21 February 1996 External T.I. 9528235 - PARTNERSHIP TO SOLE PROPRITORSHIP

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Disposal of partnership interest to proprietorship

Position:

Bump not available, recapture preserved

Reasons:

Scheme of 98(5)

		952823
XXXXXXXXXX	C. Tremblay

Attention: XXXXXXXXXX

February 21, 1996

Dear Sirs:

Re: Disposal of partnership interest to a sole proprietorship

This is in reply to your letter of October 22, 1995, requesting our opinion on a fact situation regarding the disposal of partnership interests and the continuance of the business into a sole proprietorship.

The situation that is described appears to involve a series of actual proposed transactions. It is not our practice to give written opinions concerning proposed transactions, as indicated in Information Circular 70-6R2. Should you wish to request an advance ruling on these or other transactions which may be proposed, please refer to Information Circular 70-6R2 for the procedure to be followed. If, however, your request describes completed transactions involving a specific taxpayer, your questions should be directed to your District Taxation Office which has the responsibility of determining the tax consequences of completed transactions and their implications to the specific taxpayers. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which may be of some assistance.

Subsection 98(5) of the Income Tax Act (the "Act") permits a tax-free rollover where, within three months of the termination of a Canadian partnership defined in section 102 of the Act, one of the partners commences to carry on the business of the previous partnership as a sole proprietor, using the partnership property received by him as proceeds of disposition of his partnership interest. The partnership is deemed to dispose of its assets to the proprietor at "cost amount" rather than at fair market value, thereby avoiding a taxable disposition within the partnership. The rollover provision is further discussed at paragraph 12 of IT-338R2.

Where the conditions of subsection 98(5) of the Act are met, so that one former partner continues within three months to carry on the business of a partnership which has ceased to exist, whether by operation of law, death of a partner, buyout of other partner's interests, or whatever, the continuing proprietor is considered to have disposed of his interest for proceeds deemed to be equal to the greater of:

(a) the adjusted cost base of his partnership interest together with the cost of all partnership interests acquired by him from former partners on the termination of the old partnership, and

(b) the aggregate of the "cost amount" to the former partnership of any of its property (business or otherwise) received by the continuing proprietor plus any other proceeds of disposition realized on the disposition of the proprietor's partnership interest.

We note that even with the operation of the rollover provisions pursuant to subsection 98(5) of the Act, a taxable capital gain results if the cost amount of the partnership property transferred to the proprietor is greater than the aggregate cost base of the partnership interest and any interest acquired on the termination (i.e. (b) is greater than (a) ). Further, there does not appear to be any provision that would provide for the realization of a capital loss on disposition of the partnership interest where the rollover provisions of subsection 98(5) of the Act apply.

We also note that further to subparagraph 98(5)(e)(i) of the Act, the proprietor may realize recapture of the capital cost allowance previously claimed by the partnership on a future disposition of the depreciable property.

We trust our comments will be of assistance to you.

Yours truly,

for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch