2017-0722961E5 Winding-up of a partnership

Principal Issues: After the transfer of the business assets of a partnership in favour of a new corporation using the rules provided for in subsection 85(2), whether subsection 98(5) could apply with respect to those business assets in a situation where a former member of the partnership amalgamates with the new corporation within three months of the winding-up of the partnership.

Position: Subsection 98(5) would not apply with respect to the business assets that were transferred to the new corporation pursuant to subsection 85(2).

Reasons: The corporate entity formed as a result of the amalgamation would not be a member of the partnership immediately before the partnership has ceased to exist.

Author: Labarre, Sylvie
Section: 85(2); 85(3); 98(5)

XXXXXXXXXX                                                                                             2017-072296
                                                                                                                     Sylvie Labarre, CPA, CA
January 15, 2018

XXXXXXXXXX,

Re:  Winding-up of a partnership

This is in reply to your letter of September 18, 2017 in which you requested a clarification regarding the interaction between subsections 98(5) and 85(3) of the Income Tax Act (the “Act”) on the winding-up of a Canadian partnership (the “Partnership”).

All references to sections or components of a statute are references to the Act unless otherwise specified.

Hypothetical Facts and Assumptions

1.    GPCo and LPCo are private corporations as defined in section 89.

2.    GPCo is wholly-owned by LPCo.

3.    GPCo is a general partner holding a 0.01% interest in the Partnership and LPCo is a limited partner holding a 99.99% interest in the Partnership.

4.    The assets owned by the Partnership include assets of an operating business (the “Business Assets”).

5.    The Partnership creates a new corporation (“Newco”).

6.    Immediately following the creation of Newco, the Partnership will transfer the Business Assets to Newco on a fully tax-deferred basis under subsection 85(2) (the “85(2) Transfer”) such that the Partnership will dispose of the Business Assets in favour of Newco and, as consideration, the Partnership will receive shares in the capital stock of Newco having a value equal to the fair market value (“FMV”) of the assets so transferred (“Newco Shares”). In order to ensure the application of subsection 85(2) to the 85(2) Transfer, GPCo, LPCo (as members of the Partnership) and Newco will file a joint election in prescribed form and within the prescribed time frame.

7.    As a consequence of the 85(2) Transfer, the Partnership will be the true and beneficial owner of the Newco Shares and Newco will be the true and beneficial owner of the Business Assets.

8.    Within sixty (60) days following the 85(2) Transfer, the affairs of the Partnership will be wound-up (the “Winding-up”) and immediately before the Winding-up, the only assets held by the Partnership will be the Newco Shares and possibly some nominal amounts of cash.

9.    Accordingly, the Newco Shares and the nominal amount of cash (if any) will be distributed to the members of the Partnership (being GPCo and LPCo), thereby meeting the requirements of paragraphs (a), (b) and (c) of subsection 85(3).

10.   Immediately following the Winding-up, GPCo will be liquidated into LPCo.  Subsection 88(1) will apply to the winding-up of GPCo into LPCo.

11.   Following the liquidation of GPCo and within the three (3) months following the Winding-up, LPCo and Newco will amalgamate, thereby causing the amalgamated entity (hereinafter “Amalco”) to directly hold the Business Assets.  Subsection 87(1) will apply to the amalgamation of LPCo and Newco.

Question

You request clarification regarding the interaction between subsection 98(5) and subsection 85(3). Specifically, you would like to know whether the ownership of the Business Assets by Amalco within the three (3) months following the Winding-up would 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, you would like to know which subsection takes precedence over the other, 98(5) or 85(3).

Our comments

This technical interpretation provides general comments about the provisions of 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 IC70-6R7, Advance Income Tax Rulings and Technical Interpretations.

In our view, subsection 98(5) would not apply in the hypothetical scenario provided.

It is assumed that the amalgamation described in paragraph 11 of the Hypothetical Facts and Assumptions section complies with subsection 87(1). In such a case, paragraph 87(2)(a) applies. Paragraph 87(2)(a) indicates that, for the purpose of the Act, the corporate entity formed as a result of the amalgamation is deemed to be a new corporation. Therefore, for the purpose of subsection 98(5), Amalco will be a new corporation and will not be a member of the Partnership immediately before the Partnership has ceased to exist. There is nothing in section 87 that provides a continuity rule of a predecessor corporation with respect to the application of subsection 98(5).  Please refer to paragraph 1.43 of Folio S4-F7-C1 – Amalgamation of Canadian Corporations in that regard.

Therefore, the conditions to apply subsection 98(5) will not be met and subsection 85(3) will apply with respect to the winding-up of the Partnership provided that all the conditions specified in that subsection are met.

We trust these comments will be helpful.

Yours truly,

Urszula Chalupa, LL.B, M. Fisc.
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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