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Disposition | 29 |
19 September 89 T.I. (February 1990 Access Letter, ¶1112)
If the two corporate partners of a partnership (A and B) dissolve the partnership under s. 98(3), the subsequent amalgamation of the two corporations will not result in the application of s. 98(2).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) | 68 |
88 C.R. - F.Q.22
Where the only asset of a partnership is identical units in another partnership, s. 98(3) requires each partner on dissolution to receive an undivided interest in each unit, rather than a separate unit.
84 C.R. - Q.89
even where the only partnership property is identical shares in a corporation, RC cannot accept a pro rata distribution of shares instead of a pro rata distribution of percentage interests in each share.
IT-471R "Merger of Partnerships" under "Work in Progress"
Asssumed liabilities increase ACB of partnership interest
3. ... The adjusted cost base of each partner's interest in the partnership as referred to in [98(3)(a)] will include pursuant to subparagraph 53(1)(e)(iv) the partner's proportion of the partnership liabilities assumed by the partners on the dissolution of the partnership. Under paragraph 98(3)(f), the partnership will be deemed to have disposed of the property for proceeds equal to the cost amount of the property to the partnership immediately before its distribution.
IT-457R "Election by Professionals to Exclude Work in Progress from Income" under "Meaning of 'Work in Progress'"
S. 98(3) rollout followed by s. 97(2) roll-in
19. The Act does not contain any special provisions governing the merger of partnerships. However, in the case of a Canadian partnership the effect of a merger can be accomplished by utilizing the "roll-out, roll-in" provisions of subsections 98(3) and 97(2). Where Canadian partnerships using these provisions have previously elected under section 34 not to include work in progress in computing income, each former Canadian partnership may "roll-out" its work in progress at a "cost amount" of nil (see 18 above. Furthermore, each partner of the former Canadian partnerships may "roll-in" work in progress into the new (merged) Canadian partnership at an agreed amount of nil. The new Canadian partnership may elect under paragraph 34(a) not to include in income the work in progress at the end of its first or a subsequent taxation year.
Forms
T2060 "Election for Disposition of Property Upon Cessation of Partnership"
Where a former partner is authorized to sign for the purpose of making the election, that person should...attach a copy of the authorizing agreement (the partnership agreement will not be accepted, as the partnership has ceased to exist). ...
If a member of the partnership was itself a partnership, attach a list showing each partner's name and social insurance number or business number.
Paragraph 98(3)(b)
Administrative Policy
18 May 2004 External T.I. 2004-0069691E5 F - Incorporation des professionnels
A partnership ("SENC"), which had elected under s. 34 respecting its work-in-progress, is wound-up pursuant to s. 98(3), with the partners then transferring their undivided interests in the WIP to a corporation under s. 85(1). Which of the partners or the corporation is taxed on such WIP? CRA responded:
Subparagraph 98(3)(b)(i) deems the cost to each partner of each property of the partnership to be the partner's percentage of the cost amount of the property to the partnership immediately before its distribution.
… [T]he cost amount of the work-in-progress is nil to the SENC immediately before its distribution to the partners and therefore the cost of each partner's undivided interest in the work-in-progress is nil by virtue of the application of subparagraph 98(3)(b)(i). …
When the corporation invoices the customers, the work in progress will therefore be taxed to the corporation.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 34 | insolvency practice carried on by accountants does not qualify as accountancy | 79 |
| Tax Topics - Income Tax Act - Section 40 - Subsection 40(2) - Paragraph 40(2)(a) - Subparagraph 40(2)(a)(ii) | only s. 40(2)(a)(ii)(A), not (B) or (C), is potentially engaged where transferor is individual | 125 |
| Tax Topics - Income Tax Act - Section 249.1 - Subsection 249.1(2) | s. 249.1(2) not engaged by virtue only of no income being allocated to the partner | 236 |
Paragraph 98(3)(c)
Cases
Canada v. Oxford Properties Group Inc., 2018 FCA 30
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.
After reversing the findings of D’Arcy J that these transactions did not abuse ss. 97(2) and 100(1), Noël CJ went on to find that the same purposive analysis that was applied in determining that the transactions were abusive insofar as they avoided recognition in taxable hands of recapture should also be applied to determine that GAAR should be applied only to recognize a taxable capital gain (effectively under s. 100(1)) equal to that recapture (of $116M) and not a taxable capital gain equal to the accrued capital gains on the buildings and land of $21M and $11M, respectively. In this regard, he stated (at para. 116):
[F]ailure to recognize a cost that has been actually incurred but which would disappear on a vertical amalgamation or a partnership dissolution goes against the integrity of the capital gains system because it allows for the subsequent realization of a capital gain in circumstances where there has been no economic gain.
| 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 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 97 - Subsection 97(2) | object includes ultimate taxation of the deferred gain | 234 |
| 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 |
See Also
Oxford Properties Group Inc. v. The Queen, 2016 TCC 204, rev'd 2018 FCA 30
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.
D’Arcy J stated (at para 167):
The purpose of the bump rules in subparagraph 98(3)(b)(ii) and paragraph 98(c) is to provide the partners with an opportunity to preserve their adjusted cost base of the partnership interests. Obviously, this adjusted cost base would disappear on the dissolution of the partnership. Subparagraph 98(3)(b)(ii) and paragraph 98(3)(c) effect this purpose by allowing for the transfer of the Partner’s Excess Outside Basis to the cost base of the partner’s interest in the non-depreciable capital property obtained by the partner on the dissolution of the partnership.
| 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 and bump transactions | 387 |
| Tax Topics - Income Tax Act - Section 97 - Subsection 97(2) | purpose not to tax underlying recapture on subsequent LP unit sale | 431 |
| 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 |
Subsection 98(5) - Where partnership business carried on as sole proprietorship
See Also
Canada Life Insurance Company of Canada v. Canada (Attorney General), 2018 ONCA 562
A Canada Life subsidiary (CLICC) had sought to realize an accrued loss on its LP interest in a subsidiary partnership by winding it up. This was accomplished by transferring pro rata interests in the partnership to its two partners, namely, CLICC and a wholly-owned GP, based on their respective 99% and 1% interests - followed immediately by a winding-up of the GP corporation into CLICC. CRA reassessed to deny the loss on the basis that the s. 98(5) rollover applied.
CLICC's request to cancel the winding-up of the GP was denied.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Rectification & Rescission | a transaction resulting from a tax mistake should not be remedied under the Court’s general equitable jurisdiction | 459 |
Canada Life Insurance Co. of Canada v. A.G of Canada, 2015 DTC 5128 [at at 6378], 2015 ONSC 281, rev'd 2018 ONCA 562
In order that the applicant ("CLICC") could realize an accrued capital loss on its 99% limited partner interest in a subsidiary limited partnership ("MAM LP"):
- On December 7, 2007, MAM LP distributed an asset to CLICC and a wholly-owned subsidiary of CLICC ("CLICC GP") based on their respective 99% and 1% interests.
- On December 31, 2007, the interests of CLICC and CLICC GP in MAM LP were cancelled and MAM LP distributed all its remaining property (other than $100 of limited partner capital) pro rata to CLICC and CLICC GP.
- One hour later, MAM LP was dissolved and immediately thereafter, the remaining $100 of partnership capital was distributed pro rata to CLICC and CLICC GP.
- Around eight hours later, at 11:59 p.m., CLICC GP was wound up and its assets and liabilities acquired and assumed by CLICC.
- CLICC GP was formally dissolved on October 14, 2008.
After CRA assessed to deny the loss claimed by CLICC on the basis that the s. 98(5) rollover applied, the applicant successfully applied for the transactions in 2 to 4 to be rectified so that s. 98(5) could not apply (entailing a distribution on December 31 of some of the partnership property to both CLICC and CLICC GP, a transfer of CLICC's LP interest to CLICC GP, a resulting wind-up of MAM LP into CLICC GP also on December 31, 2007 and the wind-up of CLICC GP into CLICC on April 30, 2008 (i.e., more than 3 months after December 31.)
See summary under General Concepts - Rectification.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Rectification & Rescission | rectification transactions to avoid s. 98(5) rollover contained 2 more transactions than in original plan | 383 |
Stefanson Farms Ltd v. The Queen, 2009 DTC 177, 2008 TCC 682
Pursuant to an agreement dated October 16, 1998, the taxpayer acquired a 99% interest in a partnership from its shareholder effective January 1, 1998, and then on January 3, 1998, it purchased the other 1% interest in the partnership. In finding that the taxpayer satisfied the requirement that, in order for s. 98(5) to apply, it had conducted the partnership business during the relevant two-day period, Woods, J. noted that the Courts have given short shrift to attempts by taxpayers to disavow their own written documents, and that the evidence provided to her was not sufficient for her to conclude that no partnership business was conducted during the two-day period.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - General Concepts - Substance | 83 |
Administrative Policy
2023 Ruling 2022-0941241R3 - Internal reorganization: subs and partnerships
After preliminary transactions, ParentCo and its historic subsidiary, SubCo were to be the only partners of a general partnership (Partnership C); and Partnership C, ParentCo and SubCo’s newly-incorporated subsidiary, NewCo2 were to be the only partners of a second general partnership (Partnership D).
SubCo was then to be wound-up into ParentCo (so that Partnership C would be dissolved by operation of law on a s. 98(5) rollover basis) and then, at least one week later, NewCo2 was to be wound-up into ParentCo (so that Partnership D also would be dissolved by operation of law on a s. 98(5) rollover basis). CRA ruled that s. 88(1) would apply “on” the winding-up of SubCo, then of NewCo2, notwithstanding that articles of dissolution for each such corporation would not be filed until tax litigation with CRA was resolved.
CRA ruled that to the extent that Partnerships C and D cease to exist by operation of law upon the winding-up of SubCo into ParentCo, and the winding-up of NewCo2 into ParentCo, and provided that, within 3 months of each partnership ceasing to exist, ParentCo carries on alone the business of each such partnership using all the property of each such partnership that it received as proceeds of disposition for its interest in each such partnership, in the course of carrying on those businesses, the provisions of s. 98(5) will apply (including that there could be a s. 98(5)(c) bump of land or shares of a public company); and for greater certainty, the CRP will have a cost amount of nil.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 88 - Subsection 88(1) | sequential wind-ups of child, then grandchild, respected notwithstanding that their dissolutions held in abeyance until resolution of litigation with CRA | 968 |
| Tax Topics - Income Tax Act - Section 66.7 - Subsection 66.7(16) | transfer of CRP, to the parent, out of partnerships to be wound up into the parent, to reduce risk of application of s. 66.7(16) | 229 |
29 September 2022 External T.I. 2021-0882411E5 - Partnership wind-up - life insurance
Where a partnership holding an exempt life insurance policy on the life of individual partners is wound up as described in s. 98(3) or 98(5), can the distribution of the policy on the partnership's winding-up occur on a rollover basis as may be permitted under those provisions, or are its proceeds of disposition determined under s. 148(7)? CRA responded:
[W]here a Canadian partnership that owns an interest in an exempt life insurance policy ceases to exist and all the requirements of subsection 98(3) or 98(5), as the case may be, are otherwise met, it is our general view that those provisions would take precedence over subsection 148(7) such that there would be a tax-deferred rollover of the exempt life insurance policy.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 148 - Subsection 148(7) | the s. 98(3) or (5) rollover provisions can apply to a distribution on the partnership winding-up of a life insurance policy | 170 |
| Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) | s. 98(3) rollover provisions take precedence over s. 148(7) | 121 |
7 October 2021 APFF Roundtable Q. 11, 2021-0901011C6 F - Application of subsection 98(3)
Mr. A and Mr. B carried on business in a general partnership, whose most important asset (as to 85% of the total value) was goodwill. The partnership is wound up in reliance on s. 98(3) so that each receives a pro rata portion of the assets. Mr. A transfers his pro rata portion on a s. 85(1) rollover basis to a newly-incorporated wholly-owned corporation (A Inc.) and A Inc. then purchases the pro rata portion of the assets held by Mr. B.
Regarding the application of s. 98(5) (which, if applicable, prevailed over s. 98(3)), CRA stated:
[I]n order for subsection 98(5) to apply, it is necessary, inter alia, that the person carrying on the business of the partnership was a member of the partnership immediately before the time at which the partnership ceases to exist and that person continues to use, in the course of the business, property that was owned by the partnership immediately before that time.
… In the situation where A Inc. would not be a partner of AB immediately before the time at which AB would cease to exist, we are of the view that subsection 98(5) could not apply.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) | s. 98(3) could apply to wind-up of partnership with substantial goodwill | 156 |
27 June 2018 External T.I. 2018-0745681E5 F - Wind-up of a partnership
The three members of a family farming partnership ("Partnership") transferred their interests in Partnership to a jointly-owned corporation (“Opco”). Subsequently, Partnership was dissolved and Opco continue as sole owner of the business previously carried on by Partnership. After addressing another question, CRA noted the assertion of the correspondent that s. 98(5) applied to the wind-up of Partnership, and stated:
In order for subsection 98(5) to apply, it is necessary, inter alia, that the partner carrying on the business of the partnership be a member of the partnership immediately before the partnership ceases to exist. The facts of the particular situation do not state when the Partners would transfer their interests in Partnership to Opco. In this regard, it should be noted that in a situation where such transfers occur simultaneously, the CRA is of the view that subsection 98(5) would not be applicable, given that Opco would not be a partner of Partnership immediately before Partnership ceased to exist.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 84 - Subsection 84(3) | no s. 84(3) dividend on cancellation of preferred shares of Opco held by partnership on its wind-up into Opco | 165 |
| Tax Topics - Income Tax Act - Section 28 - Subsection 28(1) - Paragraph 28(1)(f) | application of s. 28(1)(f) on partnership wind-up | 203 |
15 January 2018 External T.I. 2017-0722961E5 - Winding-up of a partnership
The Partnership, whose 0.01% general partner (GPCo) is wholly-owned by its 99.99% limited partner (LPCo), transfers it business assets (the “Business Assets”) to newly-incorporated subsidiary (“Newco”) under s. 85(2) in consideration for Newco shares. Within 60 days, the Partnership is wound-up, so that the Newco Shares and nominal cash amounts will be distributed to GPCo and LPCo. Immediately following such “Winding-up,” GPCo will be liquidated into LPCo under s. 88(1). Within the three months thereafter, LPCo and Newco will amalgamate, thereby causing the amalgamated entity (h “Amalco”) to directly hold the “Business Assets” formerly held by Partnership.
Does the ownership of the Business Assets by Amalco within the three months following the Winding-up cause Amalco to be a person who was, immediately before the winding-up, a member of the partnership that carries on alone the business that was the business of the Partnership. If so, which takes precedence, s. 98(5) or 85(3)? CRA responded:
[S]ubsection 98(5) would not apply in the hypothetical scenario provided.
… Paragraph 87(2)(a) indicates that … Amalco will be a new corporation and will not be a member of the Partnership immediately before the Partnership has ceased to exist.
2016 Ruling 2016-0651621R3 - Partnership carried on by sole proprietor
Background
Partnership1 (an LP) owes Debt1 to Taxpayer, which is a wholly-owned subsidiary of the limited partner (Holdings) of Partnership1.
Proposed transactions
Taxpayer will assume Debt1 which will be treated by Partnership1 as a contribution of capital equal to the principal amount of Debt1. As a result, Debt1 will be extinguished by way of legal confusion.
Holdings will dispose of its partnership interest in Partnership1 to Taxpayer and, as consideration therefor, Taxpayer will issue additional common shares and an interest bearing promissory note (“Note1”) to Holdings, with a joint s. 85(1) election being made. As a result, Partnership1 will cease to exist as a matter of law and Taxpayer will become the sole owner of all of the property of Partnership1.
Rulings
For the purposes of determining the ACB of the Taxpayer’s interest in Partnership1 for s. 98(5) purposes, the amount of Debt1 assumed by the Taxpayer before the partnership dissolution will be added to the ACB of the Taxpayer’s interest in Partnership1 under s. 53(1)(e)(iv).
The settlement of Debt1 will not give rise to a “forgiven amount” per s. 80(1) or 80.01(1).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv) | ACB increased by assumption of debt owing to partner by partnership | 93 |
| Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount - Element B - Paragraph B(a) | no forgiven amount where partner assumed debt owing to it by partnership | 48 |
2015 Ruling 2015-0601441R3 - XXXXXXXXXX Partnership - winding up
Current structure
Sub1 and Sub2 (both taxable Canadian corporations and wholly-owned subsidiaries of Parent) are currently the sole partners of a general partnership (“Partnership”). Partnership’s business generates income under s. 12(1)(a) and Partnership claims a reserve under s. 20(1)(m). Partnership claims reserves under s. 20(1)(l) for accounts receivable that have not been sold to Parent, and a s. 20(1)(p) deduction when they become bad. Sub1 was indebted to Partnership under the demand non-interest bearing “Sub1-Partnership Note”), and Parent was indebted to Partnership under the “Parent-Partnership Note,” which was interest bearing and payable on demand.
Proposed transactions
- Sub1 will repay the Sub1-Partnership Note by assuming Partnership’s accounts payable.
- Sub1 will assume all indebtedness of Partnership, including the Partnership-Parent Note and Partnership’s obligation to pay "Employee Accruals" under various compensation and retirement plans in consideration for additional Partnership Units.
- Partnership will pay to Sub1 a reasonable amount for undertaking to assume Partnership’s prepaid revenue obligations (by assigning an equivalent amount of the Parent-Partnership Note as payment), and a joint election will be made under s. 20(24).
- Sub2 will transfer its interest in Partnership to Sub1 in consideration for Sub1 Preferred Shares and a non-interest bearing promissory note (the “Sub1 Note”), jointly electing under s. 85(1). As a consequence Partnership will cease to exist, Sub1 will become the sole owner of all the Partnership property and Sub1 will become subject to all the remaining obligations of Partnership, and immediately after the time that Partnership ceased to exist, Sub1 will carry on alone the business that was the business of Partnership.
Ruling
S. 98(5) will apply in respect of the dissolution of Partnership.
2016 Ruling 2015-0617101R3 - 99(1) and timing of ACB adjustment
The sole limited partner (LPco) transfers it interest in an LP under s. 85(1) to GP, thereby triggering the dissolution of the LP. There was a representation that the partnership ceased to exist, and all its property became property of GPco, “upon” the partnership interest transfer.
CRA ruled that, by virtue of s. 99(1) deeming the LP fiscal period to have ended two instants of time before the termination of the LP, the ACB of the transferred partnership interest reflected a proportionate share of LP’s income for the year ending with the termination of LP– and also ruled re the application s. 98(5).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(i) | ACB of limited partner’s and GP’s interest increased by YTD income on s. 98(6) wind-up arising on GP’s s. 85 purchase of limited partner’s interest | 304 |
| Tax Topics - Income Tax Act - Section 99 - Subsection 99(1) | year ending with termination was final partnership year | 116 |
13 June 2016 External T.I. 2016-0637031E5 - Capital property excludes ECP
Having regard to utilizing the s. 98(5) “bump,”, does “capital property” include “eligible capital property”? CRA responded:
By virtue of subparagraph 39(1)(a)(i)…the gain from the disposition of an “eligible capital property” is excluded from the meaning of a taxpayer's “capital gain” and by virtue of subparagraph 39(1)(b)(ii), the loss from the disposition of an “eligible capital property” is excluded from the meaning of a taxpayer's “capital loss”. Therefore, a “capital property” does not include an “eligible capital property”.
…As discussed in…2014-0529231E5 [below], the “bump” under paragraph 98(5)(c) is only available on capital property (other than depreciable property).
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 54 - Capital Property | definition of capital property effectively excludes eligible capital property | 137 |
S4-F7-C1 - Amalgamations of Canadian Corporations
1.43 …[W] here a Canadian partnership ceases to exist because of an amalgamation involving one or more of the corporate partners:
- subsection 98(5) will not be applicable to provide a rollover where the new corporation will carry on the business of the former partnership and
- subsection 98(6) will not be applicable to provide a rollover where a new partnership is formed having the new corporation as one of its partners.
This problem can generally be avoided by having the partnership dissolve prior to the amalgamation with each partner receiving undivided interests…in the partnership property so as to be eligible for the rollover under subsection 98(3). …Where it is proposed that the new corporation enter into a Canadian partnership, the rollover provided in subsection 97(2) may be available.
8 September 2014 External T.I. 2014-0529231E5 - Partnership to Sole Proprietorship
General description of application of s. 98(5) respecting a farm partnership which would be continued by one of the member sons as a sole proprietorship.
20 September 2012 External T.I. 2012-0452411E5 - Manner of filing 98(5)(c) designations
After stating that a 98(5) designation must be filed with the proprietor's income tax return for the year in which the proprietor received partnership property, CRA stated:
Further, although the Act does not provide any mechanism for late-filed or amended designations under paragraph 98(5)(c) of the Act, the Canada Revenue Agency (the "CRA") may, at its discretion, accept such designations depending on the facts of the particular situation. A request to accept a late-filed or amended election under paragraph 98(5)(c) of the Act should be made in writing to the local Tax Services Office.
28 June 2012 External T.I. 2011-0427871E5 F - Application des paragraphes 98(3) 98(5) et 73(1)
Two spouses (Monsieur and Madame) were the members of a farming partnership. Upon their separation the partnership began renting the land. The partnership ceased to exist when under the separation agreement, Madame transferred her partnership interest to Monsieur, with the land continuing to generate rental income to Monsieur.
CRA confirmed its position that real property rental constitutes a business for s. 98(5) purposes, stating (TaxInterpretations translation):
...[W]e reiterate our long-standing position to the effect that the activity by a partnership of renting real estate constitutes a business strictly for the purposes of the application of subsection 98(5). Consequently, if all the conditions contemplated in subsection 98(5) are satisfied, we are of the opinion that this subsection can apply on the transfer of rental lands to Monsieur, on the basis that he is a partner who continues the activity of renting the lands.
...[T]hat position ... does not affect the nature of the income for the other purposes of the Act to the person receiving it, in this case income from property to Monsieur.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 73 - Subsection 73(1) | s. 73(1) available on transfer of undivided interest from one separated spouse to the other following s. 98(3) wind-up of their rental partnership | 246 |
25 June 2012 External T.I. 2011-0403001E5 - From Partnership to Sole Proprietorship - CCA
In response to an inquiry as to whether the deeming by s. 98(5) of partnership property to be disposed of before the partnership ceased to exist (with the partnership year end also being deemed by s. 99(1) to occur immediately before the partnership ceased to exist) results in no capital cost allowance being available to the partnership for that year, CRA indicated that this mooted problem did not arise:
Subsection 98(1) applies for the purpose of paragraph 98(5)(f) but not for the purposes of subsection 99(1). Generally, therefore, it is our view that the application of paragraph 98(5)(f) would be deferred until after the partnership has ceased to exist under provincial partnership law and after the application of subsection 99(1). It follows then that the partnership would have had the partnership property at the deemed year-end created under subsection 99(1), and could claim CCA on the asset for that fiscal year.
31 May 2012 External T.I. 2011-0426091E5 - 98(5) - ptnsp's leasehold int if ptnr is lessor
A partnership was leasing property from a partner, and then is wound up as described in s. 98(5), with the former partner continuing to use the particular property in the business of the terminated partnership. If the leasehold interest is extinguished by merger, s. 98(5) would not apply to the leasehold interest. The terminated partnership would be considered to have disposed of its leasehold interest for nil proceeds of disposition (having regard to the BCN case, 79 DTC 5068), thereby resulting in a terminal loss.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) | 89 |
14 March 2012 External T.I. 2011-0422551E5 F - Application du paragraphe 98(5)
A Canadian-controlled private corporation (CCPC) which operates a seniors residence is leased the residence by a limited partnership of which it is a general partner. Upon the acquisition of all the other partnership interests in the partnership by CCPC under s. 85(1), the partnership ceases to exist so that the CCPC becomes the owner of the residence.
S. 98(5) does not apply to the winding-up of the partnership as the previous rental operation is not carried on by the CCPC.
2010 Ruling 2009-0347301R3 - Does s.s. 13(21.2) apply on s.s. 98(5) rollover
Debt owing by a limited partnership to its limited partner is converted into equity; and the limited partnership (which has a large number of depreciable properties in different classes) then is wound up under s. 98(5), by its general partner being wound-up as described in s. 88(1) into the limited partner.
Ruling that s. 13(21.2) will not apply to the transfer of the depreciable properties by the limited partnership to the limited partner. The issue summary states:
Although there is no specific rule in the Act that provides an exception to the application of subsection 13(21.2) in the case of a rollover under subsection 98(5), this provision would not apply to the particular circumstances set out in the ruling.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 13 - Subsection 13(21.2) | 122 |
9 July 2009 External T.I. 2008-0275151E5 - Partnership Wind-up
Where a top-tier general partnership holding an interest in a lower-tier partnership is wound-up so that the surviving partner of the former top-tier partnership receives the partnership interest in the lower-tier partnership, the application of s. 98(5) will not be precluded simply because, prior to ceasing to exist, the top-tier partnership's only asset was the interest in the lower-tier partnership. S.98(5) also would be available where, prior to its wind-up, the only activity of the top-tier partnership was ownership of shares of a corporation.
16 March 2004 External T.I. 2003-0050041E5 F - Fin de société de personnes et 98(5)
Can subsection 98(5) of the Act apply where all the members of a partnership transfer their interest in the partnership to a corporation (that is not a member of the partnership) of which they are all shareholders (a) simultaneously, or (b) at one-day intervals? CRA responded:
[S]ubsection 98(5) does not apply where the members' interests are sold concurrently to a corporation, as the corporation was not a member of the partnership immediately before the partnership ceased to exist.
… [I]n Interpretation 1999-0011335 …[t]he transferee corporation was … considered to have been a member of the partnership immediately before the partnership ceased to exist even if it had been a member for only a fraction of a second.
Thus, subsection 98(5) may apply in the situation you present where each of the partners transfers their interest in the partnership to Bco at a day’s interval since Bco is considered to have been a member of the partnership immediately before the partnership ceased to exist … .
17 February 2004 Internal T.I. 2003-0046981I7 F - Paragraphe 98(5) de la Loi
The Directorate essentially repeated the position stated shortly thereafter in 2003-0050041E5 F, namely:
[S]ubsection 98(5) is not applicable … where the members' interests are sold simultaneously to a corporation, since the corporation was not a member of the partnership immediately before the partnership ceased to exist. However, subsection 98(5) may apply if the interests are sold successively and all other conditions of that subsection are satisfied since the corporation is considered to have been a member of the partnership immediately before the partnership ceased to exist.
In response to a further question as to whether s. 98(5) may apply where corporations that are members of a partnership amalgamate to form one corporation and, as a result, the partnership ceases to exist, the Directorate stated:
The position set out in paragraph 53 of Interpretation Bulletin IT-474R remains unchanged. That position is that where a partnership ceases to exist as a result of an amalgamation of one or more of its members that are corporations, subsection 98(5) does not apply and no rollover is allowed to the new corporation if it continues to carry on the business of the former partnership.
15 May 2002 External T.I. 2001-0107805 F - PLUSIEURS ENTREPRISES
A partnership with three members (A. B and C) was carrying on four businesses. A and B transferred their partnership interests to a new partnership (New AB), and then the old partnership was wound up as described in s. 98(3), so that New AB and C each received undivided interests in the partnership property. New AB then sold its proportionate interest in the property of Business 4 to C and C sold his proportionate interest in the property of Businesses 1, 2 and 3 to New AB.
Would s. 98(5) apply if C, as sole proprietor, continued to carry on one of the four businesses previously carried on by the partnership, so that s. 98(4) would preclude s. 98(3) from applying?
CCRA indicated that it would be appropriate to apply s. 33(2) of the Interpretation Act (references to the singular included the plural) so that the sole proprietor would be required, in order for s. 98(5) to apply, to be carrying on all of the businesses previously carried on by the old partnership. Accordingly, s. 98(5) would not apply.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Statutory Interpretation - Interpretation Act - Subsection 33(2) | reference to “the” business included all the businesses | 57 |
26 January 2001 External T.I. 2000-0060725 - PARTNERSHIP ROLLOVER
S.98(5) does not apply where the "person" who continues to carry on the business of the former partnership is, itself, a partnership. S.102(2) "is a limited deeming provision and does not deem the partnership that continues the business to be either 'one' person or to carry on 'alone' the business ... ."
7 October 1994 A.P.F.F. Round Table, Q. 38, No. 5M08340
"The Department considers that operation of a rental building by a partnership is a business for the purposes of applying subsection 98(5) ... . However, this position ... does not change the nature of the income to its recipient for other purposes of the Act."
5 November 1991 Memorandum (Tax Window, No. 13, p. 2, ¶1587)
No rollover will be available where a partnership ceases to exist as the result of all the corporate partners amalgamating.
27 September 1991 T.I. (Tax Window, No. 11, p. 16, ¶1511)
Trade receivables of a cash basis farming partnership which are outstanding at the time the partnership ceases to exist will not be included in the partnership's income for its final fiscal year.
18 April 1990 T.I. (September 1990 Access Letter, ¶1425)
Where B disposes of its partnership interest to the other partner, A, with the result that the partnership ceases to exist, then in order to satisfy the requirement that A continue to use the property in the business, A must carry on the business for a reasonable length of time. [C.R: 53(1)(e)(i)]
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(i) | 112 |
19 September 89 T.I. (February 1990 Access Letter, ¶1112)
Corporations A and B which together carry on a partnership wish to amalgamate. S.98(5) will not apply if prior to the amalgamation A transfers its partnership interest to B, B liquidates the partnership business and A and B amalgamate, because in order for s. 98(5) to apply it will be necessary for B to carry on by itself the business that was the business of the partnership.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 98 - Subsection 98(3) | 33 |
89 C.R. - Q.35
Where one partner of a two-person partnership dies, RC considers that "immediately before the partnership ceases to exist" is immediately before the death of the partner.
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv) | 45 |
IT-338R "Partnership Interests - Effects on Adjusted Cost Base Resulting from the Admission or Retirement of a Partner"
Discussion of assumption of mortgage indebtedness by the continuing partner.
Articles
Paul Cormack, Janette Pantry, "Partnership Reorganizations", Canadian Tax Highlights, Vol. 26, No. 6, June 2018, p. 5
If s. 98(5) applies on the basis of one former partner using any property in the business, s. 98(3) will not apply to the other partner (pp. 6-7)
Pursuant to subsection 98(4), subsection 98(3) cannot apply if a rollover under subsection 98(5) or 85(3) applies. Consider a Canadian partnership that operates a construction business and has two partners, Aco and Bco. The partners want to dissolve the partnership on a tax-deferred basis by jointly electing to distribute an undivided interest of property to its members pursuant to subsection 98(3). After the dissolution of the partnership, it is intended that Bco will carry on a construction business separately within three months of the dissolution. If the construction business carried on by Bco is considered to be the same business carried on by the partnership (a question of fact), subsection 98(5) automatically applies and overrides subsection 98(3). Further, because subsection 98(5) only requires the former partner to use “any property” in the business (that is, not “all property”), the fact that an undivided interest in the partnership property was also distributed to Aco should not preclude the application of subsection 98(5). Accordingly, if subsection 98(5) is deemed to apply, only the transfer of partnership property to Bco receives tax-deferred treatment, but the transfer of property to Aco is deemed disposed for FMV proceeds.
Perry Truster, "Windup-Bump Comparison: Subsections 98(3) and (5)", Tax for the Owner-Manager (Canadian Tax Foundation), Vol. 15, No. 1, January 2015, p. 8.
Bump of real estate inventory (p. 9)
How does subsection 98(5) work when the real estate was inventory to the partnership (which intended to develop it as, say, a shopping plaza for resale) but capital property to the proprietor (which intends to develop it into a shopping plaza for retention)? Does the fact that the proprietor must continue to use the property in the course of the business imply that the partnership must have "used" the property in the partnership business? ln Qualico (84 DTC 6119 (FCA)), a minority opinion stated that unsold inventory is not "used" in a business; inventory is used only when it is sold. As a consequence, if the real estate is inventory to the former partnership, the application of subsection 98(5) is not entirely clear.
What is clear is that subsection 98(5), unlike subsections 88(1) and 98(3), will bump the tax value of the property only if the property is non-depreciable capital property to the proprietor after the winding up.
Subsection 98(6) - Continuation of predecessor partnership by new partnership
Administrative Policy
30 June 2014 External T.I. 2014-0522181E5 F - Legal status of partnership and application of 98(6)
Does s. 98(6) apply when a limited partnership becomes a general partnership following the dissolution of its sole corporate general partner (so that its partners are solely the former limited partners)? CRA stated (TaxInterpretations translation):
[A]ll partners of the New Partnership must have been partners of the Predecessor Partnership immediately before the transfer. Furthermore, where a partner withdraws and has received its share of the property of the Predecessor Partnership before the Predecessor Partnership ceased to exist, the Canada Revenue Agency (CRA) will consider that all the property of the Predecessor Partnership will have been transferred to the New Partnership if all the property has been directly transferred to the New Partnership immediately after the settlement of the interest of the outgoing partner.
9 September 2005 External T.I. 2005-0126771E5 - predeces. partnership by new partnership
In the situation where all the property of the predecessor partnership other than property necessary to "pay out" a retiring partner is transferred to a new partnership, CRA first noted that "[o]rdinarily, the partnership agreement will provide for the continuation of the partnership ... [so that] subsection 98(6) does not apply because the partnership would not have ceased to exist." CRA then stated:
When a partnership ceases to exist, partnership law provides for the application of partnership property vis-à-vis the partnership's creditors and for each partner as against the other partners. If subsection 98(6) applies, the fiction for tax purposes is the partnership continues to exist. Therefore, the words in subsection 98(6) regarding the transfer of all of the predecessor partnership's property can only be satisfied if the fictional transfer happened at the same time as the cessation. If the outgoing partner was provided with his share of the partnership property before the partnership ceases to exist, as contemplated by the words "at or before that time" in subsection 98(6), administratively, Canada Revenue Agency would consider the words "all of the property", satisfied if all of the property of the old partnership was directly transferred by the predecessor partnership to the new partnership immediately after the settlement of the outgoing partner's interest.
90 C.R. - Q29
Where s. 98(6) applies, any negative ACB of a partnership interest of a member will continue as an element of the ACB of his new partnership interest.
89 C.R. - Q34
Where s. 98(6) applies, any negative adjusted cost base of a partnership interest of a member in the predecessor partnership will be included in computing the adjusted cost base of his new partnership interest and will not be subject to s. 98(1)(c).
IT-338R "Partnership Interests - Effects on Adjusted Cost Base Resulting from the Admission or Retirement of a Partner"
All of the property" means all the property after the settlement of a retired partner's interest.