Adam would transfer the assets to the partnership using the rollover provision of subsection 97(2) — and Amit formed this year operate retail store specializing gag gifts who
General StudiesGeneralWorked Solution
Adam and Amit formed a partnership this year to operate a retail store specializing in gag gifts. Adam, who has been in the business for about 13 years as a sole proprietor, owned the following assets:
Adam transferred these assets to the partnership on February 1, 2008, in exchange for a 60% partnership interest. Amit contributed $59,000 in cash and marketable securities with a fair market value of $30,000 in return for a 40% interest. The marketable securities were purchased about 12 years ago at a cost of $25,000.
REQUIRED
(A) How can Adam’s assets be transferred to the partnership without immediate tax consequences? What is the cost to the partnership of Adam’s assets?
(B) What is the maximum non-partnership consideration that Adam can receive without adverse tax consequences?
(C) What is the adjusted cost base of his partnership interest to Adam, assuming that the only consideration received for the transferred assets is a partnership interest?
(D) What is the adjusted cost base of his partnership interest to Amit, assuming that (i) the only consideration received for the transferred assets is a partnership interest and (ii) Amit and the partnership elected jointly to have the rollover provisions [ssec. 97(2)] apply to the transfer?
SOLUTION
(A)
Adam would transfer the assets to the partnership using the rollover provision of subsection 97(2).
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Cost amount
FMV
Elected amount (P of D)
Income
Inventory (rollover not necessary)
$ 22,000
$ 22,000
$ 22,000
Nil
Store fixtures
16,000
19,500
16,000
Nil
Leasehold improvements
33,500
35,000
33,500
Nil
Goodwill
Nil
40,000
1 (1)
.50
$ 71,500
$ 116,500
$ 71,501
The cost to the partnership of Adam’s assets:
Cost
UCC/ CEC
Capital cost
Inventory
$ 22,000
Store fixtures
$ 16,000
$ 17,500
Leasehold improvements
33,500
37,500
Goodwill
.50
Note how Adam has transferred his gains and the inherent tax on those gains to the partnership in which Amit shares 40%.
(B) The maximum non-partnership consideration that Adam can receive is the aggregate of (i) the elected amounts for the assets transferred ($71,501) and (ii) the fair market value of the accounts receivable ($17,000) for a total of $88,501. Note that section 22 can be elected on the transfer of the accounts receivable.
(C) The adjusted cost base to Adam of his partnership interest is the aggregate of (i) the elected amounts for the assets transferred ($71,501) and (ii) the fair market value of the accounts receivable ($17,000) for a total of $88,501.
(D) Amit and the partnership will elect to have subsection 97(2) apply to defer the income or gain realized on the transfer of assets to the partnership. The elected amounts would be $25,000, being the adjusted cost base to Amit of the marketable securities.
The adjusted cost base to Amit of his partnership interest is the aggregate of (i) the elected amount for the marketable securities ($25,000) and (ii) cash ($59,000) for a total of $84,000.
NOTES TO SOLUTION
(1) Nil is not an amount; therefore, the elected amount is $1.