Department of Finance-TEI Liaison Meeting Agenda: December 3, 2003.

• Position: Appendix

1. Supplement to Agenda Item Number 16

   As background for item 16 in the 2003 Department of Finance-TEI Liaison Meeting Agenda, we submit Question 8 from the CCRA-TEI 2002 Liaison Meeting Agenda--Sale of a Partnership Interest, as well as CCRA's response.

   TEI's Question:

   The taxation year of a partnership is its fiscal period. Subsection 249.1(7) of the Income Tax Act (hereinafter "the Act") states that "no change in the time when a fiscal period ends may be made for the purposes of this Act without the concurrence of the Minister." On a sale of a partner's interest where the partnership carries on an active business, the partners generally prefer to terminate the partnership's fiscal period as of or immediately prior to the closing date. Closing the books and the fiscal period immediately prior to the sale ensures a proper allocation of income or loss to the continuing, terminating, and new partners for their respective periods of ownership of the partnership interest. It also ensures that various adjustments to the adjusted cost base of a partner's partnership interest are made.

   Although the Minister will generally agree to a request for a change in a partnership's fiscal period, the partnership must specify a date certain in its request for a new fiscal period and taxation year. In the context of a sale of a partnership interest, however, the partners and partnership may be unable to specify an exact calendar date for the closing because of time needed to perform due diligence, obtain regulatory approvals, and satisfy conditions precedent that arise from the negotiations and the purchase and sale agreements. Once the various approvals are received and the conditions precedent satisfied, there is generally a rush to complete the purchase and close as soon as possible. Filing a request for a change in fiscal period with CCRA will delay the closing and is viewed as an unnecessary business and legal risk.

   In lieu of the current requirement to specify a date certain in the request for a change in taxation period, would CCRA consider granting a request for a year-end change to the "date immediately prior to the acquisition of control"? In other words, will CCRA grant a change in the taxation year end that is "formula driven" rather than a specific date?

   CCRA's Reply:

   A departure of a partner from a partnership is governed by the relevant provincial law and terms of the Partnership Agreement, which Agreement normally dictates the fiscal year of...