Mr. A and Mr. B carried on business in a general partnership, whose most important asset (as to 85% of the total value) was goodwill. The partnership is wound up in reliance on s. 98(3) so that each receives a pro rata portion of the assets. Mr. A transfers his pro rata portion on a s. 85(1) rollover basis to a newly-incorporated wholly-owned corporation (A Inc.) and A Inc. then purchases the pro rata portion of the assets held by Mr. B.
Regarding the application of s. 98(5) (which, if applicable, prevailed over s. 98(3)), CRA stated:
[I]n order for subsection 98(5) to apply, it is necessary, inter alia, that the person carrying on the business of the partnership was a member of the partnership immediately before the time at which the partnership ceases to exist and that person continues to use, in the course of the business, property that was owned by the partnership immediately before that time.
… In the situation where A Inc. would not be a partner of AB immediately before the time at which AB would cease to exist, we are of the view that subsection 98(5) could not apply.