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: If a partner converts a loan owing from the partnership into capital will it bump ACB of partnership interest pursuant to 53(1)(e)(iv)?
Position: Would appear to be the case
Reasons: Where a corporation issues shares to a shareholder in satisfaction of debt owing to the shareholder paragraph 80(2)(g) deems the amount paid in satisfaction of the debt to be equal to the fair market value of the share at the time of issue.. No similar provision for partnership.
Debt forgiveness rules in paragraph 80(1)(k) in effect treat the forgiveness of debt owing by a partnership to a partner as capital where the partner is a general partner.
1999-001149
XXXXXXXXXX S. Tevlin
(613) 957-2093
Attention: XXXXXXXXXX
June 29, 2000
Dear Sirs:
Re: Partnership - Subparagraph 53(1)(e)(iv) of the Income Tax Act (the "Act")
We are writing in response to your letter dated October 22, 1999 wherein you requested our opinion concerning a situation where a loan by a partner is converted to a capital contribution.
In particular, you asked whether such a conversion would result in an addition to the partner's adjusted cost base of his partnership interest pursuant to subparagraph 53(1)(e)(iv) of the Act.
In this regard we offer the following general comments.
Where a debt owing by a debtor has been effectively extinguished there would normally be a "forgiven amount" for purposes of the Act.
However, the "forgiven amount" definition in subsection 80(1) of the Act in respect of a debt owing by a partnership is nullified, pursuant to paragraph 80(1)(k) of the Act, in the event that a debtor is an "active" member of a partnership and the obligation has always been payable to an active member of the partnership. For this purpose, an "active" member of a partnership is a member of the partnership actively engaged on a regular continual and substantial basis, in partnership activities (other than the financing of the partnership business). Thus, such debt is not subject to the debt forgiveness rules of section 80 and in these situations where the principal amount of an obligation owing by a partnership to a partner has been formally converted to capital there is no specific provision in the Act to account for the result.
Generally, the debt owing to the partner would be capital in nature and the provisions of subdivision c would apply. We would also expect that a formal conversion of debt by a general partner would result in an addition to the adjusted cost base of the general partner's partnership interest pursuant to paragraph 53(1)(e)(iv) of the Act. The amount of the "proceeds of disposition" and "contribution" for these purposes would be a question of fact.
The forgoing comments are given in accordance with the practice referred to in paragraph 21 of Information Circular IC-70-6R3, and are not binding on the Canada Customs and Revenue Agency.
We trust our comments will be of assistance to you.
Yours truly,
Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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