2016-0651621R3 Partnership carried on by sole proprietor

Principal Issues: Whether (i) subsection 98(5) would apply; (ii) whether subparagraph 53(1)(e)(iv) would apply; (iii) whether subsection 80(1) would apply; and (iv) whether paragraph 20(1)(c) would apply?

Position: (i) Yes. (ii) Yes. (iii) Yes. (iv) Yes.

Reasons: Pursuant to the provisions of the particular provisions.

Author: XXXXXXXXXX
Section: 98(5); 20(1)(c); 80(1); 53(1)(e)(iv)

XXXXXXXXXX                                                                                                                         2016-065162

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
       XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers (the “Taxpayers”).  We also acknowledge the information provided in various emails and telephone conversations.

To the best of your knowledge and that of the Taxpayers, none of the issues involved in the ruling request is:

i. in a previously filed tax return of any of the Taxpayers or a related person;

ii. being considered by a tax services office or a tax centre in connection with a previously filed tax return of any of the Taxpayers or a related person;

iii. under objection by any of the Taxpayers or a related person;

iv. the subject of a current or completed court process involving the Taxpayers or a related person;

v. the subject of a ruling request previously considered by the Directorate.

Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”) and all references to monetary amounts are in Canadian dollars.

DEFINITIONS:

“ACB” means the adjusted cost base as this expression is defined in section 54;

“capital property” has the meaning assigned by section 54;

“Corp1” means XXXXXXXXXX, the corporation described in Paragraph 1;

“Corp1 Related Group” means Corp1 and its subsidiaries including the Partnerships;

“Corp2” means XXXXXXXXXX, the corporation described in Paragraph 2;

“CRA” means Canada Revenue Agency;

“Debt1” means the non-interest bearing payable described in Paragraph 7;

“Debt2” means the amount payable by Partnership2 to Taxpayer as described in Paragraph 10;

“Holdings” means XXXXXXXXXX, the corporation described in Paragraph 3;

“License” means the license agreement described in Paragraph 3;

“New Name” means XXXXXXXXXX;

“Note1” means the interest bearing promissory note at a rate of XXXXXXXXXX% per annum, described in Paragraph 14;

“Note2” means the interest bearing promissory note at a rate of XXXXXXXXXX% per annum described in Paragraph 19;

“Paragraph” means a numbered Paragraph in this letter;

“Partners” means Taxpayer and Holdings;

“Partnership1” means XXXXXXXXXX, the limited partnership described in Paragraph 5;

“Partnership2” means XXXXXXXXXX, the general partnership described in Paragraph 8;

“Partnership2 Payable” means the amount owing by Partnership2 to Partnership1 as described in Paragraph 10;

“Partnerships” means collectively Partnership1 and Partnership2;

“Province” means the province of XXXXXXXXXX;

“Receivable” means the non-interest bearing receivable described in Paragraph 6;

“Receivable2” means the non-interest bearing receivable described in Paragraph 9;

“related persons” has the meaning assigned by subsection 251(2);

“taxable Canadian corporation” has the meaning assigned by subsection 89(1);

“Taxpayer” means XXXXXXXXXX, the corporation described in Paragraph 4; and

XXXXXXXXXX

FACTS:

1. Corp1 is a taxable Canadian corporation and a public corporation, the shares of which are widely held by XXXXXXXXXX and which is controlled ultimately by XXXXXXXXXX. The shares of Corp1 are listed on the XXXXXXXXXX. Corp1 is a diversified holding corporation which operates XXXXXXXXXX. Corp1 is the ultimate parent of the Corp1 Related Group.

2. Corp2 is a taxable Canadian corporation and a public corporation, the shares of which are widely held XXXXXXXXXX and which is controlled by Corp1, which owns approximately XXXXXXXXXX% of all voting rights attached to the issued and outstanding shares of Corp2. The common shares of Corp2 are listed on the XXXXXXXXXX. Corp2 provides XXXXXXXXXX.

3. Holdings is a taxable Canadian corporation and is a wholly-owned subsidiary of Corp2. The taxation year-end of Holdings is XXXXXXXXXX. Its address is XXXXXXXXXX. Its tax centre is the XXXXXXXXXX Tax Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office. Holdings is the licensee of XXXXXXXXXX (“License”). Holdings has capital losses carried forward of approximately $XXXXXXXXXX as of XXXXXXXXXX.

4. Taxpayer is a taxable Canadian corporation and is a wholly-owned subsidiary of Holdings. The taxation year-end of Taxpayer is XXXXXXXXXX. Its address is XXXXXXXXXX.  Its tax centre is the XXXXXXXXXX Tax Centre and its Tax Services Office is the XXXXXXXXXX Tax Services Office.

5. Partnership1 is a Canadian partnership and a limited partnership formed under the laws of Province. Holdings owns approximately XXXXXXXXXX% of the limited partnership interest in Partnership1 while Taxpayer acts as general partner and owns approximately XXXXXXXXXX% of the partnership interest in such capacity. Partnership1 provides XXXXXXXXXX. The amount of the liabilities of Partnership1 does not exceed the value of its assets. The fiscal period of Partnership1 ends on XXXXXXXXXX.

6. The assets of Partnership1 consist, inter alia, in inventory, depreciable property, eligible capital property, account receivables and an amount receivable from Holdings (“Receivable”).

7. At the time of the implementation of the Proposed Transactions, the liabilities of Partnership1 could include, inter alia, an amount payable to Taxpayer (“Debt1”).

8. Partnership2 is a Canadian partnership and a general partnership formed under the laws of the Province of XXXXXXXXXX. Holdings owns approximately XXXXXXXXXX% of the partnership interest in Partnership2 while Taxpayer owns the remaining approximately XXXXXXXXXX% partnership interest. Partnership2 provides XXXXXXXXXX.  The amount of the liabilities of Partnership2 does not exceed the value of its assets. The fiscal period of Partnership2 ends on XXXXXXXXXX.

9. The assets of Partnership2 consist, inter alia, in inventory, depreciable property, eligible capital property, account receivables, an amount receivable from Holdings (“Receivable2”) and cash.

10. At the time of the implementation of the Proposed Transactions, the liabilities of Partnership2 could include:

i. An amount payable to Taxpayer (“Debt2”); and

ii. An amount payable to Partnership1 (“Partnership2 Payable”).

PROPOSED TRANSACTIONS

11. On XXXXXXXXXX, 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.

12. On XXXXXXXXXX, Taxpayer will assume the Debt2 which will be treated by Partnership2 as a contribution of capital equal to the principal amount of Debt2.  As a result, Debt2 will be extinguished by way of legal confusion.

13. On XXXXXXXXXX, Partnership2 will repay the Partnership2 Payable using cash available in its bank account. As a result, the Partnership2 Payable will be extinguished.

14. On XXXXXXXXXX, 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. Note1 will bear interest at a reasonable rate for the purposes of the application of paragraph 20(1)(c) of the Act. Holdings and Taxpayer will jointly elect under subsection 85(1) in prescribed form and manner and within the time referred to in subsection 85(6) with respect to the disposition of the partnership interest owned by Holdings in Partnership1 in favor of Taxpayer. The agreed amount on the election will be equal to the ACB to Holdings of its partnership interest in Partnership1 at the time of the transfer. The principal amount of Note1 issued will be lower than the ACB to Holdings of its partnership interest in Partnership1 at the time of the transfer.

15. Holdings will cease to be a partner in Partnership1 upon the transfer of its partnership interest to Taxpayer.

16. Taxpayer, as sole partner of Partnership1, will enter into a distribution and dissolution agreement with Partnership1, whereby on XXXXXXXXXX, Partnership1 will cease to exist and the business that was the business of Partnership1 will be carried on by Taxpayer as sole proprietorship.

17. As a result of the execution of the distribution and dissolution agreement by Taxpayer and Partnership1 on XXXXXXXXXX, Partnership1 will cease to exist as a matter of law and Taxpayer will become the sole owner of all of the property of Partnership1, including the Receivable1. As well, as a result of the foregoing transfer, Taxpayer will become solely responsible for and will assume all of the remaining liabilities of Partnership1. Immediately after the particular time at which Partnership1 has ceased to exist, Taxpayer will carry on alone the business that was the business of Partnership1 for the purpose of earning income and will continue to use, in the course of the business, any property that was, immediately before the particular time, property of Partnership1 that is received by Taxpayer upon the cessation of Partnership1. The total of the ACB to Taxpayer of its partnership interest in Partnership1 (through the application of subsection 98(5) of the Act) (outside basis) will be higher than the total of the cost amount to the partnership, immediately before Partnership1 will have ceased to exist, of each of Partnership1’s property received by Taxpayer (inside basis).

18. Taxpayer may make designations under paragraph 98(5)(c) in respect of certain property transferred to it in connection with the cessation of Partnership1.

19. On XXXXXXXXXX, Holdings will dispose of its partnership interest in Partnership2 to Taxpayer and, as consideration therefor, Taxpayer will issue additional common shares and an interest bearing promissory note (“Note2”) to Holdings. Note2 will bear interest at a reasonable rate for the purposes of the application of paragraph 20(1)(c) of the Act. Holdings and Taxpayer will jointly elect under subsection 85(1) in prescribed form and manner and within the time referred to in subsection 85(6) with respect to the disposition of the partnership interest owned by Holdings in Partnership2 in favor of Taxpayer. The agreed amount on the election will be equal to the ACB to Holdings of its partnership interest in Partnership1 at the time of the transfer. The principal amount of Note2 issued by the Taxpayer will be lower than the ACB to Holdings of its partnership interest in Partnership2 at the time of the transfer.

20. Holdings will cease to be a partner in Partnership2 upon the transfer of its partnership interest to the Taxpayer.

21. Taxpayer, as sole partner of Partnership2, will enter into a distribution and dissolution agreement with Partnership2, whereby on XXXXXXXXXX, the partnership will cease to exist and the business that was the business of Partnership2 will be carried on by Taxpayer as sole proprietorship.

22. As a result of the execution of the distribution and dissolution agreement by Taxpayer and Partnership2 on XXXXXXXXXX, Partnership2 will cease to exist as a matter of law and Taxpayer will become the sole owner of all of the property of Partnership2, including the Receivable2. As well, as a result of the foregoing transfer, Taxpayer will become solely responsible for and will assume all of the remaining liabilities of Partnership2. Immediately after the particular time at which Partnership2 has ceased to exist, Taxpayer will carry on alone the business that was the business of Partnership2 for the purpose of earning income and will continue to use, in the course of the business, any property that was, immediately before the particular time, property of Partnership2 that is received by Taxpayer upon the cessation of Partnership2. The total of the ACB to Taxpayer of its partnership interest in Partnership2 (through the application of subsection 98(5) of the Act) (outside basis) will be higher than the total of the cost amount to the partnership, immediately before Partnership2 will have ceased to exist, of each of Partnership2’s property received by Taxpayer (inside basis).

23. Taxpayer may make designations under paragraph 98(5)(c) in respect of certain property transferred to it in connection with the cessation of Partnership2.

24. On XXXXXXXXXX, Holdings and Taxpayer will jointly elect under subsection 85(1) in prescribed form and manner and within the time referred to in subsection 85(6) with respect to the transfer of the License to Taxpayer with the agreed amount in the election being equal to the cost amount of the License to Holdings at the time of the transfer. In consideration for the transfer, Taxpayer will issue additional common shares to Holdings.

ADDITIONAL INFORMATION

25. Following the implementation of the Proposed Transactions, Taxpayer will change its corporate name to New Name by filing articles of amendment with Industry Canada.

26. It is expected that Partnerships will legally offset a portion of their amount payables to Taxpayer and Holdings by applying, against these amount payable, any corresponding portion of amount receivables from Taxpayer and Holdings by the Partnerships immediately before the implementation of the Proposed Transactions. The amount payables by Partnership1 and Partnership2 described in Paragraph 7 and 10 above (i.e. Debt1, Debt2, and Partnership2 Payable) are the anticipated result of such netting operations.

27. The liabilities of the Partnership that are assumed by the Taxpayer will not reasonably be regarded as a benefit conferred on any other member of the Partnership.

REPRESENTATIONS

28. The Partners of Partnership1 hold their interest in the partnership as capital property.

29. The Partners of Partnership2 hold their interest in the partnership as capital property.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to simplify the corporate structure of the Corp1 Related Group and to gather all the activities related to the XXXXXXXXXX into a single corporate entity.

RULINGS PROVIDED

Provided that

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions, Additional Information, Other Representations and the Purpose of the Proposed Transactions,

(b) the Proposed Transactions are completed in the manner described above, and

(c) there are no other transactions which may be relevant to the rulings requested,

we rule that:

A. Provided that Taxpayer continues to carry on the business of the Partnerships subsequent to the completion of the proposed transactions, subsection 98(5) will apply in respect of the dissolution of the Partnerships.

B. For the purposes of determining the ACB of the Taxpayer’s interest in each of the Partnerships for the purposes of subsection 98(5), the amount of each Debt1 and Debt2 assumed by the Taxpayer before the dissolution of the Partnerships, as described in Paragraphs 11 and 12 above, will be added to the ACB of the Taxpayer’s interest in Partnership1 or Partnership2, as the case may be, pursuant to subparagraph 53(1)(e)(iv).

C. The settlement of Debt1 and Debt2 will not, in and of itself, give rise to a “forgiven amount” within the meaning of subsection 80(1) or 80.01(1).

D. Provided that the Taxpayer has a legal obligation to pay interest on the Notes, and provided that the Taxpayer uses the property acquired from the Partnerships for the purpose of earning income from a business or property (other than income which is exempt or property that is a life insurance property), Taxpayer will be entitled pursuant to paragraph 20(1)(c) to deduct, in computing its income for a taxation year, the lesser of: (i) the interest paid or payable in respect of the particular Note for that taxation year (depending on the method regularly followed by the Taxpayer in computing its income for the purposes of the Act); and (ii) a reasonable amount in respect thereof.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016, and are binding on the CRA provided that the Proposed Transactions, are commenced on or before XXXXXXXXXX.

The above rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

COMMENTS

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a) the fair market value or ACB of any property or the paid-up capital of any shares referred to herein;

(b) the reasonableness or fair market value of any fees or expenditures referred to herein;

(c) the amount of any non-capital loss, net capital loss or any other amount of any corporation referred to herein; and

(d) any tax consequences relating to the Facts and Proposed Transactions described herein, other than those specifically described in the rulings given above.

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate

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