A partnership has several members, some of whom hold partnership interests which participate in both income and capital of the partnership. The partnership agreement will be amended to provide for the issuance of two partnership interests: the first, to provide for participation only in income; and the second, to provide for participation only in capital. Would there be a disposition where an existing interest is converted or split up into a capital and income interest?
After noting that s. 97(2) permits a taxpayer to dispose of property on a tax-free basis to a partnership if, among other things, the taxpayer is a member of the partnership immediately following the disposition, CRA stated:
[T]here would be a disposition of the initial interest if the interests in income and in capital received in consideration had rights and characteristics sufficiently different to be distinguishable from those of the initial interest. If this difference does not exist, we consider that there would not be a disposition and subsection 97(2) could not apply.
It should be noted that the totality of the interests of a partner held in a partnership constitute a single property of the partner and represent its interest in the partnership for purposes of the Act.