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Corporation to partnership

Expert: Donna Lee

Sally asked:

My husband and I currently run our restaurant as a corporation, set up as such on the advice of a lawyer. However, since my outside income could be written off against our losses, we are interested in transferring all assets to a partnership and making the corporation inactive for the time being. What is involved in transferring assets from a corporation to a partnership, both with the same ownership structure, in Ontario?

Donna Lee answered:

The sale of the land as described above will likely be considered a disposition of capital property for tax purposes (and therefore be considered a capital gain). The calculation of the capital gain in this situation is complex as there are many factors to consider. In general, regular capital gains are taxed at a 50% inclusion rate (i.e. 50% of the capital gain would be included in your income in the year of sale and taxed at a maximum rate of 19.5%). One of two exemptions may be available which could eliminate or reduce a capital gain - the Principal Residence Exemption (PRE) and the Lifetime Capital Gains Exemption (LCGE). The comments below describe in general how these exemptions could apply, however we would advise that you talk to your tax advisor as there may be some tax planning opportunities to explore.

The Principal Residence Exemption is usually available to eliminate or reduce a capital gain on the disposition of a taxpayer's principal residence. However, the PRE will likely not apply in your situation where excess land is divided and sold, and you still own the property where the house is situated (the land sold is not considered necessary for the use and enjoyment of the housing unit as a residence). There are also restrictions on use of the PRE where the land is in excess of one-half hectare. For more information on the PRE see Canada Revenue Agency Interpretation Bulletin IT-120R6.

The Lifetime Capital Gains Exemption may also be available if the property is considered "qualified farm property". There are numerous tests that must be met, however if the property qualifies, you may be able to claim up to $750,000 (proposed amount based on the 2007 Federal Budget; $500,000 otherwise) of the capital gains from the disposition of qualified farm property. A determination of whether the property qualifies for this exemption should be completed prior to the sale.

About the author

Donna Lee is a Senior Tax Manager at Meyers Norris Penny LLP in Calgary, AB.

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