Upon the taxpayer’s withdrawal from a partnership, the partnership agreement (the “Original Agreement”) provided for the payment to him or her of lump sum amounts, equal to an average of the former partner’s annual partnership income (or ½ that sum in some circumstances), to be paid as compensation for a share of the partnership goodwill. Respecting whether s. 96(1.1) applied, CRA stated:
[W]e do not believe that the compensatory provision in the Original Agreement can help us determine the nature of the amounts you received … [and] it is an agreement, written or unwritten, between a person who ceases to be a partner and the other members of the partnership that determines which of subsection 96(1.1) or section 98.1 applies. …
[I]f a person who ceases to be a partner, demonstrates that the person contributed to the creation of goodwill and receives payments in respect thereof, the payments could be consideration for the former partner's rights to partnership property and would, therefore, be payments of capital. …
… A member who ceases to be a member of a partnership has an income interest in the partnership under subsection 96(1.1) if, inter alia, all the members agree to allocate a portion of the partnership's income to the member who has ceased to be a member of the partnership. Such an agreement could not be subsequently unilaterally altered by the withdrawing partner or by the remaining members of the partnership.