Iberville Developments – Tax Court of Canada finds that the starting ACB of a partnership interest was determined exclusively under s. 97(2)(b)
All you gotta do to offset the capital gain from a property sale is run the sale through a new partnership. For example, a taxpayer with a property with an adjusted cost base and fair market value of $20 and $120, respectively, contributes the property under s. 97(2) to a newly-formed LP in consideration for units with a FMV of $120. This is a barter exchange so that on general principles, the cost of the units is $120. S. 97(2)(b) provides that “immediately after” the disposition of the property to the LP, the elected amount of $20 “shall be added” to the ACB of the partnership interest, so that its ACB is now increased to $140. The property is sold by the LP at a gain of $100, which is largely allocated to the taxpayer, and the ACB of its interest thus is increased to $240. The taxpayer can then realize a capital loss on winding-up LP that more than offsets the capital gain that was realized on the sale.
In dealing with transactions that were only modestly more complex than these, Boyle J first found that the Quebec LP had been formed several hours before the time of the drop-down transaction, at the time that the limited partnership agreement was entered into. It was at that time that the taxpayer acquired its interest in the LP, so that its cost was nil. Partnership units are an irrelevancy under the scheme of the Act. Thus, it did not matter whether the taxpayer was issued additional units on the drop down – all it continued to have was a partnership interest with a nil cost, and with an ACB as increased only as contemplated under s. 97(2)(b) (i.e., to $20 in the above example).
Even if the taxpayer had managed to have the LP formed simultaneously with the drop-down transaction, Boyle J still would not have been persuaded. It was not at all clear to him that under the scheme of the Act, the cost of the taxpayer’s interest was to be determined at the very instant of the drop-down conveyance - rather than immediately after, when s. 97(2)(b) would govern.
It is unclear whether the reasoning in this case will give rise to interpretive difficulties where there are various contributing partners and the s. 97(2) rollover is not utilized. S. 97(1) does not explicitly deal with adjustments to the cost or ACB of a partnership interest – but Boyle J nonetheless helpfully stated that “subsection 97(1) … would be the specific rule which would provide that a transferor partner’s cost of their partnership interest is fair market value.”