CRA says s. 103 and s. 80 did not apply on sale of a partnership

Published by Ian Gamble

In 2014-0529981I7, the CRA Rulings Directorate considered a case where partnership interests and a debt obligation (Particular Note) owed by a partnership were sold mid-year.  No portion of the partnership’s loss for the year was allocated to the selling partners.  On audit, the local Tax Services Office (TSO) proposed to reallocate a pro rata portion of the partnership’s loss to the selling partners under s. 96(1.01) and s. 103.  The TSO also proposed to treat the sale of the Particular Note as engaging the debt-parking rules in s. 80.01.  The Rulings Directorate disagreed with the TSO on both accounts.

  1. With respect to the reallocation of the partnership’s loss, s. 96(1.1) does not require any particular allocation method.  The allocation is governed by the partnership agreement, as contemplated by s. 96(1).  In rejecting the proposed assessment under s. 103, the Rulings Directorate cited a 1985 CRA Roundtable Answer where the CRA said that s. 103 should not apply “…in bona fide situations – that is, where a partner is acquiring an interest with a view to becoming an ongoing member of the partnership”.
  2. The Rulings Directorate further said the debt-parking rules in s. 80.01 were not engaged because at no time did the various owners of the debt obligation deal at arm’s length with the debtor (i.e., the Partnership).  Further, at both times that the Particular Note was acquired by another person the other person was related to the holder of the Particular Note.