2014-0559731E5 85(3) rollover

Principal Issues: One of the requirements of paragraph 85(3)(b) is that the affairs of a partnership have to be been wound up within 60 days after the disposition of the partnership property. If beneficial ownership of partnership property is transferred within 60-day period but legal title to partnership property is transferred after the end of the 60-day period, is the 60-day requirement met?

Position: If beneficial ownership is transferred within the 60-day period but legal title is not transferred until after the 60-day period is over because a valuation of land is required, we would consider that generally, this would not mean that the 60-day requirement in paragraph 85(3)(b) is not met as long as the legal transfer is completed as soon as is practical after the valuation of property is completed.

Reasons: Consistent with paragraph 7 of IT-378R

Author: Friedlander, Lara G.
Section: 85(1), 85(2), 85(3), 98(1), definition of "affairs" in 2(1) of CBCA

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                                                                                                                                                            2014-055973

January 14, 2015

Dear XXXXXXXXXX:

Re:  Winding-up of a Partnership

This is in response to your letter of December 2, 2014, concerning the winding-up of a partnership that holds land. 

Subsection 85(3) of the Income Tax Act (the “Act”) provides for a rollover in respect of the disposition of any partnership property to a corporation if all of the requirements therein are met. One of these requirements is that the affairs of the partnership must be wound up within 60 days after the disposition of the partnership property to a corporation.

You have stated that in order to effect the transfer of title of land with the relevant government authority, a valuation of the land is necessary.  However, the valuation could take several months after the proposed effective date of the asset transfer.  You have asked whether the 60-day requirement in paragraph 85(3)(b) is satisfied if beneficial ownership of the land owned by the partnership is transferred within the 60-day period but legal title is not transferred until after the end of that 60-day period.

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R6, Advance Income Tax Rulings, dated August 29, 2014.  Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we have provided some general comments below.

Our Comments

Paragraph 7 of Interpretation Bulletin IT-378R (February 15, 1980) states the following:

For the purpose of paragraph 85(3)(b) the Department will consider the affairs of a partnership to have been wound up when all the property of the partnership, including money, has been distributed to the members in satisfaction of their interests in the partnership. The “rollover” will not be denied for the reason only that some of the requirements to complete the dissolution of the partnership, other than the distribution of all property, have not been fulfilled within 60 days after the disposition of property to the corporation.

We also note paragraph 6 of IT-378R, which states as follows:

The Act does not define the meaning of the terms “wound up” and “immediately before the winding-up” as used in subsection 85(3). To accomplish a “winding-up” of the affairs of a partnership all the property of the partnership must be distributed to the partners in satisfaction of their interests in the partnership. In addition, the law under which a partnership has been formed, or the terms of the agreement of a partnership, may require certain formalities or procedures (such as a notification of dissolution given by a partner to other partners, advertisement for dissolution, deregistration of partnership etc.) to be complied with before the partnership is considered to have been wound up.

In common law jurisdictions, two forms of property ownership are recognized - legal and beneficial. Normally, legal ownership exists when title is transferred to, recorded in, registered in or otherwise carried in the name of a person. Legal owners are generally entitled to enforce their ownership rights against all other persons. In contrast, the term beneficial ownership is used to describe the type of ownership of a person who is entitled to the use and benefit of the property whether or not that person has concurrent legal ownership. A disposition does generally not occur for tax purposes if there is a transfer of title that is not accompanied by the transfer of beneficial ownership. The determination of whether a person beneficially owns a particular property is primarily one of law the determination of which would require a complete understanding of all the relevant facts and circumstances applicable to a particular situation.

It is our view that if beneficial ownership of property has in fact been transferred from a partnership to a corporation within the 60-day period discussed above, the partnership still holds legal title to the property after the 60-day period only because the parties are awaiting the valuation necessary to effect the transfer of title, and legal title to the property in question will be transferred as soon as is practical after the valuation is completed, we would generally consider the 60-day requirement in paragraph 85(3)(b) of the Act to be met. Note that the other requirements of subsection 85(3) must also be met.

We trust that these comments will be of assistance.

Yours truly,

G. Moore
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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