LANGIND E
DOCNUM 2013-0501831E5
REFDATE 131220
SUBJECT Partnership - 85(2), (3) and 100(2)
SECTION 40(1), 85(2) and (3), 100(2), 248(1) "disposition"
Please note
at the time
Prenez note
représenter
that the following document, although believed to be correct
of issue, may not represent the current position of the CRA.
que ce document, bien qu'exact au moment émis, peut ne pas
la position actuelle de l'ARC.
PRINCIPAL ISSUES:
(1) Can a partnership transfer property to a
corporation under subsection 85(2) without any tax consequences where the
non-share consideration is in excess of the elected amount? (2) Where
subsection 85(3) is applicable, does the wind-up of the partnership
result in a disposition of the partnership interest? If yes, what are the
tax consequences where a general partner has a negative adjusted cost
base?
POSITION:
(1) No. (2) Yes, the wind-up would result in a disposition
of the partnership interest and a general partner with a negative
adjusted cost base would have a gain pursuant to subsection 100(2).
REASONS:
(1) Subject to paragraph 85(1)(c), paragraph 85(1)(b)
provides that the elected amount cannot be less than boot. (2) The
definition of "disposition" under subsection 248(1) includes any
transaction or event entitling a taxpayer to proceeds of disposition of
the property and paragraph 85(3)(g) deems the amount of the proceeds of
disposition where subsection 85(3) is applicable. Further, paragraph
85(3)(g) specifically refers to "the disposition of the interest". Thus,
subsection 100(2) would apply.
XXXXXXXXXX
2013-050183
Tim Hum
December 20, 2013
Dear XXXXXXXXXX:
Re:
Subsections 85(2), (3) and 100(2)
This is in response to your e-mail of August 15, 2013, concerning the
application of subsections 85(2) and (3) of the Income Tax Act (the
"Act"). We also acknowledge our telephone discussion of August 19, 2013
(Hum/XXXXXXXXXX), as well as the subsequent e-mail communications. You
are enquiring whether or not a general partnership can transfer goodwill
pursuant to subsection 85(2) to a taxable Canadian corporation without
any tax consequences where the non-share consideration is in excess of
-2the agreed upon amount. In addition, where subsection 85(3) is
applicable, you ask if the wind-up of the general partnership results in
a disposition of the partnership interest and, if yes, you wonder as to
the tax consequences if a partner has a negative adjusted cost base
("ACB") in respect of the partnership interest.
You provide a hypothetical situation where a general partnership is
proposing to transfer its goodwill to a taxable Canadian corporation
("Corp") on a tax-deferred basis under subsection 85(2) in return for
consideration that includes shares of Corp. You state that the goodwill
has not been purchased by the partnership, has a nil tax basis and the
elected amount being considered for the goodwill is $1. In addition, you
state that the Corp would assume all the partnership debt and the fair
market value of the goodwill is greater than the fair market value of
that debt. You wonder whether or not the partnership can transfer the
goodwill to Corp under subsection 85(2) at an elected amount of $1
without any tax consequences. In addition, you state that subsequently
the partnership would be wound-up so that subsection 85(3) would apply
and you wonder as to the tax consequences if a partner has a negative
ACB.
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 IC 70-6R5,
Advance Income Tax Rulings.
Our Comments
In general, subsection 85(2) is an elective provision that allows for the
rollover of property from a partnership to a taxable Canadian
corporation, if certain conditions are met. A joint election in
prescribed form and within the time referred to in subsection 85(6) of
the Act must be filed by the corporation and all the members of the
partnership. Where all the conditions in subsection 85(2) are met, the
rules in paragraphs 85(1)(a) to (i) of the Act are applicable, with such
modifications as the circumstances require. We refer you to IT-291R3,
Transfer of Property to a Corporation Under Subsection 85(1), which
discusses the rollover provisions of the Act under which a taxpayer may
elect to transfer eligible property to a taxable Canadian corporation in
exchange for consideration that includes shares of the corporation. In
the situation described, the goodwill would be eligible property pursuant
to paragraph 85(1.1)(e) of the Act. The assumption of the partnership
debt by Corp would be considered non-share consideration received by the
partnership. As noted in paragraph 10 of IT-291R3, pursuant to paragraph
-385(1)(b), the agreed amount generally cannot be less than the fair market
value of the non-share consideration received. Therefore, in the
situation described, the elected amount for the goodwill cannot be $1 and
will be deemed to be an amount equal to the fair market value of the
assumed debt.
Where other assets are also being transferred, we refer you to the
comments in paragraph 17 of IT-291R3 which include the following:
Paragraph 85(1)(b), however, will not apply where the fair market
of the non-share consideration given (including the assumption of
the transferee) is allocated among several properties transferred
retained by the transferee and the amount allocated to each asset
greater than the agreed amount in respect of each asset.
value
debt by
and
is not
Under subsection 248(1) of the Act, "disposition" is defined to include
any transaction or event entitling a taxpayer to proceeds of disposition
of the property. In the case where subsection 85(3) applies, paragraph
85(3)(g) deems the amount of the proceeds of disposition. Further,
paragraph 85(3)(g) specifically refers to "the disposition of the
interest". Accordingly, it is our view that the wind-up of the
partnership does result in a disposition of the partnership interest.
Therefore, for those partners that have a negative ACB, subsection 100(2)
of the Act would be applicable such that the negative ACB would be added
to the amount, if any, determined under subsection 40(1) of the Act which
provides the normal rules for computing the gain from the disposition of
the partnership interest.
We trust the above comments will be of assistance.
Yours truly,
Chrys Tzortzis, CPA, CA
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch