26 April 1995 External T.I. 9504975 - capital gains election - negative acb of partnership INTEREST

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1.Whether the capital gains election can be filed in respect of a fraction only of a partnership interest.

2.Whether the ACB of a partnership interest can be negative for purposes of the capital gains election.

Position TAKEN:

1. The election can be filed in respect of a fraction only.

2.ACB cannot be negative.

Reasons FOR POSITION TAKEN:

1.A taxpayer can dispose of only a portion of his or her partnership interest.

2.For the 1994 and subsequent taxation years, unless the Act specifically provides otherwise, the adjusted cost base to a taxpayer of a property can never be less than nil.

		5-950497
XXXXXXXXXX		C. Chouinard

Attention: XXXXXXXXXX

April 26, 1995

Dear Sir:

Re: Capital Gains Election - Negative ACB of a Partnership Interest

We are writing in reply to your letter of February 22, 1995 in which you requested our comments regarding the application of the capital gains election in two different situations involving partnership interests.

In the situation you describe, on February 22, 1994, an individual had a partnership interest, the adjusted cost base and fair market value of which were - $50,000 and $100,000 respectively. You inquire whether, if the individual had an unused capital gains exemption balance of $80,000, they could, by designating proceeds of disposition of $30,000, trigger a capital gain of $80,000 which would be added to the individual's exempt capital gains balance as provided in subsection 39.1(1) of the Income Tax Act (the "Act"). If, on the other hand, the individual's unused capital gains exemption balance were only $25,000, you inquire whether the individual could file the capital gains election in respect of only half of their partnership interest, such that, by designating proceeds of disposition of $1, the individual would trigger a capital gain of $25,001 which would be added to the individual's exempt capital gains balance.

Our Comments

The Department has taken the position that a fraction of a partnership interest is a property, as that term is defined in subsection 248(1) of the Act, and, therefore, that such portion constitutes a capital property for purposes of the capital gains election.

With respect to the adjusted cost base ("ACB") of a property, you will note that new paragraph (d) of the definition of "adjusted cost base" in section 54 of the Act provides that, for the 1994 and subsequent taxation years, unless the Act specifically provides otherwise, the adjusted cost base to a taxpayer of a property can never be less than nil. Furthermore, where an individual files the capital gains election in respect of an interest in a partnership, subsection 110.6(23) of the Act requires that certain adjustments be made to the individual's adjusted cost base of the interest for the purpose of computing the individual's capital gain resulting from the election. These adjustments ensure that the income or loss of the partnership for the period up to February 22, 1994 that is reflected in the value of a partnership interest on that day, but would otherwise not be reflected in the adjusted cost base of an individual's interest until the end of the fiscal period, will be reflected in the adjusted cost base of the interest for the purpose of determining the individual's gain accrued to February 22, 1994. These adjustments are provided for in subparagraph 53(1)(e)(xii) of the Act, which adds a reference to the addition required by paragraph 110.6(23)(a) of the Act, and in subparagraph 53(2)(c)(xi) of the Act, which adds a reference to the deduction required by paragraph 110.6(23)(b) of the Act.

Accordingly, as regards Scenario A, if the taxpayer designated the amount of $30,000 as proceeds of disposition, the election would give rise to a capital gain of $30,000 (i.e., $30,000 - 0). However, by virtue of subsection 100(2) of the Act, the taxpayer would have to include in computing the capital gain resulting from the deemed disposition of the partnership interest, an amount equal to the negative ACB of the partnership interest, namely $50,000. Accordingly, the total amount added to the taxpayer's "exempt capital gains balance" would be $80,000 (i.e., $30,000 + $50,000).

As regards Scenario B, if the taxpayer elected proceeds of disposition of $1 in respect of 50% of their partnership interest, the election would give rise to a capital gain of $1 (i.e., $1 - 0). However, by virtue of subsection 100(2) of the Act, the taxpayer would have to include in computing the capital gain arising from the election, an amount equal to 50% of the negative ACB, of their partnership interest, that is, $25,000. Accordingly, the capital gain generated by the election would amount to $25,001. Since the taxpayer's unused balance of the $100,000 capital gains exemption is only $25,000, according to subclause 110.6(20)(a)(i)(B)(I) of the Act, the taxpayer's election would not be valid. Therefore, in the situation you describe, the taxpayer would have to dispose of slightly less than 50% of their partnership interest in order for the capital gains election to be valid.

The foregoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990 and are not binding on Revenue Canada.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch