ARCHIVED - Winding-up of a Partnership
DATE: February 15, 1980
SUBJECT: INCOME TAX ACT
Winding-up of a Partnership
REFERENCE: Subsection 85(3) (also subsection 85(2))
This Bulletin replaces and cancels Interpretation Bulletin IT-378 dated May 30, 1977. Current additions are designated by vertical lines.
1. Subsection 85(3) applies where a partnership has disposed of property to a corporation under subsection 85(2), winds up its affairs within 60 days of that disposition and has, immediately before the winding-up, no property other than money or property received from the corporation as consideration for the disposition. The Department's view is that where the provisions of subsection 85(3) are otherwise met, its application is not denied only because the partnership has, immediately before the winding-up, money other than money received in connection with the disposition of property to the corporation. This would be the result where the partnership disposed of all of its property except money to the corporation.
2. The consideration received by the partnership for one or more properties disposed of under subsection 85(2) must include at least one share of the capital stock of the corporation. In practice the number issued is determined by the need for shares in the course of winding up under subsection 85(3). For administrative ease the shares are sometimes issued in the names of the partners instead of the name of the partnership. The Department's view is that this procedure does not invalidate the application of subsection 85(2), nor a subsequent application of subsection 85(3), if the intent is that the shares beneficially belong to the partnership and not to the partners themselves.
3. Subsections 85(2) and (3) taken together provide a means whereby partnership property may be transferred to a corporation and the related partnership interests converted into share holdings without realization of gains or losses at either level. (Those results may be different where property other than property described in subsection 85(2) is transferred to the corporation and/or property having a fair market value in excess of the adjusted cost base of a partner's partnership interest is transferred to him.) The Department's view is that the validity of an election under subsection 85(2) and of a winding-up under subsection 85(3) is contingent upon the partnership property being transferred to and share capital taken back from only one corporation.
4. The reference in paragraph 85(2)(b) to "all the members of the partnership" is to those who were members at the time of the transfer of property to the corporation. Where a second partnership was a partner at that time, each member of the second partnership is also technically required to sign the election form. Nevertheless the Department is prepared to accept a signature of one partner of the second partnership who is authorized to act for all of them.
5. An election under subsection 85(2) may be invalid because one or more of the participants to it has failed to meet a condition precedent to making it, or because it was not made in the prescribed form or within the prescribed time. Where one or more of these conditions exist, the Department may reject the election. If the Department accepts an otherwise invalid election, its validity may not thereafter be denied by the taxpayer.
6. The Act does not define the meaning of the terms "wound up" and "immediately before the winding up" as used in subsection 85(3). To accomplish a "winding up" of the affairs of a partnership all the property of the partnership must be distributed to the partners in satisfaction of their interests in the partnership. In addition, the law under which a partnership has been formed, or the terms of the agreement of a partnership, may require certain formalities or procedures (such as a notification of dissolution given by a partner to other partners, advertisement for dissolution, deregistration of partnership etc.) to be complied with before the partnership is considered to have been wound up.
7. 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.
8. For the purposes of paragraph 85(3)(c) the partnership must not own any property immediately before the winding up other than property received from the corporation as consideration for the disposition or money. Consequently any other partnership property must have been disposed of prior to distribution on winding up of the property described in paragraph 85(3)(c).
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