CASE STUDY #6
Recommended Solution:
(1) Review of the Act:
There are no provisions within the Act which would
disallow the rollover of property to the partnership with
a subsequent withdrawal of cash from the partnership. (2) Identification of a Tax Benefit:
The land developer disposes of land on a tax deferred
basis and receives cash equal to the fair market value of
the land transferred to the partnership. The tax
deferred on the disposal would constitute a tax benefit
for the purposes of subsection 245(1) (3) Identification of an Avoidance Transaction:
We would question the actual existence of a partnership
whereby the land developer would have a partner's capital
account balance of negative nine million dollars and the
partnership profit allocation is based on each partner's
capital account balance. It would appear that the primary
purpose of the rollover of the property to the
partnership is to obtain the identified tax benefit. (4) Misuse or Abuse of the Act:
This series of transactions would result in a misuse of
the rollover provisions under subsection 97(2) of the
Act. The avoidance transaction would, therefore, not
qualify for the exemption from the application of
subsection 245(2) available pursuant to subsection
245(4). (5) Application of GAAR:
We would treat the cash withdrawal as proceeds received
disposition of the property to the partnership. The
partnership could have its cost of the property adjusted
accordingly through a request for adjustment pursuant to
subsection 245(6). Other Comments:
You may wish to refer to paragraph 12 of the Information
Circular 88-2 (IC882) where this example is presented and
analyzed with respect to GAAR. Also, you may wish to
refer to the case of Haro Pacific Enterprises Ltd. v. The
Queen (90 DTC 6583) which addresses this situation in
a pre-GAAR context.000163