Current structure
Sub1 and Sub2 (both taxable Canadian corporations and wholly-owned subsidiaries of Parent) are currently the sole partners of a general partnership (“Partnership”). Partnership’s business generates income under s. 12(1)(a) and Partnership claims a reserve under s. 20(1)(m). Partnership claims reserves under s. 20(1)(l) for accounts receivable that have not been sold to Parent, and a s. 20(1)(p) deduction when they become bad. Sub1 was indebted to Partnership under the demand non-interest bearing “Sub1-Partnership Note”), and Parent was indebted to Partnership under the “Parent-Partnership Note,” which was interest bearing and payable on demand.
Proposed transactions
- Sub1 will repay the Sub1-Partnership Note by assuming Partnership’s accounts payable.
- Sub1 will assume all indebtedness of Partnership, including the Partnership-Parent Note and Partnership’s obligation to pay "Employee Accruals" under various compensation and retirement plans in consideration for additional Partnership Units.
- Partnership will pay to Sub1 a reasonable amount for undertaking to assume Partnership’s prepaid revenue obligations (by assigning an equivalent amount of the Parent-Partnership Note as payment), and a joint election will be made under s. 20(24).
- Sub2 will transfer its interest in Partnership to Sub1 in consideration for Sub1 Preferred Shares and a non-interest bearing promissory note (the “Sub1 Note”), jointly electing under s. 85(1). As a consequence Partnership will cease to exist, Sub1 will become the sole owner of all the Partnership property and Sub1 will become subject to all the remaining obligations of Partnership, and immediately after the time that Partnership ceased to exist, Sub1 will carry on alone the business that was the business of Partnership.
Ruling
S. 98(5) will apply in respect of the dissolution of Partnership.