2014-0529231E5 PARTNERSHIP TO SOLE PROPRIETORSHIP

Principal Issues: Where a partnership business is continued as a sole proprietorship, can the depreciable property of the partnership be transferred to the sole proprietorship on a tax-deferred basis?

Position: Yes, provided the conditions under subsection 98(5) are met.

Reasons: Subsection 98(5), which is a non-elective provision, contains rules which provide a tax-deferred transfer or "rollover" of a Canadian partnership's property where the partnership has ceased to exist and the transfer is to one member of the partnership who continues to carry on the business of the partnership as a sole proprietor.

Author: Tzortzis, Chrys
Section: 98(5)

XXXXXXXXXX
2014-052923
Chrys Tzortzis, CPA, CA

September 8, 2014

Subject: Partnership business carried on as sole proprietorship

This is in response to your email of April 25, 2014, wherein you inquire whether or not a partnership business can be carried on as a sole proprietorship on a tax-deferred basis.

You describe a situation where a farm partnership has XXXXXXXXXX members all of which are individuals (a mother and her XXXXXXXXXX sons). You state that one of the sons wants to continue the partnership business as a sole proprietorship and you wonder if the depreciable property of the partnership can be transferred to the sole proprietorship on a tax-deferred basis.

This technical interpretation provides general comments about the provisions of the Income Tax Act (the "Act") and related legislation (where referenced).It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

OUR COMMENTS

In general terms, any partnership property transferred by the partnership to a partner is deemed by subsection 98(2) of the Act to be disposed of by the partnership and acquired by that partner at fair market value unless the "rollover" provisions of subsection 85(3), 98(3) or 98(5) of the Act apply.

Subsection 85(3) generally applies where a partnership has disposed of property to a corporation under subsection 85(2) of the Act, winds up its affairs within 60 days of that disposition and has, immediately before the winding-up, no property other than money or property received from the corporation as consideration for the disposition. In general, subsection 98(3) is an elective provision that applies, provided certain conditions are met, where a Canadian partnership ceases to exist and all of the property of the partnership has been distributed to the members of the partnership and each member receives an undivided interest in each partnership property equal to the member's undivided interest in each other property distributed. Subsection 98(3) is not applicable in any case in which subsection 85(3) or 98(5) is applicable.

Subsection 98(5), which is a non-elective provision, contains rules which provide a tax-deferred transfer or "rollover" of a Canadian partnership's property where the partnership has ceased to exist and the transfer is to one member of the partnership who continues to carry on the business of the partnership as a sole proprietor. In general terms, the provision applies only in situations where a Canadian partnership ceases to exist and, within three months, one member (referred to hereafter as the "proprietor") carries on the partnership business as a sole proprietorship and continues to use the partnership property (which was received by the proprietor as proceeds of disposition of the proprietor's partnership interest) in that business. A Canadian partnership, which is defined under subsection 102(1) of the Act, means a partnership all of the members of which were, at any time in respect of which the expression is relevant, resident in Canada.

Where all the requirements are met, subsection 98(5) provides that the partnership shall be deemed to have disposed of its property at its cost amount and sets out deeming rules for determining the proprietor's proceeds of disposition of the proprietor's partnership interest and the cost to the proprietor of the transferred property. In general terms, under paragraph 98(5)(a), the proprietor's proceeds of disposition of the proprietor's interest in the partnership are deemed to be equal to the greater of: (i) the adjusted cost base of the proprietor's interest in the partnership including the interests acquired from other members of the partnership (as per the deeming rule under paragraph 98(5)(g)), and (ii) the aggregate of the cost amount to the partnership of the property transferred to the proprietor and the amount of any other proceeds (including money) received by the proprietor on the disposition of the proprietor's partnership interest.

In general, the cost to the proprietor of each transferred property is deemed to be equal to the cost amount to the partnership of the property. However, pursuant to paragraphs 98(5)(b) and (c), where the amount described in (i) above exceeds the amount described in (ii) above, the proprietor may designate this excess to be added to the cost base of one or more capital properties (other than depreciable property), subject to certain limitations. Prior to its repeal, paragraph 98(5)(d) governed the "bump" on depreciable property and property other than capital property. Paragraph 98(5)(d) has been repealed applicable with respect to certain events occurring after December 4, 1985. However, this paragraph continues to apply to certain grandfathered partnership property acquired by the partnership before December 5, 1985 but the coming-into-force rules that provide for the repeal of the provision should be consulted to determine if all the conditions are met. In addition, other provisions in the Act could apply in certain circumstances to effectively restrict the "bump" provided under paragraph 98(5)(d), including, in the case of depreciable property, paragraph 13(7)(e) of the Act.

Additionally, in the case of depreciable property, a rule contained in paragraph 98(5)(e) ensures that any capital cost allowance claimed by the partnership will be subject to recapture on a future disposition of the depreciable property by the proprietor.

Based on the foregoing, although partnership property (including depreciable property) may be transferred to the proprietor on a tax-deferred basis pursuant to subsection 98(5), the proprietor would realize a capital gain (i.e. no rollover) on the disposition of the proprietor's partnership interest if the amount described in (ii) above exceeds the amount described in (i) above due to the deeming rule provided under paragraph 98(5)(a).

As the situation described above involves a farm partnership, the availability of the capital gains deduction under subsection 110.6(2) of the Act should be considered since qualifying farm property is eligible for the lifetime capital gains exemption. Additionally, the provisions under subsections 73(4) and (4.1) of the Act should be considered where an interest in a family farm partnership is transferred to a child since under certain circumstances those provisions allow a deferral of the capital gains that would otherwise arise on the transfer of the partnership interest.

Finally, in your correspondence, you inquire as to the possibility of a name change if the partnership business is carried on as a sole proprietorship. In that regard, any provincial or territorial laws governing the partnership or any applicable legislation (including any business name registration requirements) affecting sole proprietorships should be consulted. Please note that a change from a partnership to a sole proprietorship will have implications in regards to the business number and the Canada Revenue Agency (CRA) should be advised as per the instructions on the CRA's website at www.cra-arc.gc.ca under the general topic of "change in legal status".

We trust the above comments will be of assistance.

Yours truly,

G. Moore
for Director
Partnerships & Corporate Financing Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without the prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5.

© Her Majesty the Queen in Right of Canada, 2014

Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistribuer de l'information, sous quelque forme ou par quelque moyen que ce soit, de façon électronique, mécanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.

© Sa Majesté la Reine du Chef du Canada, 2014