21 June 1989 Income Tax Severed Letter AC58131 - Partnership Reorganization

5-8131
                                                S.J. Tevlin
                                                (613) 957-2118

Dear Sirs:

Re: Partnership Reorganization

This is in response to your letter of May 18, 1989, wherein you requested a technical interpretation with respect to the applicability of section 245 of the Income Tax Act (the "Act") to the following hypothetical situation:

1. A Canadian partnership (as defined in section 102 of the Act) owns real estate used in an active business and operating assets.

2. The partnership is wound-up pursuant to subsection 98(3) of the Act.

3. Each partner would then transfer their respective and undivided interest in the real estate to one company ("Realco") and their respective and undivided interest in the operating assets to a second company ("Opco").

4. The purpose of splitting the assets would be to "creditor proof" the real estate from the operations.

Your concern is whether section 245 of the Act would apply to the series of transactions considering that the partnership could not use subsections 85(2) and 85(3) of the Act to accomplish the same results since the assets of the partnership would be transferred to more than one corporation.

The expression "tax benefit" is defined in subsection 245(1) of the Act as including a deferral of tax.

In the transactions described above, a tax benefit would occur upon the elections under subsections 85(1) and 98(3) of the Act since tax otherwise payable would be deferred until a subsequent disposition.

However, generally we are of the opinion that the use of subsections 98(3) and 85(1) of the Act as described in your example would not constitute a misuse or abuse of the provisions of the Act in and by themselves for purposes of subsection 245(4) of the Act. However, other factors pertaining to a particular situation may alter this view.

As explained in paragraph 24 of the Information Circular 70-6R, any written or verbal opinions are not rulings and are not binding upon Revenue Canada, Taxation in respect of any taxpayers.

Yours truly,

for Director Reorganizations and Non-Resident Division Speciality Rulings Directorate Legislative and Intergovernmental Affairs Branch