Principal Issues: Whether the CRA would extend the application of the exception in paragraph 55(3)(a) on an administrative basis where there is a breakdown of a common-law partnership? If the answer to the previous question is negative, whether the CRA would make a recommendation to the Minister of Finance seeking a revision to the definition of common-law partnership so that the exception in paragraph 55(3)(a) apply in such circumstances?
Position: (1) No; (2) This issue was brought to the attention of the Legislative Policy Directorate, Legislative Policy and Regulatory Affairs of the CRA. It was also suggested that the taxpayer's representative write directly to the Tax Policy Branch of the Department of Finance.
Reasons: The CRA is to administer and enforce the Act as passed by Parliament. The concern raised in this letter relates to tax policy, which is the responsibility of the Department of Finance.
XXXXXXXXXX 2011-039400 U. Chalupa
February 23, 2011
Dear XXXXXXXXXX :
Re: Paragraph 55(3)(a)
This is in reply to your email dated January 26, 2011 in which you requested our comments on the application of paragraph 55(3)(a) of the Income Tax Act (hereinafter the "Act") in the context of a common-law partnership breakdown.
Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the Act.
Facts
In your email, you briefly described the facts of a situation as follows:
Paragraph 55(3)(a), which is an exception to the application of subsection 55(2), may apply where a married couple divides property consisting of shares in the capital stock of a private corporation as a consequence of a breakdown in the marriage, and the divorce is the final step in the series of transactions. Based on the fact that, until divorced, married individuals are related to each other pursuant to paragraph 251(2)(a), the exception contained in paragraph 55(3)(a) would apply at the time the shares of the capital stock of the corporation are divided between them as a consequence of the breakdown of the marriage.
As the definition of common-law partner in subsection 248(1) excludes persons who ceased to cohabit for a period of at least 90 days because of a breakdown in their conjugal relationship, it does not appear that the exception in paragraph 55(3)(a) would apply to them when they would like to divide the shares between them as a consequence of a breakdown of their relationship (except in the unlikely circumstances that such individuals can divide their property within 90 days of such a breakdown).
In your opinion, the Act bas been amended in recent years to treat taxpayers equally regardless if their relationship is a marriage or common-law partnership or if the relationship is between persons of the opposite or same sex (hereinafter "the policy of equality"). Consequently, you are of the opinion that the application of the exception in paragraph 55(3)(a) to a marriage but not to a common-law partnership is contrary to the policy of equality and may even violate the Canadian Charter of Rights and Freedoms.
In this context, you asked whether the Canada Revenue Agency (hereinafter "CRA") would extend the application of the exception in paragraph 55(3)(a) on an administrative basis where there is a breakdown of a common-law partnership. If the answer to the previous question is negative, you asked whether the CRA would make a recommendation to the Minister of Finance seeking a revision to the definition of common-law partnership so that the exception in paragraph 55(3)(a) apply in such circumstances.
Our comments
In general terms, we agree with your interpretation of the relevant provisions of the Act in the situation you described. For example, our Directorate has confirmed in document no. 2007-0226581R3 that the exception in paragraph 55(3)(a) would apply to individuals connected by marriage even though they are living separate and apart by reason of a breakdown of their marriage, provided that the individuals remain legally married throughout the implementation of the corporate reorganization.
On the other hand, if the common-law partners live separate and apart for a period of at least 90 days because of a breakdown in their conjugal relationship, they therefore do not meet the definition of "common-law partners" in subsection 248(1). Consequently, they would cease to be "related persons" under paragraph 251(2)(a).
The CRA does not have and does not intend to adopt an administrative policy that would allow to extend the application of the exception in paragraph 55(3)(a) to a breakdown of a common-law partnership.
However, we brought this issue to the attention of the Legislative Policy Directorate (hereinafter "LPD"), Legislative Policy and Regulatory Affairs of the CRA, in order that, if appropriate, this issue be raised with representatives of the Department of Finance. In this respect, please note that we have sent a copy of this letter to LPD.
Finally, we would like to stress that the role of the CRA is to administer and enforce the Act as passed by Parliament. The concern raised in your letter relates to tax policy, which is the responsibility of the Department of Finance. Should you wish to pursue this further with representatives of the Department of Finance, you may write to the Tax Policy Branch of the Department of Finance at L'Esplanade Laurier, 140 O'Connor Street, Ottawa, Ontario K1A 0G5.
We trust that the foregoing will be of assistance to you.
Yours truly,
Stéphane Prud'Homme, LL.B, M. Fisc.
Manager
Mergers and Acquisitions Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
cc. Mickey Sarazin
Director General
Legislative Policy Directorate