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).
Proposed transactions
- 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.
- The total income for Partnership’s taxation year ending in the year of wind-up will include (pursuant to s. 12(1)(d) or 12(1)(e)) all amounts in respect of which Partnership will have claimed a reserve pursuant to any of ss. 20(1)(l), 20(1)(m) or 20(1)(n). Partnership’s income for its final fiscal period will be allocated to Sub1 and Sub2 in proportion to their respective interests.
Ruling
Sub1 may claim a reserve under s. 20(1)(n) in respect of its proportionate share of Partnership’s final fiscal period income inclusion under s. 12(1)(e) which relates to Partnership’s preceding year reserve under paragraph 20(1)(n).