The general rule on the dissolution of a partnership is that all partnership property is disposed of at fair market value (s 98(2)). The Income Tax Act (Canada), however, contains a number of rules providing for a rollover.
- 85(3)—No bump if outside basis is higher than inside basis. Partner does not realize a capital gain, even if outside basis is less than inside basis.
- 98(3)—Permits a bump if outside basis is higher than inside basis. Partner realizes a capital gain if outside basis is less than inside basis. Tax deferral for all former partners. Each partner must receive a proportionate undivided interest in each partnership property. Does not apply if 85(3) or 98(5) applies (per 98(4)).
- 98(5)—Permits a bump if outside basis is higher than inside basis. Partner realizes a capital gain if outside basis is less than inside basis. Tax deferral only for the partner that continues to carry on the business.
Consider a partnership, the partners of which are Parentco and Subco. They want to carry on the partnership business through a corporation. They amalgamate. The conditions in 98(3) and 98(5) will not be met because amalco is a “new corporation” for tax purposes, and there is no continuity rule for the purposes of the subsections. Amalco is not a former partner that carries on the partnership business or that has acquired an undivided interest in the partnership property. A winding-up of Subco into Parentco, however, would ensure that 98(5) will apply.
Summary of Paul Cormack and Janette Pantry, “Partnership Reorganizations” 26:6 Canadian Tax Highlights (June 2018).