| 920847 | |
| 19(1) | Marc Vanasse |
| (613) 957-8953 |
June 4, 1992
Dear Sir:
Re: Partnership Merger and the Application of the General Anti-Avoidance Rules ("GAAR")
This is in reply to your letter dated March 16, 1992 wherein you requested our opinion as to whether subsection 245(2) of the Income Tax Act (the "Act") could apply to your particular hypothetical situation.
The particular circumstances outlined in your letter on which you have asked our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R2 (copy enclosed), it is not the Department's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate district taxation office for their views. We are therefore not in a position to give you a definitive response as to the application of GAAR. However, we can offer you the following comments which may be of assistance.
We understand that as part of a partnership merger involving subsections 98(3) and 97(2) of the Act, your transaction attempts to eliminate any capital gain that may arise when applying the rules contained in subsection 98(3) of the Act. More specifically, when a partner's adjusted cost base of his or her partnership interest is less than the aggregate cost amount of his or her pro rata interest in the partnership property, the partner would contribute monies to the partnership, before it ceases, in the form of a capital contribution (the "Contribution") as to increase the adjusted cost base of the partner's partnership interest and, thus, eliminating a potential capital gain. Thereafter, the partner would transfer his undivided interest in the partnership's property to a new partnership under subsection 97(2) of the Act and withdraw, from this new partnership, an amount equal to the Contribution.
It is our opinion that the Contribution to the original partnership with its subsequent withdrawal from the new partnership is an attempt to circumvent the provisions contained in subsection 98(3) of the Act and as such would be contrary to the scheme of the Act read as a whole. As a result, subsection 245(2) would apply. Subject to a thorough review of all relevant facts and circumstances surrounding a particular situation, the Department may take a different view as to the application of GAAR if the Contribution to the original partnership is retained in the new partnership.
The preceding comments would not be altered if the situation involved a negative adjusted cost base to the partner in the original partnership.
Yours truly,
for DirectorManufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
NOTES TO FILE
FILE #5/920847
At issue is whether GAAR could apply to the following set of facts:
FACTS
1) In order to achieve a partnership merger, a partnership (the "Original Partnership") will cease to exist with the application of ss.98(3) and will follow with the subsequent rollover of the partner's undivided interest in the Old Partnership's property to the new partnership (the "New Partnership") pursuant to ss. 97(2).
2) In order to eliminate the possible capital gain to the partner (triggered through the deemed proceed of disposition contained in paragraph 98(3)(a)) the partner will borrow monies and make a capital contribution to the Old Partnership prior to it ceasing.
3) Thereafter, once the rollover under ss.97(2) is completed, the partner would withdraw monies from the New Partnership in order to repay the loan.
COMMENTS
Subsection 245(2) states that where a transaction is an avoidance transaction, the tax consequences to a person shall be determined as is reasonable in the circumstances in order to deny a tax benefit that would result from that transaction or from a series of transaction that includes that transaction. An avoidance transaction is defined in 245(3) as a single transaction or one that is a part of a series of transaction where the single transaction or the series result s directly or indirectly in a tax benefit, unless the transaction is carried out primarily for bona fide purposes other than to obtain the tax benefit. Tax benefit is defined to mean a reduction, avoidance or deferral of tax or other amount payable or an increase in a refund of tax or other amount under the Act. Subsection 245(4) provides that the rule in 245(2) does not apply to a transaction where it may reasonably be considered that the transaction would not result directly or indirectly in a misuse of the provisions of the Act or an abuse having regard to the provisions of the Act read as a whole.
IC 88-2 and the supplement thereto does not specifically address GAAR as it pertains to the fact situation described above. However, in an example given in paragraph 12 of IC 88-2, a taxpayer owns property that, if disposed of in a straight-forward manner, would result in the immediate realization of income or a capital gain. The taxpayer and another taxpayer that wants to buy the property (the purchaser) form a partnership and the taxpayer transfers the property into the partnership and elects under subsection 97(2) to defer the recognition of gain which otherwise would arise. The purchaser contributes cash to the partnership in an amount equal to the fair market value of the property. The taxpayer withdraws all the cash from the partnership and, because of such withdrawal, the taxpayer's share of the income and loss of the partnership is reduced. The partnership continues to carry on business. The Department has interpreted the use of the partnership as an attempt to circumvent the provisions that provide that proceeds of disposition of property are to be accounted for at the time of receipt and would be contrary to the scheme of the Act read as a whole. Subsection 245(2) would accordingly apply.
Although the above example does not specifically deal with our situation, one can conclude that, in general, where a taxpayer tries to reduce, defer or avoid taxes by circumventing the rules set out in 98(3), then GAAR should apply. It would seem that the holding of the cash (i.e. capital contribution) in the New Partnership for a short period of time is a purely transitory arrangement and is exactly what GAAR was aimed at.
However, my opinion may different if the cash was retained in the New Partnership as a capital contribution.
Marc Vanasse
June 2, 1992