Dear Sirs:
Re: Paragraph 98(1)(c) of the Income Tax Act (the "Act")
This in reply to your letter of October 26, 1990 regarding the above noted subject. We apologize for the delay in responding.
Our understanding of the issues for consideration would appear to relate to the time of disposition referred to in paragraph 98(1)(c) of the Act vis-a-vis the time that a partnership ceases to exist as described in paragraph 98(1)(a) of the Act and the time of distribution of property of the partnership to its members.
Our comments are as follows:
1. Paragraph 98(1)(c) requires that a deemed gain on the disposition of a partnership interest is to be determined as at the end of the partnership's fiscal period.
2. By virtue of subsection 99(1) of the Act the fiscal period of a partnership is deemed to end when the partnership actually ceases to exist even if subsection 98(1) of the Act deems the partnership not to have ceased to exist by virtue of incomplete distributions of partnership assets. Wether or not a partnership actually ceases to exist is a question of fact. Such property distributions after cessation of the partnership means that the partnership will have at least another fiscal year end until distribution of all the assets is completed. (See paragraph 9 of Interpretation Bulletin, IT-358 where distribution of all the partnership's assets occurs more than twelve months after it actually ceases to exist).
3. Subsection 98(1) will not apply where, the affairs of a partnership are wound up at any time during its usual fiscal period and all of the partnership's property is distributed prior to, or concurrently with, the winding-up. In such a case, the winding-up of the partnership automatically brings the fiscal period to an end.
4. A deemed gain is recognized for tax purposes at the end of any fiscal period of the partnership after it actually ceases to exist, where the amounts in subparagraph 98(1)(c)(i) exceed the amounts in subparagraph 98(1)(c)(ii). For this purpose, the "end of a fiscal period" referred to in paragraph 98(1)(c) will be the time of the disposition by virtue of the words "at that time" in the post-amble to paragraph 98(1)(c). In addition, there is no requirement for a distribution of all of the property of a partnership to occur before a deemed gain under paragraph 98(1)(c) is effected.
We hope our comments will be of assistance to you.
Yours truly
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch