Subsection 97(1) - Contribution of property to partnership
Administrative Policy
Income Tax Regulation News, Release No. 3, 30 January, 1995 under "Use of a Partner's Assets by a Partnership"
When a partnership acquires the right to use the property of a partner for no rent, the partner will be deemed by s. 97(1) to dispose of that right for proceeds equal to its fair market value.
Subsection 97(2) - Rules if election by partners
Cases
The Queen v. Pinot Holdings Ltd., 99 DTC 5772, Docket: A-689-95 (FCA)
The taxpayer transferred land to a partnership for consideration of $13.5 million which was satisfied by that amount being paid by the partnership, out of new partnership borrowings in excess of that amount, in order to discharge a mortgage owing by the taxpayer prior to the transfer on the transferred land. The Court reversed a finding that, for purposes of applying s. 97(2), the taxpayer had received only $6.75 million because it remained liable qua partner for 50% of the new loan negotiated in the partnership's name. Noël J.A. stated (at p. 5778):
"The suggestion that for tax purposes amounts disbursed by a partnership from borrowed funds in the discharge of an obligation owed to one of its partners retain their character as loan proceeds is, in my view, wholly without foundation ... . It necessarily follows that the legal character of amounts paid by a partnership to a partner is a function of the obligation being discharged irrespective of how the payment is funded."
Continental Bank Leasing Corp. v. The Queen, 96 DTC 6355 (FCA), rev'd 98 DTC 6501 (SCC)
After the cancellation of an agreement for the sale of the shares of the taxpayer by its parent ("Continental Bank") to a third party ("Central Capital"), the taxpayer transferred, purportedly on a rollover basis pursuant to s. 97(2), the assets of its leasing business to a partnership in which two subsidiaries of Central Capital acquired a 1% partnership interest. Five days later, following a winding-up of the taxpayer into Continental Bank, Continental Bank sold its partnership interest to the two Central Capital subsidiaries.
Before concluding that no partnership, in fact, had been formed, Linden J.A. found that the distribution and sharing of profits attributed to the five-day period was not conclusive evidence of partnership, no business was conducted during the five-day period in the sense that no decisions were made by the parties, a formal servicing agreement between the supposed partnership and a third party for operating its leasing business was not signed until subsequently, and the object of the arrangement was to wind-up the business rather than carrying it on.
In any event, the supposed partnership was deemed to be dissolved ab initio by virtue of s. 34 of the Partnership Act and common law principles because the Continental Bank was prohibited from indirectly participating in a partnership by virtue of s. 174(2)(i) of the Bank Act.
Haro Pacific Enterprises Ltd. v. The Queen, 90 DTC 6583 (FCTD)
The taxpayer ("Haro") contributed real estate worth $1.9 million to a partnership and the other member ("B.C. Ltd.") contributed $950,000 in cash. Five days later, Haro withdrew $950,000 from the partnership pursuant to a clause in the partnership agreement which stated that "following the transfer of title to the lands by Haro ... Haro shall be entitled to demand and receive forthwith out of the property of the Partnership a Capital Repayment in cash for an amount equal to the amount contributed by B.C. Ltd.".
Reed J. held that it would be artificial in the extreme to characterize the facts any other way than that Haro had received both a partnership interest and the cash payment as consideration for the transfer of the lands, with the result that the agreed amount in the subsection 97(2) election filed jointly by Haro and B.C. Ltd. was deemed to be $950,000.
See Also
Ceco Operations Ltd v. The Queen, 2006 DTC 3006, 2006 TCC 256
The taxpayer transferred assets of a business to a partnership in what was intended to be an s. 97(2) rollover transactions in consideration for cash, promissory notes and assumption of debt ("boot") totalling an amount less than the cost amount of the transferred assets, and a Class "F" partnership interest stipulated to have a value equal to the balance of the purchase price. The partnership used cash (derived in part from a third party who had subscribed for ¾ of the equity in the partnership) to subscribe for preferred shares of a sister company of the taxpayer ("Holdings"), with Holdings in turn using the proceeds to subscribe for preferred shares of holding companies ("Holdcos") for the various indirect individual shareholders of the taxpayer. A "back-flow preventor" clause in the Partnership Agreement provided that in the event that the partnership received any payments in respect of preferred securities held by the partnership, the partnership would make distributions to the holders of Class F units equalling such payments received.
In finding that the $18.7 million payment made by the Partnership to Holdings ostensibly as consideration for preference shares of Holdings was not additional consideration to the taxpayer for the business assets transferred by it to the Partnership, Bonner J. noted (at p. 3012) that the Crown had admitted in its pleadings that the Class F units received by the taxpayer together with the boot was equal to the fair market value of the transferred assets. Accordingly there was "no room for even a penny of additional consideration when the legal form of the transaction governed".
Vantem Holdings Ltd. v. The Queen, 98 DTC 1335, Docket: 95-2137-IT-G (TCC)
The taxpayer borrowed money from a bank, contributed the borrowed money and a shopping centre to a partnership in consideration for the assumption of indebtedness and the issuance of debt and a partnership interest. The partnership then made a distribution of capital to the taxpayer in the form of cash and the issuance of a mortgage, with the taxpayer using the cash to pay off the bank loan.
In finding that s. 85(1)(b) should be applied to increase the consideration deemed to be received by the taxpayer to an amount above that initially elected, Bell TCJ. stated (at p. 1339):
"The withdrawal of approximately 2/3 of the capital account at the time of asset transfer followed 38 days later by the withdrawal of the balance is inconsistent with the concept of a true capital account. The form of the entire transaction does not conceal its substance."
MDS Health Group Ltd. v. The Queen, 96 DTC 1324 (TCC), aff'd 97 DTC 5009 (FCA)
The taxpayer contributed technology valued at U.S. $3 million to a newly-formed partnership between it and an arm's length Canadian corporation ("P-E Canada"), P-E Canada contributed U.S. $1.5 million to the partnership and five days later, the taxpayer was paid U.S. $1.5 million by the partnership pursuant to a clause in the partnership agreement entitling it to "an initial distribution by way of return of capital of $1,500,000 immediately after the making of the initial contributions". (The agreement provided for an equal sharing of all other distributions.)
The distribution to the taxpayer was found to be part of the consideration for the contribution of property made by it to the partnership. Although the taxpayer's counsel relied on a clause in the partnership agreement requiring each partner to contribute capital of U.S. $500,000 in each of the partnership's first three fiscal years, this continuing obligation was characterized as relating to the additional funding by each party of R&D expenditures rather than as a liability of the taxpayer to recontribute the amount it had withdrawn, allegedly on a temporary basis.
Administrative Policy
December 2014 CTF Roundtable, Q. 6
Transactions which entailed the formation on a rollover basis of a Canadian partnership followed immediately by the admission of a non-resident partnership were found to be an abuse of ss. 100(1) and (1.4) without comment being made on the "immediately after" requirement in s. 97(2).
See detailed summary under s. 100(1) and 2014 CTF Conference
.
2014 Ruling 2013-0505431R3 - XXXXXXXXXX
In connection with an extensive reorganization, Pubco will transfer its undivided interest in a royalty to a partnership (Partnership D) mostly owned by it as a contribution to its capital, with a s. 97(2) election being made. Ruling that with the requisite filings, s. 97(2) will apply to such contribution. See more detailed summary under s. 55(3)(a).
29 July 2009 T.I. 2008-0297011E5 F
A partnership has several members, some of whom hold partnership interests which participate in both income and capital of the partnership. The partnership agreement will be amended to provide for the issuance of two partnership interests: the first, to provide for participation only in income; and the second, to provide for participation only in capital. Would there be a disposition where an existing interest is converted or split up into a capital and income interest?
After noting that s. 97(2) permits a taxpayer to dispose of property on a tax-free basis to a partnership if, among other things, the taxpayer is a member of the partnership immediately following the disposition, CRA stated (TaxInterpretations translation):
[T]here would be a disposition of the initial interest if the interest in income and capital received in consideration had rights and characteristics sufficiently different to be distinguishable from those of the initial interest. If this difference does not exist…there would not be a disposition and subsection 97(2) could not apply. …It should be noted that the totality of the interests of a partner held in a partnership constitue a single property of the partner and represent its interest in the partnership for purposes of the ITA.
3 December 2003 T.I. 2003-004601
Where a predecessor corporation made a transfer to a partnership described in s. 97(2), the amalgamated corporation can file the s. 97(2) election in respect of the transfer.
9 June 2003 T.I. 2003-000483 -
In a s. 97(2) transfer, the partnership is not considered a person related to the taxpayer solely because the taxpayer is a majority interest partner. Therefore, assuming that the taxpayer is not a corporation controlled by the partnership, and there is no intention to confer any benefit on the other partners, s. 85(1)(e.2) would not apply to the transfer.
2001 Ruling 2001-007094 -
A corporation ("Company A") disposed of a real estate property to a limited partnership in consideration for partnership interest and the assumption of indebtedness, and thereafter was lent money pursuant to an interest-bearing note by the partnership. The Agency noted that no s. 97(2) ruling had been requested and stated that:
"It would be a question of fact as to whether the Note ... would constitute proceeds of disposition received by Company A for purposes of subsection 97(2) ..."
17 November 1999 T.I. 990126
"[W]here an individual transfers property to a partnership under subsection 97(2) of the Act and receives, in addition to a partnership interest as consideration, a promissory note payable over, say, five years, the agreed amount would include the note and this amount would be deemed to be the proceeds for the individual and the cost to the partnership. In such a situation, where a gain has been triggered, i.e., the agreed amount exceeds the adjusted cost base of the property transferred, the transferor will be entitled to claim a reserve under paragraph 40(1)(a) of the Act if the note taken back is received as a 'conditional payment'."
1999 Ruling 993226
A partnership that is a member of a partnership may elect under s. 97(2).
7 February 1997 T.I. 5-970224
Pending the completion of a review of the matter, the administrative position on s. 85(1)(b) described at the 1996 Corporate Management Tax Conference, Q. 7, will not be extended to transfers of property under s. 97(2).
24 August 1992 T.I. (Tax Window, No. 23, p. 13, ¶2125)
Where a corporation converts a capital property to inventory and transfers it to a partnership under s. 97(2), RC will apply its policy in IT-218R, paragraph 15 at the time of the transfer of the real estate to the partnership, and not when the partnership eventually disposes of the real estate.
89 C.R. - Q.36
Where an election under s. 97(2) is made indicating that a particular property is capital property, the election will not be considered invalid by reason of RC subsequently determining that the property is inventory.
87 C.R. - Q.5
It is a question of fact whether there is a Canadian partnership immediately after the transaction.
IT-471R "Merger of Partnerships"
IT-338R "Partnership Interests - Effects on Adjusted Cost Base Resulting from the Admission or Retirement of a Partner"
IT-457R "Election by Professionals to Exclude Work in Progress from Income" under "Transfers of Work in Progress"
Articles
M. O'Brien, "The 97(2) Rollover - Basic Rules and New Developments", Business Vehicles, Vol IV, No. 2, 1998, p. 186.
McMullen, "Tax Considerations in the Reorganization of Partnerships", 1994 Corporate Management Tax Conference Report, c. 6.
Bernstein, "Partnership Versus Joint Company", Tax Profile, March 13, 1990
Discussions of deferred extraction of "boot" from the partnership in light of RC positions on GAAR and partial dispositions; and of partnership mergers.
Accounting Pronouncements
CICA Emerging Issues Committee, EIC-28 "Accounting for Assets Contributed to a Joint Venture"
Subsection 97(3) - Election not available — section 88
Administrative Policy
16 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 19, ¶1051)
Where a corporation disposes of property at a loss to a partnership which is owned by its controlling shareholder and his spouse, s. 97(3) will deny a capital loss to the corporation, but because the corporation is not a partner there is no partnership interest to which the stop-loss can be added.