Changes to the ‘Bump’ Rules for Partnership Interests

Volume No. 12-36

“partnerships are still a useful vehicle.”

A partnership is a useful form of business organization that has tax advantages as a flow-through vehicle.  If you are planning the acquisition of a business, a partnership can be useful as a way of flowing income and losses (especially losses!) to the purchaser.

Income tax rules allow a purchaser to increase, or ”bump”, the tax cost of certain assets (e.g. land that is not inventory, marketable securities and partnership interests) owned by the acquired corporation (the “target” corporation), if the target corporation is merged with the acquiring corporation after the purchase.

These rules are useful where the purchase price for the shares of the target corporation is higher than the underlying tax basis in the assets of the target corporation, such as companies that own substantial amounts of real estate.  Acquisition planning often involves a tax-free transfer of assets that would not be eligible for a bump (such as depreciable assets and goodwill) to a partnership in advance of the acquisition so that, at the time of the acquisition, the target corporation owns a partnership interest (eligible for the bump) as opposed to assets that were not eligible. 

The March 2012 budget, and the October 2012 draft legislation implementing the budget proposals, will effectively eliminate this planning opportunity. These rules also prevent planning that would otherwise restore the ability to bump the partnership interest.

While the ability to bump the partnership interest has been restricted, partnerships are still a useful vehicle for business acquisitions or structuring newly formed businesses.  Your TSG representative would be happy to discuss with you the best way to structure your business.


TAX TIP OF THE WEEK is provided as a free service to clients and friends of the Tax Specialist Group member firms. The Tax Specialist Group is a national affiliation of firms who specialize in providing tax consulting services to other professionals, businesses and high net worth individuals on Canadian and international tax matters and tax disputes.

The material provided in Tax Tip of the Week is believed to be accurate and reliable as of the date it is written. Tax laws are complex and are subject to frequent change. Professional advice should always be sought before implementing any tax planning arrangements. Neither the Tax Specialist Group nor any member firm can accept any liability for the tax consequences that may result from acting based on the contents hereof.