Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Would the proposed partnership structure and transaction be suitable to accomplish the indefinite deferral of capital gains?
Position: No. It is possible for the transferor to transfer the shares to a partnership (via 97(2)) without having immediate tax implications. However, the gain, loss, or recapture is only deferred until such time as the partnership actually disposes of the shares or the partner disposes of his partnership interest.
Reasons: Legislation.
XXXXXXXXXX 2004-010801
Shaun Harkin
February 21, 2005
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Rollover to Partnership
We are writing in reply to your letters of December 6, 2004 and January 6, 2005 and subsequent to our telephone conversation of February 15, 2005 (Harkin/XXXXXXXXXX) requesting our views on your proposed transaction.
It is your desire to defer capital gains on shares to future generations by using the rollover provisions of subsection 97(2) of the Income Tax Act (the "Act"). As discussed we were not able to provide the ruling you requested but alternatively will provide the following general comments.
It is possible for a transferor to transfer shares to a partnership, using subsection 97(2) of the Act, without having immediate tax implications. However, any gain or loss is normally only deferred until such time as the partnership actually disposes of the shares or the partner disposes of his partnership interest.
Your transaction was based on your misunderstanding that a partnership interest could be transferred at its adjusted cost base ("ACB") to another partner upon the death of a partner (paragraph 5 of the partnership agreement). However, an individual who dies is generally deemed to have disposed of capital property (including a partnership interest) owned by that individual immediately before his death for proceeds of disposition equal to its fair market value at that time. The transfer of capital property upon death at its ACB is normally only possible where the transfer is to a spouse or spousal trust pursuant to subsection 70(6) of the Act.
Please note that, with respect to the use of partnership structures in estate freezes, we stated, in response to question 13 at the 1992 Canadian Tax Foundation Conference Round Table, that whether or not a partnership is used for estate-freezing purposes, the allocation of income within a partnership should recognize the capital contributions of the partners, as well as the non-monetary contributions of each partner. Otherwise, subsection 103(1) or (1.1) of the Act may apply. It appears that paragraph 3 of your proposed partnership agreement does not result in the allocation of income that recognizes the capital contributions of each partner.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.
We trust the above comments are of assistance.
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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