8 May 2014 External T.I. 2014-0522771E5 - Whether a partnership has ceased to exist

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: i) Whether a partnership has ceased to exist when there is only one partner left? ii) Does 98(1) apply to extend the existence of the partnership?

Position: i) Question of fact. ii) Question of fact.

Reasons: i) It depends on the partnership agreement and provincial law, but generally a partnership requires at least two partners. ii) Generally, subsection 98(1) applies to deem a partnership not to have ceased to exist until such time as all of the partnership's property has been distributed to persons entitled by law to receive them.

XXXXXXXXXX
J. Gibbons
2014-052277

May 8, 2014

Dear XXXXXXXXXX:

Re: Subsection 85(3)

This is in response to your email of March 3, 2014, concerning subsection 85(3) of the Income Tax Act (the "Act") and whether a partnership in the particular circumstances described below could rely on that provision.

You describe the following hypothetical scenario:

1. A Canadian general partnership (the "Partnership") operated a grocery business in the province of Quebec.
2. The Partnership was held equally by two individuals, Partner A and Partner B, who were Canadian residents and were not related under the Act.
3. Partner A sold his 50% partnership interest to Partner B, and, as a result, Partner B became the sole partner of the Partnership.
4. Immediately after step 3, the Partnership disposed of all of its properties to a taxable Canadian corporation (the "Corporation") of which Partner B was the sole shareholder and elected under subsection 85(2) of the Act with respect to that disposition. However, the legal title of all assets and liabilities, such as accounts receivable, accounts payable, inventory and equipment were still under the name of the Partnership.
5. As a consequence of the disposition in step 4, the Partnership held no assets or liabilities, except for promissory notes and common shares issued by the Company under subsection 85(2) of the Act, and ceased to be active.
6. Partner B filed the dissolution of the Partnership under the Civil Code of Quebec (the "CCQ") more than 60 days after the disposition.

Your Questions

A. At the moment that Partner B became the sole partner of the Partnership, was the Partnership still a "partnership" under the Act?
B. Would the requirement under paragraph 85(3)(b) that "the affairs of the partnership were wound up within 60 days after the disposition" be met even though a dissolution under the CCQ is filed more than 60 days after the disposition?

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

Whether or not a partnership ceases to exist is a question of fact that generally depends on the partnership agreement as well as the partnership law that governs the partnership. A partnership is generally defined as the relationship that exists between persons carrying on a business in common with a view to profit. Thus, a partnership would generally cease to exist if there are no longer at least two partners carrying on the business. The Civil Code of Quebec (the "CCQ") also contemplates a minimum of two persons as partners. In this regard, section 2186 of the CCQ states that:

"a contract of partnership is contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share any resulting pecuniary profits."

Also, section 2232 of the CCQ states that:

"The uniting of all the shares in the hands of a single partner does not entail dissolution of the partnership, provided at least one other partner joins the partnership within 120 days."

In Maslanka et al. v. The Queen, 2006 DTC 2560, the Tax Court of Canada confirmed that a Quebec general partnership no longer existed once only one individual held all of that partnership's interest.

Notwithstanding that a partnership may have ceased to exist, subsection 98(1) of the Act provides that, for purposes of the Act, the partnership is deemed not to have ceased to exist until such time as "all of the partnership property and any property substituted therefor has been distributed to the persons entitled by law to receive it." It is a question of fact whether subsection 98(1) would apply in a given situation.

In Bow River Pipelines Limited v. The Queen, 2000 DTC 609, the Federal Court of Appeal explained the operation of this provision as follows:

"However, the context of paragraph 98(1)(a) indicates that the entitlement to receive partnership property on dissolution and its distribution are not equivalent. In other words, entitlement implies an equitable right to the receipt of the property while distribution would indicate the transfer of legal title to the property. The provision recognizes that, for purposes of the Income Tax Act, an event giving rise to dissolution does not automatically result in the distribution of the partnership property to the partners. A transaction distributing the property is required. Appellant's counsel pointed out that the role of paragraph 98(1)(a) is to ensure that tax consequences do not depend on whether a partnership terminated under partnership law before its assets are distributed.

Your second question concerns the requirement in paragraph 85(3)(b) of the Act that "the affairs of the partnership were wound up within 60 days after the disposition," and whether this requirement would be met even though a dissolution under the CCQ is filed more than 60 days after the disposition. This issue is addressed in paragraph 7 of IT-378R (Archived), "Winding-up of a Partnership," which states that:

"For the purpose of paragraph 85(3)(b) the Department will consider the affairs of a partnership to have been wound up when all the property of the partnership, including money, has been distributed to the members in satisfaction of their interests in the partnership. The ‘rollover' will not be denied for the reason only that some of the requirements to complete the dissolution of the partnership, other than the distribution of all property, have not been fulfilled within 60 days after the disposition of property to the corporation."

Generally, the rollover provisions under subsection 98(5) of the Act would apply where a Canadian partnership has ceased to exist and within 3 months thereafter, one of the former partners carries on alone the business that was the business of the partnership. However, in the hypothetical scenario described in your letter, subsection 85(3) would apply instead of subsection 98(5). We are unable to provide more definitive comments without additional details concerning this scenario. All of the facts and circumstances surrounding an actual situation would have to be examined to determine if other provisions of the Act may apply.

We trust these comments will be of assistance.

Yours truly,

G. Moore
for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch