Winding-Up or Incorporating Partnerships - CPTS · business of the partnership in common with a...

STIKEMAN ELLIOTT LLP www.stikeman.com

Winding-Up or Incorporating PartnershipsDouglas RichardsonKevin GuentherStikeman Elliott LLP

Presentation to CPTS Annual ConferenceJune 10, 2015

STIKEMAN ELLIOTT LLP

� Background

� Commercial Considerations

� Partnership Wind-Up

– Taxable

– Tax deferred

� Partnership Incorporation

Winding-Up or Incorporating Partnerships

Background

� Deferral partnerships

� Demise of the QTI reserve beginning in 2016

� Rationale for ongoing existence and administration of the former deferral partnership

SLIDE 2 STIKEMAN ELLIOTT LLP


Background

� Reserve Denial Rules

– The QTI reserve is lost for a taxation year if, at the beginning of the following taxation year, the partnership no longer principally carries on the activities to which the reserve relates

� subparagraph 34.2(13)(c)(i)

– Therefore, the QTI reserve is no longer applicable when you wind-up a partnership



Commercial Considerations

– Rights of First Refusal

– Change of Control

– Assignments

� Contracts

� Trademarks

� Patents

� Trade Names

– Transfer of Regulatory Permits

– Consents

– Transfer Tax



Partnership Wind-Up

� Taxable – subsections 98(1) and (2)

� Tax Deferred

– subsection 98(3)




Partnership Incorporations

� Tax Deferred




Partnership Wind-Up

� Taxable: Subsections 98(1) and 98(2)

– Partnership ceases to exist

– All the partnership property (and substituted property) is distributed in accordance with the partnership agreement and/or the Partnership Act

– To persons entitled at law to receive it

– Other than in circumstances subject to subsections 98(3) or 98(5)



Partnership Wind-Up

� Taxable

– When does a partnership “cease to exist”?

� A mixed question of fact and law that depends on the partnership agreement and the Partnership Act

� The partnership agreement may set a specific time for termination of the partnership

� Under provincial law, a partnership will generally cease to exist if there are no longer two partners carrying on the business of the partnership in common with a view to profit



Partnership Wind-Up

� Taxable

– When does a partnership “cease to exist”?

� Paragraph 98(1)(a) deems the partnership to continue to exist until all the partnership property (or substituted property) has been distributed

� The rule in paragraph 98(1)(a) must be read in conjunction with subsection 99(1) that provides that even if a partnership is deemed by paragraph 98(1) to continue to exist, the partnership’s fiscal period will end immediately before it actually ceased to exist



Partnership Wind-Up

� Taxable

– Which persons are entitled at law to receive partnership property?

� The property of the partnership is divided in the following order:

– In paying the debts and liabilities to persons not partners;

– In paying each partner what is due to that partner for advances;

– In paying each partner in respect of capital; and

– The residue, if any, is divided amongst the partners in proportion in which profits are divisible.



Partnership Wind-Up

� Taxable

– Subsection 98(2) deems:

� the partnership to dispose of property to a taxpayer who was immediately before that time a member of the partnership for proceeds of disposition equal to its FMV; and

� the taxpayer to have acquired the property with a cost equal to FMV.

– Will result in recognition of gain or loss at the partnership level that will be allocated to former partners

– Partners will have a disposition of their partnership interests for proceeds equal to the cash and the FMV of the property received from the partnership



Partnership Wind-Up

� Tax Deferred: Subsections 98(3) and 98(5)

– Subsection 98(3): Distribution of undivided interests

– Subsection 98(5): Rollout to sole proprietor



Partnership Wind-Up

� Subsection 98(3): Application

– Canadian partnership (only resident Canadians or Canadian partnerships are members);

– Ceases to exist;

– All the partnership property has been distributed to persons who were members of the partnership immediately before that time;

– Of an undivided interest or right in property;

– That is equal to the person’s undivided interest in each property distributed; and

– Every member of the partnership has jointly elected in prescribed form (Form T2060) and within prescribed time (the earliest of days on or before which any taxpayer making the election is required to file a return of income for the taxation year to which the election relates).



Partnership Wind-Up


– No tax deferred rollover if:

� the partnership is a non-Canadian partnership;

� not all the property has been distributed;

� the partnership has not ceased to exist;

� there is a distribution of divided interests in property;

� a member’s undivided interest in each property is not the same; or

� a joint election is not made either on Form T2060 or within prescribed time (no ability to late file a subsection 98(3) election).



Partnership Wind-Up

� Subsection 98(3): Rules

– Deemed Proceeds of Disposition of a Partner’s Interest

� Equal to the greater of:

(i) the ACB immediately before the partnership ceases to exist; and

(ii) money received plus the person’s percentage of the cost amount of each such property distributed

– The difference between (i) and (ii) is referred to as the “Excess” (outside tax basis over inside tax basis)

� The Excess is not a loss recognized on the wind-up, but it can be used to bump the ACB of certain property distributed

� To the extent (ii) exceeds (i), the partner would realize a gain on the wind-up



Partnership Wind-Up

� Subsection 98(3): Example

– Deemed proceeds of disposition of a member’s interest

A = $45

B = $50

– A’s gain = $20

– B’s gain = nil



Partnership

Cost amount =$90

50%

ACB=$25

A B

50%

ACB=$50

C

Partnership Wind-Up


– Cost (or Cost Amount) of Partnership Property Acquired

� Non-Depreciable Capital Property (“NDCP”)

– cost of each person’s undivided interest in NDCP (other than eligible capital property) is the “cost amount” plus the amount of the Excess, if any, designated by the taxpayer, not to exceed the FMV of the property distributed

– Subsection 98(3) and 98(5) “bump” is unlike the paragraph 88(1)(d) “bump” which has a limitation on the “bump” entitlement where the NDCP is an interest in a resource partnership



Partnership Wind-Up


� Subsection 98(3): Example

– A’s ACB of corporation shares = $25 + nil = $25

– B’s ACB of corporation shares = $50 + ($50 - $25) = $75


50%

ACB=$25

B

50%

ACB=$50

Corp

ACB = $50

FMV = $150

A

Partnership

Partnership Wind-Up

� Cost (or Cost Amount) of Partnership Property Acquired

– For depreciable property, the cost amount is, that proportion of the UCC of the particular class to which the property belongs that the capital cost of the particular property distributed is of the total capital cost of all property of that class except property disposed of previously

– For eligible capital property, other than depreciable property, the cost amount is 4/3 of the cumulative eligible capital that the FMV of the property distributed to the partner is of the FMV of property of all the property distributed



Partnership Wind-Up

� Cost (or Cost Amount) of Partnership Property Acquired

– For inventory, the cost amount is the value assigned to it in determining the taxpayer’s income



Partnership Wind-Up

� Partnership’s Proceeds of Disposition

– Paragraph 98(3)(f) deems the partnership to have disposed of each property for proceeds equal to the cost amount to the partnership of the property immediately before distribution



Partnership Wind-Up

� Subsection 98(3): Issues

– Assumed Liabilities: treated as the equivalent of a capital contribution that increases the ACB of the partnership interest immediately before distribution

� Each partner should assume a proportionate share of the partnership liabilities immediately before the dissolution to ensure the assumption of liabilities is recognized in the ACB computation

– Reserve: any reserve claimed in a prior fiscal period will be required to be brought back into income and allocated to partners

� CRA allows former partners to claim a reserve in year of wind-up



Partnership Wind-Up


– Partition: Subsections 248(20) and 248(21) may provide a solution to the cumbersome undivided interest requirements of subsection 98(3)

� To the extent the FMV of a person’s undivided interest in a property equals the FMV of the divided property received on a partition of that property, the person will be considered to neither have acquired nor disposed of any property

� Subsection 248(20) provides that to the extent a person’s FMV in a specific property is increased after a partition of the property, such person is deemed to have acquired an interest in the property equal to the amount of the increase



Partnership Wind-Up


– Fiscal Period

� Subsection 99(1) deems the fiscal period to have ended immediately before the time that the partnership is legally dissolved

� To the extent that property has not yet been distributed, subsection 98(1) deems the partnership not to have ceased to exist for tax purposes

� It is therefore possible to have one or more fiscal periods after the partnership has legally ceased to exist



Partnership Wind-Up


– Fiscal Period: Example

� A partnership with a December 31, 2015 year end legally dissolves and ceases to exist on June 30, 2015

– The partnership does not completely distribute property until July 31, 2016

– Subsection 99(1) will deem the partnership to have a fiscal year end on June 30, 2015

– A new fiscal period will start on July 1, 2015 and end when all property is distributed on July 31, 2016, which results in a fiscal period of more than 12 months

� Therefore, the partnership will have a second year end prior to July 31, 2016



Partnership Wind-Up


– ACB of Partnership Interest on Dissolution

� Paragraph 96(1.01)(b) deems the fiscal period of the partnership to end immediately before the time that is immediately before the time that the partners ceased to be members of the partnership for purposes of the ACB adjustments under subparagraphs 53(1)(e)(i) and 53(2)(c)(i)

– Therefore, a portion of the partnership’s income or loss is allocable to the partners even though they have ceased to be members of the partnership

– Partner’s Indebtedness to Partnership



Partnership Wind-Up


– Clearance Certificates

� CRA has noted that a general partner that is winding-up the limited partnership should obtain a certificate pursuant to subsection 159(2) for the limited partnership certifying that the tax debts of the limited partnership have been paid or security for the payment thereof has been accepted by the Minister before distributing the partnership property to the partners

– It is not necessary for each limited partner to obtain subsection 159(2) clearance certificate



Partnership Wind-Up


– Half-year rule

� Under regulation 1100(2), the CCA that can be claimed on a depreciable asset that is acquired in a particular year is limited to ½ of the normal amount

� Exception in regulation 1100(2.2): Continuity of Ownership

– When depreciable property is acquired from a non-arm’s length person, the recipient will not be subject to the ½ year rule, if:

� The property transferred was depreciable property; and

� The transferor owned the depreciable property continuously for the period from a day that was at least 364 days before the end of the taxation year of the recipient during which it was acquired



Partnership Wind-Up


– Canadian partnership (only resident Canadians or Canadian partnerships are members);

– Ceases to exist;

– Within three months, one, but not more than one, of the former partners (the “proprietor”) carries on alone the business that was the business of the partnership;

– The proprietor continues to use, in the course of the business, the property that was partnership property and that was received by the proprietor as proceeds of disposition of the proprietor’s interest; and

– No election, automatic rollover.



Partnership Wind-Up

� Subsection 98(5): Application– No tax deferred rollover if:

� the partnership is a non-Canadian partnership;

� the partnership has not ceased to exist;

� the proprietor is a partnership;

� the proprietor does not carry on the business of the partnership;

� any other former partner also carries on the business of the partnership within the three months following time the partnership ceases to exist;

� the partnership ceases to exist because the partnership consisted of two corporations which amalgamated; or

� the partnership property is acquired by a corporation formed on the amalgamation of two partners.



Partnership Wind-Up


– Deemed Proceeds of Disposition of a Proprietor’s Partnership Interest

� Equal to the greater of:

(i) the ACB immediately before the partnership ceases to exist; and

(ii) money received plus the person’s percentage of the cost amount of each such property distributed



Partnership Wind-Up


– Deemed Proceeds of Disposition of a Proprietor’s Partnership Interest

� Similar to 98(3), a proprietor can never realize a capital loss on the disposition of a partnership interest

� A proprietor can realize a capital gain on the disposition of its partnership interest if the proprietor's ACB of its partnership interest is less than the aggregate cash and cost amount of property distributed



Partnership Wind-Up


– Bump: the bump available as described under subsection 98(3) is also available under 98(5)

– Reserve: any reserve claimed in a prior fiscal period will be required to be brought back into income and allocated to partners

� CRA allows former partner to claim a reserve in year of wind-up



Partnership Wind-Up


– If partners elect under subsection 98(3), but one former partner carries on the business of the partnership within three months of the wind-up, subsection 98(5) will apply, nullifying the use of the subsection 98(3) election

� Care should be taken to avoid this unintended consequence

– The rollover only applies to the proprietor, each other partner will have:

� actual proceeds of disposition if they sell their interest to the proprietor; or

� a reduction in ACB of their partnership interest due to partnership property being distributed

– If their ACB goes negative, a capital gain will result



Partnership Incorporation

� Subsections 85(2) and 85(3): Application

– Consideration received by the partnership must include shares of the transferee corporation

– Transferee must be a taxable Canadian corporation (partnership not required to be Canadian partnership)

– Partnership must be wound up within 60 days after the disposition (no need to distribute undivided interests in the shares)

– Immediately before the winding-up, there must not be partnership property other than money or property received from the corporation as consideration for the disposition

– Partnership and transferee (corporation) must jointly elect by way of CRA Form T2058




� Subsections 85(2) and 85(3): Rules

– Property eligible for transfer includes:

� Capital property (other than real or immoveable property or an interest in such property if the partnership was not a Canadian partnership at the time of disposition);

� Canadian resource property;

� Foreign resource property;

� Eligible capital property;

� Inventory (other than real or immoveable property); and

� a specified debt obligation of a partnership that is a financial institution.




� Subsections 85(2) and 85(3): Rules

– Limitations on elected amount:

� Elected amount can never be more than FMV of the particular property transferred or less than the amount of the non-share consideration received

� In the case of NDCP, the elected amount cannot be less than the lower of: the cost and its FMV

� In the case of depreciable property, the elected amount cannot be less than the least of: (i) the original cost of the property, (ii) the FMV of the property, and (iii) the remaining UCC of the class of depreciable property to which the property belongs

� In the case of inventory, the elected amount cannot be less than the lesser of its cost amount and its FMV





– Cost to any member of the partnership:

� of any property received (other than shares of the transferee corporation) is the FMV of such property

� of preferred shares of any class is the lesser of: (i) the FMV of the preferred shares of that class; and (ii) that proportion of the excess of the ACB of the partnership interest over the value of any non-share consideration that the FMV of the preferred shares of that class is of the FMV of all preferred shares

� of common shares is any remaining ACB of the partnership interest, after the cost of any non-share consideration and of any preferred shares is deducted





– Proceeds of Disposition of the Partnership Interest:

� The total of the cash and the cost of all shares and property received




� Subsections 85(2) and 85(3): Example



Partnership

ACB=$60

FMV=$200

ACB=$45

A B

ACB=$35

A1

C

A2

ACB=$40

FMV=$100

ACB=$20



– Step 1: Subsection 85(2)

� Partnership transfers A1 and A2 to Canco 1 at an elected amount equal to $40 and $60, respectively

– As consideration, the partnership receives 1,000 shares (FMV $200) in Canco 1 and $100 in cash

– Since the partnership received $100 in cash, the ACB of the shares is nil





– Step 1



Partnership

ACB=$60

FMV=$200

ACB=$45

A B

ACB=$35

A1

C

A2

ACB=$40

FMV=$100

ACB=$20

Canco 1

$100 cash

1,000 shares with FMV $200



– Step 2: Subsection 85(3)

� Partnership distributes cash and shares to partners

– A receives $45 in cash and 450 shares having a FMV of $90

– B receives $35 in cash and 350 shares having a FMV of $70

– C receives $20 in cash and 200 shares having a FMV of $40

� On the dissolution

– Partnership gain/loss is nil as property disposed at cost

– Cost base of shares received by partners is nil since the shares are deemed disposed at cost

– Partners gain/loss is nil, since the ACB of partnership interest equals their non-share consideration received from partnership





– Step 2





– If ACB is less than the non-share consideration received:

� A’s partnership interest ACB is $50: receives $45 in cash and 500 shares with an ACB of $5 and a FMV of $100

� B’s partnership interest ACB is $35: receives $35 in cash and 350 shares with an ACB of nil and a FMV of $70

� C’s partnership interest ACB is $15: receives $20 in cash and 150 shares with an ACB of nil and a FMV of $30

– This would trigger a capital gain of $5 on the disposition of C’s partnership interest as C’s ACB is less than the non-share consideration





– C’s gain can be avoided by choosing to distribute the cash and shares disproportionately

� A would receive $50 in cash and 425 shares having a FMV of $85

� B would receive $35 in cash and 350 shares having a FMV of $70

� C would receive $15 in cash and 225 shares having a FMV of $45

– In total, each partner still receives a combination in cash and shares equal to their income and loss entitlement

� A=45%, B=35% and C=20%




� Subsections 85(2) and 85(3): Captive Partnership



99.99%

.01%

100%

Parent

GPCo

Partnership

Parent

Newco

100%


� Subsections 85(2) and 85(3): Issues

– Reserve: Pursuant to subsection 20(24), where an amount has been included in a taxpayer’s income under paragraph 12(1)(a) and the taxpayer pays an amount to another person to assume the taxpayer’s obligations, the payor can deduct the amount so paid in computing income if the parties jointly elect (no prescribed election)

� effectively, the payee steps into the shoes of the payor

– CRA’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 onecorporation





– CRA 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

� CRA notes that if beneficial ownership is transferred within 60 days (but legal title is not), the 60-day requirement is met, as long as the transfer of legal title is completed as soon as practical after the valuation of the property is completed





– Stop Loss Rules

� Subsection 13(21.2) applies where a person or partnership disposes of depreciable property to a corporation which is an affiliated person of the transferor when, on the 30th day after the transfer, an affiliated person of the transferor owns or has the right to acquire the transferred property

� Subsection 85(2) is not applicable and the lesser of the ACB and UCC will be deemed to be the taxpayer’s proceeds of disposition

� The loss is suspended until the earliest of the events in 13(2.1)

� The taxpayer is prevented from realizing a terminal loss when transferring its property to a corporation which it will still control





– Stop Loss Rules

� Similar to subsection 13(2.1), subsection 40(3.4) applies where:

– a corporation, trust or partnership disposes of NDCP;

– during a period that begins 30 days before and ends 30 days after the disposition, the transferor or an affiliated person acquires the same or an identical property;

– At the end of the period, the transferor or an affiliated person owns the property

� The transferor’s loss is deemed to be nil, is held in suspense and is deferred until the earliest of the events in paragraph 40(3.4)(b)





– Deemed CCA: Under subsection 85(5), where the capital cost to the transferor of depreciable property exceeds the agreed proceeds of disposition, for the purposes of sections 13 and 20, and any regulations made for the purposes of paragraph 20(1)(a), subsection 85(5) deems:

� that the capital cost of the property to the transferee is the amount that was the capital cost to the transferor, and

� that the excess has previously been allowed to the transferee as CCA

– This is to ensure that the transferee will be liable for any CCA recapture that might arise on a subsequent disposition





– Section 54.2 applies where a person has disposed of property that consisted of all or substantially all of the assets used in an active business to a corporation for consideration that includes shares

� the acquired shares will be deemed to be capital property



STIKEMAN ELLIOTT LLP www.stikeman.com

For further informationDouglas [email protected]

Kevin [email protected]

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