Income Tax Act (R.S.C., 1985, c. 1 (5th Supp.))

Marginal note:Residual interest in partnership

• 98.1 (1) Where, but for this subsection, at any time after 1971 a taxpayer has ceased to be a member of a partnership of which the taxpayer was a member immediately before that time, the following rules apply:

  • (a) until such time as all the taxpayer’s rights (other than a right to a share of the income or loss of the partnership under an agreement referred to in subsection 96(1.1)) to receive any property of or from the partnership in satisfaction of the taxpayer’s interest in the partnership immediately before the time at which the taxpayer ceased to be a member of the partnership are satisfied in full, that interest (in this section referred to as a “residual interest”) is, subject to sections 70, 110.6 and 128.1 but notwithstanding any other section of this Act, deemed not to have been disposed of by the taxpayer and to continue to be an interest in the partnership;

  • (b) where all of the taxpayer’s rights described in paragraph 98.1(1)(a) are satisfied in full before the end of the fiscal period of the partnership in which the taxpayer ceased to be a member thereof, the taxpayer shall, notwithstanding paragraph 98.1(1)(a), be deemed not to have disposed of the taxpayer’s residual interest until the end of that fiscal period;

  • (c) notwithstanding subsection 40(3), where at the end of a fiscal period of the partnership, in respect of a residual interest in the partnership,

    • (i) the total of all amounts required by subsection 53(2) to be deducted in computing the adjusted cost base to the taxpayer of the residual interest at that time

    exceeds

    • (ii) the total of the cost to the taxpayer of the residual interest determined for the purpose of computing the adjusted cost base to the taxpayer of that interest at that time and all amounts required by subsection 53(1) to be added to the cost to the taxpayer of the residual interest in computing the adjusted cost base to the taxpayer of that interest at that time

    the amount of the excess shall be deemed to be a gain of the taxpayer, for the taxpayer’s taxation year that includes that time, from a disposition at that time of that residual interest; and

  • (d) where a taxpayer has a residual interest

    • (i) by reason of paragraph (b), the taxpayer shall, except for the purposes of subsections 110.1(4) and 118.1(8), be deemed not to be a member of the partnership, and

    • (ii) in any other case, the taxpayer shall, except for the purposes of subsection 85(3), be deemed not to be a member of the partnership.

• Marginal note:Continuation of original partnership

  (2) Where a partnership (in this subsection referred to as the “original partnership”) has or would but for subsection 98(1) have ceased to exist at a time when a taxpayer had rights described in paragraph 98.1(1)(a) in respect of that partnership and the members of another partnership agree to satisfy all or part of those rights, that other partnership shall, for the purposes of that paragraph, be deemed to be a continuation of the original partnership.

Marginal note:Transfer of interest on death

98.2 Where by virtue of the death of an individual a taxpayer has acquired a property that was an interest in a partnership to which, immediately before the individual’s death, section 98.1 applied,

• (a) the taxpayer shall be deemed to have acquired a right to receive partnership property and not to have acquired an interest in a partnership;

• (b) the taxpayer shall be deemed to have acquired the right referred to in paragraph 98.2(a) at a cost equal to the amount determined to be the proceeds of disposition of the interest in the partnership to the deceased individual by virtue of paragraph 70(5)(a) or (6)(d), as the case may be; and

• (c) section 43 is not applicable to the right.

Marginal note:Fiscal period of terminated partnership

• 99 (1) Subject to subsection (2), if, at any particular time in a fiscal period of a partnership, the partnership would, if this Act were read without reference to subsection 98(1), have ceased to exist, the fiscal period is deemed to have ended immediately before the time that is immediately before that particular time.

• Marginal note:Fiscal period of terminated partnership for individual member

  (2) Where an individual was a member of a partnership that, at any time in a fiscal period of a partnership, has or would have, but for subsection 98(1), ceased to exist, for the purposes of computing the individual’s income for a taxation year the partnership’s fiscal period may, if the individual so elects and subsection 249.1(4) does not apply in respect of the partnership, be deemed to have ended immediately before the time when the fiscal period of the partnership would have ended if the partnership had not so ceased to exist.

• Marginal note:Validity of election

  (3) An election under subsection 99(2) is not valid unless the individual was resident in Canada at the time when the fiscal period of the partnership would, if the election were valid, be deemed to have ended.

• Marginal note:Idem

  (4) An election under subsection 99(2) is not valid if, for the individual’s taxation year in which a fiscal period of the partnership would not, if the election were valid, be deemed to have ended but in which it would otherwise have ended, the individual elects to have applicable the rules set out in the Income Tax Application Rules that apply when two or more fiscal periods of a partnership end in the same taxation year.

Marginal note:Disposition of interest in partnership

• 100 (1) If, as part of a transaction or event or series of transactions or events, a taxpayer disposes of an interest in a partnership and an interest in the partnership is acquired by a person or partnership described in any of paragraphs (1.1)(a) to (d), then notwithstanding paragraph 38(a), the taxpayer’s taxable capital gain for a taxation year from the disposition of the interest is deemed to be the total of

  • (a) 1/2 of such portion of the taxpayer’s capital gain for the year from the disposition as may reasonably be regarded as attributable to increases in the value of any partnership property of the partnership that is capital property (other than depreciable property) held directly by the partnership or held indirectly by the partnership through one or more other partnerships, and

  • (b) the whole of the remaining portion of that capital gain.

• Marginal note:Acquisition by certain persons or partnerships

  (1.1) Subject to subsection (1.2), subsection (1) applies in respect of a disposition of a partnership interest by a taxpayer if the interest is acquired by

  • (a) a person exempt from tax under section 149;

  • (b) a non-resident person;

  • (c) another partnership to the extent that the interest can reasonably be considered to be held, at the time of its acquisition by the other partnership, indirectly through one or more partnerships, by a person that is

    • (i) exempt from tax under section 149,

    • (ii) a non-resident, or

    • (iii) a trust resident in Canada (other than a mutual fund trust) if

      • (A) an interest as a beneficiary (in this subsection and subsection (1.2) having the meaning assigned by subsection 108(1)) under the trust is held, directly or indirectly through one or more other partnerships, by a person that is exempt from tax under section 149 or that is a trust (other than a mutual fund trust), and

      • (B) the total fair market value of the interests as beneficiaries under the trust held by persons referred to in clause (A) exceeds 10% of the fair market value of all the interests as beneficiaries under the trust; or

  • (d) a trust resident in Canada (other than a mutual fund trust) to the extent that the trust can reasonably be considered to have a beneficiary that is

    • (i) exempt from tax under section 149,

    • (ii) a partnership, if

      • (A) an interest in the partnership is held, whether directly or indirectly through one or more other partnerships, by one or more persons that are exempt from tax under section 149 or are trusts (other than mutual fund trusts), and

      • (B) the total fair market value of the interests held by persons referred to in clause (A) exceeds 10% of the fair market value of all the interests in the partnership, or

    • (iii) another trust (other than a mutual fund trust), if

      • (A) one or more beneficiaries under the other trust are a person exempt from tax under section 149, a partnership or a trust (other than a mutual fund trust), and

      • (B) the total fair market value of the interests as beneficiaries under the other trust held by the beneficiaries referred to in clause (A) exceeds 10% of the fair market value of all the interests as beneficiaries under the other trust.

• Marginal note:De minimis

  (1.2) Subsection (1) does not apply to a taxpayer’s disposition of a partnership interest to a partnership or trust described in paragraph (1.1)(c) or (d) — other than a trust under which the amount of the income or capital to be distributed at any time in respect of any interest as a beneficiary under the trust depends on the exercise by any person or partnership of, or the failure by any person or partnership to exercise, any discretionary power — if the extent to which subsection (1) would, but for this subsection, apply to the taxpayer’s disposition of the interest because of subsection (1.1) does not exceed 10% of the taxpayer’s interest.

• Marginal note:Exception — non-resident person

  (1.3) Subsection (1) does not apply in respect of a disposition of an interest in a partnership by a taxpayer to a person referred to in paragraph (1.1)(b) if

  • (a) property of the partnership is used, immediately before and immediately after the acquisition of the interest by the non-resident person, in carrying on business through one or more permanent establishments in Canada; and

  • (b) the total fair market value of the property referred to in paragraph (a) equals at least 90% of the total fair market value of all property of the partnership.

• Marginal note:Anti-avoidance — dilution

  (1.4) Subsection (1.5) applies in respect of a taxpayer’s interest in a partnership if

  • (a) it is reasonable to conclude that one of the purposes of a dilution, reduction or alteration of the interest was to avoid the application of subsection (1) in respect of the interest; and

  • (b) as part of a transaction or event or series of transactions or events that includes the dilution, reduction or alteration, there is

    • (i) an acquisition of an interest in the partnership by a person or partnership described in any of paragraphs (1.1)(a) to (d), or

    • (ii) an increase in, or alteration of, an interest in the partnership held by a person or partnership described in any of paragraphs (1.1)(a) to (d).

• Marginal note:Deemed gain — dilution

  (1.5) If this subsection applies in respect of a particular interest in a partnership of a taxpayer, then for the purposes of subsection (1),

  • (a) the taxpayer is deemed to have disposed of an interest in the partnership at the time of the dilution, reduction or alteration;

  • (b) the taxpayer is deemed to have a capital gain from the disposition equal to the amount by which the fair market value of the particular interest immediately before the dilution, reduction or alteration exceeds its fair market value immediately thereafter; and

  • (c) the person or partnership referred to in paragraph (1.4)(b) is deemed to have acquired an interest in the partnership as part of the transaction or event or series of transactions or events that includes the disposition referred to in paragraph (a).

• Marginal note:Gain from disposition of interest in partnership

  (2) In computing a taxpayer’s gain for a taxation year from the disposition of an interest in a partnership, there shall be included, in addition to the amount thereof determined under subsection 40(1), the amount, if any, by which

  • (a) the total of all amounts required by subsection 53(2) to be deducted in computing the adjusted cost base to the taxpayer, immediately before the disposition, of the interest in the partnership,

  exceeds

  • (b) the total of

    • (i) the cost to the taxpayer of the interest in the partnership determined for the purpose of computing the adjusted cost base to the taxpayer of that interest at that time, and

    • (ii) all amounts required by subsection 53(1) to be added to the cost to the taxpayer of that interest in computing the adjusted cost base to the taxpayer of that interest at that time.

• Marginal note:Idem

  (2.1) Where, as a result of an amalgamation or merger, an interest in a partnership owned by a predecessor corporation has become property of the new corporation formed as a result of the amalgamation or merger and the predecessor corporation was not related to the new corporation, the predecessor corporation shall be deemed to have disposed of the interest in the partnership to the new corporation immediately before the amalgamation or merger for proceeds of disposition equal to the adjusted cost base to the predecessor corporation of the interest in the partnership at the time of the disposition and the new corporation shall be deemed to have acquired the interest in the partnership from the predecessor corporation immediately after that time at a cost equal to the proceeds of disposition.

• Marginal note:Transfer of interest on death

  (3) Where by virtue of the death of an individual a taxpayer has acquired a property that was an interest in a partnership immediately before the individual’s death (other than an interest to which, immediately before the individual’s death, section 98.1 applied) and the taxpayer is not a member of the partnership and does not become a member of the partnership by reason of that acquisition,

  • (a) the taxpayer shall be deemed to have acquired a right to receive partnership property and not to have acquired an interest in a partnership;

  • (b) the taxpayer shall be deemed to have acquired the right referred to in paragraph 100(3)(a) at a cost equal to the amount determined to be the proceeds of disposition of the interest in the partnership to the deceased individual by virtue of paragraph 70(5)(a) or 70(6)(d), as the case may be; and

  • (c) section 43 is not applicable to the right.

• Marginal note:Loss re interest in partnership

  (4) Notwithstanding paragraph 39(1)(b), the capital loss of a taxpayer from the disposition at any time of an interest in a partnership is deemed to be the amount of the loss otherwise determined minus the total of all amounts each of which is the amount by which the taxpayer’s share of the partnership’s loss, in respect of a share of the capital stock of a corporation that was property of a particular partnership at that time, would have been reduced under subsection 112(3.1) if the fiscal period of every partnership that includes that time had ended immediately before that time and the particular partnership had disposed of the share immediately before the end of that fiscal period for proceeds equal to its fair market value at that time.

• Marginal note:Replacement of partnership capital

  (5) A taxpayer who pays an amount at any time in a taxation year is deemed to have a capital loss from a disposition of property for the year if

  • (a) the taxpayer disposed of an interest in a partnership before that time or, because of subsection (3), acquired before that time a right to receive property of a partnership;

  • (b) that time is after the disposition or acquisition, as the case may be;

  • (c) the amount would have been described in subparagraph 53(1)(e)(iv) had the taxpayer been a member of the partnership at that time; and

  • (d) the amount is paid pursuant to a legal obligation of the taxpayer to pay the amount.