Principal Issues: [TaxInterpretations translation] To the extent that a partnership agreement is amended to provide for the issuance of interests permitting the sharing of income and the issuance of interests permitting the sharing of capital of the partnership, we must answer the following questions:
(1) is there a disposition if an interest in a partnership is converted into a share of income and a share of capital, i.e. split in two?
(2) if only the income share is subsequently disposed of, for example, in a corporate reorganization, would it be a partial disposition of property?
(3) if the previous transaction was completed, would subsection 96(1.1) and proposed subsection 96(1.01) apply to the transfer of the interest?
Position: (1) Question of fact.
(2) Subsection 43(1) and paragraph 53(2)(d) may apply to determine the ACB of the portion that is disposed of and the portion that is retained.
(3) Question of fact. Probably no.
Reasons: The Income Tax Act.
XXXXXXXXXX 2008-029701
July 29, 2009
Dear Sir,
Subject: Application of subsection 97(2) of the Income Tax Act (the "Act")
This is further to your letter of October 10, 2008 requesting our views on the application of subsection 97(2) of the Act with respect to the creation of partnership interests with different rights. We apologize for the delay in responding to your question.
Unless otherwise indicated, all statutory references herein are to the provisions of the Act.
Specifically, you described a situation where a partnership has several partners who all have identical interests that allow them to share in the capital and profits of the partnership. To the extent that the partnership agreement is amended to provide for the issuance of interests permitting the sharing of income and the issuance of interests permitting the sharing of capital, you wish to have answers to the following questions:
(1) is there a disposition if an interest in a partnership is converted to provide for a share of income and for a share of capital, i.e. split in two?
(2) if only the income share is subsequently disposed of, for example, in a corporate reorganization, would that constitute a partial disposition of property?
(3) if the previous transaction was completed, would subsection 96(1.1) and proposed subsection 96(1.01) apply to the transfer of the interest?
Our Comments
Written confirmation of the tax consequences specific to particular transactions is provided by the Directorate only if the transactions are proposed and are the subject of an advance income tax ruling request. When transactions have been completed, the request for information should be directed to the appropriate Tax Services Office. We are, however, prepared to provide the following comments.
(1) Pursuant to subsection 97(2), a taxpayer may dispose of certain types of property to a Canadian partnership on a tax-free basis, provided that the taxpayer and all other members of the partnership jointly elect and the other conditions set out in that subsection are satisfied. The rollover under that subsection is available only if, immediately after the disposition, the taxpayer is a member of the partnership.
In our view, there 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. It is possible for a partnership to issue units with different rights whether to a taxpayer who will become a partner as a result of its contribution to the partnership or to a taxpayer who is already a partner. Where a partner's interest in a partnership is converted into a share of income and a share of capital, it is necessary to determine whether the partner's rights, following the conversion, are sufficiently different to be clearly distinguishable from the original interest. It should be noted that the sharing of the tax attributes of partnership shares may be subject to section 103.
It is also to be noted that the question of whether a person, holding only a share of the capital of a partnership, is a member of the partnership is a question of fact.
(2) The CRA accepts that a partner's interest in a partnership may take the form of various shares in the partnership. However, such an interest remains a single property. Accordingly, on a partial disposition of the interest, the adjusted cost base ("ACB") of the interest in the partnership is determined under subsection 43(1). Under paragraph 53(2)(d), the ACB of the retained portion of the interest is equal to the ACB of the entire interest less the ACB of the portion subject to the partial disposition.
(3) Proposed subsection 96(1.01) applies to the 1995 and subsequent taxation years. Paragraph 96(1.01)(a) provides that a taxpayer who is a former member of a partnership is deemed to be a member of the partnership at the end of the fiscal period in which the taxpayer ceased to be a member of the partnership, for the purpose of allocating the income or loss of the partnership for that period. Thus, in computing certain amounts related to the income or loss of the partnership, including the ACB for the former member of the partnership, a portion of the income of the partnership will be attributable to the former member.
Proposed paragraph 96(1.01)(b) specifies that income or loss that is allocated for the period during which the taxpayer was a member of the partnership is included in computing the adjusted cost base of the partnership interest at the time the former member disposes of the interest or a residual interest.
Subsection 96(1.1) sets out certain rules that apply for the purposes of subsection 96(1) and sections 101 and 103 where a taxpayer ceases to be a member of a partnership and the members enter into an agreement to allocate a portion of the income or loss of the partnership to the taxpayer or the taxpayer's spouse or estate.
In that case, the application of either subsection 96(1.1) or proposed subsection 96(1.01) is a question of fact. However, with respect to subsection 96(1.1), there is nothing in your request that leads us to believe that the conditions for the application of that subsection are present. With respect to proposed subsection 96(1.01), we do not believe that it is applicable since a member of the partnership would dispose only of its share of income and would not cease to be a member of the partnership.
These comments do not constitute an advance income tax ruling and are not binding on the Canada Revenue Agency in respect of any particular factual situation.
We hope that the above comments are of assistance.
Best regards,
François Bordeleau, Advocate
Manager
Business and Partnerships Section
Income Tax Rulings Directorate.