What is the T2060 Election? Deferring Tax When Winding Up a Canadian Partnership
Dissolving a Canadian partnership can trigger significant tax liabilities. When a partnership ends, partners are often deemed to dispose of their interests at fair market value, resulting in immediate taxable gains. However, Form T2060 – Election in Respect of the Disposition of Property by a Partnership on Winding-Up – provides a way to defer this tax. By filing this election, partners may roll over partnership property without immediate tax consequences under subsection 98(3) of the Income Tax Act.
A Toronto tax lawyer can help determine whether this election applies to your situation and ensure the filing is handled correctly.
What is the T2060 Election?
The T2060 Election allows partners of a Canadian partnership to defer taxation when distributing partnership property upon dissolution. Rather than recognizing capital gains immediately, each partner receives their share of the property on a tax-deferred basis, inheriting the partnership’s original cost of the property.
In simple terms, the T2060 Election is a joint filing that permits tax deferral when winding up a Canadian partnership and distributing property to the former partners.
When Can You Use the T2060 Election?
To qualify for a rollover under subsection 98(3), all of the following conditions must be met:
- Each partner who was a partner immediately before the dissolution must receive their share of the partnership’s property;
- Immediately after distribution, each partner must hold an undivided interest in each property, proportionate to their former partnership interest; and
- All partners must file Form T2060 jointly within the prescribed time.
Failing to meet any of these conditions means that tax will be triggered immediately based on the fair market value of the distributed property.
Why File the T2060 Election?
Filing Form T2060 offers several important benefits. The primary advantage is tax deferral. Instead of facing immediate capital gains or recapture, partners can continue holding the property without triggering tax. This preserves cash flow and allows partners to reorganize or restructure their holdings more efficiently.
It is important to understand that this election defers tax rather than eliminates it. When the distributed property is eventually sold, gains or losses will be calculated based on the original partnership’s tax cost.
Practical Example
Consider a real estate partnership that owns several commercial properties. Upon winding up the partnership, the partners elect under subsection 98(3) using Form T2060. Instead of paying immediate tax on the accrued appreciation of the properties, each partner receives their proportional share of the properties on a tax-deferred basis. The tax liability is deferred until the properties are sold in the future.
What Happens if You Do Not File Form T2060?
Failure to file the T2060 Election can result in significant immediate tax consequences. Without the election:
- Capital gains tax will apply based on the fair market value of the property distributed.
- Partners may face unexpected tax liabilities.
- Opportunities for strategic tax planning and deferral will be lost.
When real estate or other significant partnership property is involved, it is critical to file the election correctly and on time. If you do not, a late election might be possible. Be sure to consult with a Toronto tax lawyer to determine your eligibility.
Filing Deadlines and Requirements
Form T2060 must be filed jointly by all partners. The deadline generally coincides with the partnership’s tax year-end but should be confirmed with a Toronto tax lawyer.
Strict conditions regarding proportional distribution and documentation must be met to ensure the election is valid.
Kirshen Tax Law Can Help
The T2060 Election involves complex conditions and strict deadlines. Errors in filing can result in costly and unnecessary tax assessments. At Kirshen Tax Law, we assist businesses and individuals in navigating the dissolution of Canadian partnerships, ensuring that Form T2060 is filed correctly and that subsection 98(3) compliance is maintained.
Contact us today for a free consultation with a Toronto tax lawyer to protect your assets and defer unnecessary tax.
Jeff Kirshen BA, JD (CA), JD (US)
Tax Lawyer | Founder, Kirshen Tax Law
Disclaimer
The content on this website, including articles and blog posts, is provided for general informational purposes only. It reflects the laws and regulations as of the date of publication, which may have since changed. This content is not intended to serve as legal advice and should not be relied upon as such. Tax laws and situations can be complex and unique to each individual. The information provided may not apply to your specific circumstances. For personalized advice regarding your tax or legal matters, we recommend consulting a qualified lawyer.