CRA indicates that a negative ACB gain from a partnership interest that is TCP is not subject to s. 116

Where a partnership has ceased to exist, any negative adjusted cost base to a taxpayer (including a non-resident) of its partnership interest at the end of the fiscal period is deemed to be a capital gain from a disposition of its interest in the partnership – but its partnership interest is not deemed to be disposed of to the partnership (cf. s. 84(9).) Given this gap, the negative ACB gain is not subject to s. 116 even if the partnership interest was taxable Canadian property, so that there is no requirement to make a s. 116 remittance under s. 116(5) failing a s. 116 certificate.

Although not discussed, s. 98(1)(c) also only deems the negative ACB gain to be a factually-immaculate capital gain, and not a capital gain from the disposition of taxable Canadian property for s. 2(3) purposes, and given inter alia the precise timing of its application, appears to operate without being affected by the draft s. 40(3.1)(b) rule even where the interest is of a limited partner.

Neal Armstrong. Summary of 9 August 2017 External T.I. 2017-0709351E5 under s. 98(1)(c).