G. Martineau (613) 957-8953
XXXX
December 3, 1987
Dear Sirs:
This is in reply to your letter of March 18, 1987 wherein you request our opinion of the transitional provisions of paragraphs 98(3)(d) and 98(5)(d) of the Income Tax Act (the "Act") on the following situations:
Situation A
. The AB partnership was formed and carried on business prior to December 5, 1983. Mr. A owns a 60% interest and Mr. B owns a 40% interest in the AB partnership, Mr. A and B deal with each other at arm's length.
. As at December 4, 1985 the fair market value (FMV) of the AB partnership was $ 20,000, all of which is attributable to goodwill. The cost amount of the underlying assets of the AB partnership is nil.
. Mr. A and Mr. B's adjusted cost base (ACB) of their respective partnership interest is nil.
. In 1986, the FMV of the AB partnership increased to $ 25,000 (all related to goodwill) and Mr. A. paid Mr. B $ 10,000 ($ 25,000 x 40%) for his 40% partnership interest. Mr. A continued to carry on the business as a sole proprietor.
Situation B
. A partnership was formed and carried on business prior to December 5, 1985.
. In 1986, the partnership is wound up. The assets of the partnership are rolled out to partners under subsection 98(3) of the Act. Prior to rolling their assets into a new partnership (using the provisions of subsection 97(2) of the Act) certain partnership interests of retiring or withdrawing partners are acquired in arm's length transactions by the continuing partners.
With respect to Situation A, it is your understanding that Mr. A will be entitled to "bump" the cost amount of the goodwill with respect to his original 60% partnership interest pursuant to paragraph 98(5)d) of the Act. However the bump for the goodwill received in satisfaction of the 40% interest acquired from Mr. B under paragraph 98(5)d) of the Act will not apply since the property is received in satisfaction of an interest in the partnership acquired by the member after December 4, 1985. The maximum bump which Mr. A can apply to goodwill will be $ 5,000 by virtue of subparagraph 98(5)(d)(iii) of the Act.
With respect to Situation B, it is your view that the continuing partners will be entitled to a "bump" under paragraph 98(3)d) of the Act to the extent of their partnership interest acquired before December 5, 1985.
We agree with your interpretation described herein provided the property received by a member of the partnership is not a property that was acquired by the partnership after December 4, 1985, otherwise than pursuant to an agreement in writing entered into before that date.
Yours truly,
for Director Bilingual Services and Resource Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch