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:
Would there be a rollover of the negative adjusted cost base of a partnership interest acquired on amalgamation ?
Position:
The amalgamation, in and of itself, would not result in a realization of, or an income inclusion in respect of, any negative adjusted cost base of such predecessor corporation in respect of its interest in the partnership.
In the situation described, the grandfathering provisions of subsection 40(3.1) would no longer apply.
Reasons:
Subsection 100(2.1) does not apply in the present situation. Paragraph 87(2)(e.1) would apply.
Our view is that any increase in a partner's percentage holding after February 22, 1994 would cause the "grandfathering" provisions of subsection 40(3.1) to no longer apply. The single partnership interest held by Amalco represents an increase in the percentage holding of Corporation A. Therefore, this single partnership interest is not the same partnership interest held on February 22, 1994 by Corporation A even if paragraph 87(2)(e.1) applies. The single partnership interest held by Amalco is not the same partnership interest held on February 22, 1994 by Corporation B. This would cause the "grandfathering" provisions of subsection 40(3.1) to no longer apply.
XXXXXXXXXX 2000-000135
Sylvie Labarre, CA
Attention: XXXXXXXXXX
April 5, 2000
Dear Sir\Madam:
Re: Partnership Interest
We are writing in response to your letter dated January 7, 2000 in which you requested a technical interpretation concerning the rollover of the negative adjusted cost base of a partnership interest acquired on amalgamation in the following hypothetical situation.
1. Corporation A, Corporation B and Corporation C are three wholly-owned subsidiaries of Corporation D.
2. Each of Corporation A and Corporation B holds an interest in a partnership and that interest represents capital property to its holder. The partnership interest was held by each corporation on February 22, 1994. Corporation B sold a part of its interest in the partnership to Corporation C after February 22, 1994. The interest of Corporation A in the partnership has a negative adjusted cost base. Subsection 40(3.1) of the Income Tax Act (the "Act") does not apply to Corporation A since its partnership interest is an excluded interest as defined by subsection 40(3.15) of the Act. The interest of Corporation B in the partnership has a positive adjusted cost base.
3. Corporation A and Corporation B agree to merge to form Amalco.
Questions
You have asked us to confirm the tax consequences resulting from the amalgamation relating to the partnership interests held by Corporation A and Corporation B.
You have also asked whether the partnership interest acquired by Amalco on the amalgamation of Corporation A and Corporation B would be subject to the identical property rules provided by section 47 of the Act.
Considering the facts and the assumptions provided in your letter, Amalco would be deemed to have been related to Corporation A and Corporation B by virtue of subsection 251(3.2) of the Act. If Amalco is a wholly-owned subsidiary of Corporation D, Amalco would also be deemed to have been related to Corporation A and Corporation B by virtue of subsection 251(3.1) of the Act. Consequently, subsection 100(2.1) would not apply to deem any corporation to have disposed of its interest in the partnership. By virtue of paragraph 87(2)(e.1), the cost of the partnership interest of Amalco would be deemed to be the amount that is the cost to Corporation A and Corporation B and Amalco would be deemed to be the same corporation as and a continuation of Corporation A and Corporation B in respect of their partnership interest.
Consequently, the amalgamation, in and of itself, would not result in a realization of, or an income inclusion in respect of, any negative adjusted cost base of such predecessor corporation in respect of its interest in the partnership.
The partnership interest acquired by Amalco on the amalgamation of Corporation A and Corporation B would be considered as a single partnership interest with a cost equal to the aggregate of the cost to Corporation A and to Corporation B and with adjusted cost base adjustments equal to the aggregate of the adjustments required to be made by Corporation A and by Corporation B.
However, it is our view that any increase in a partner's percentage holding after February 22, 1994 would cause the "grandfathering" provisions of subsection 40(3.1) to no longer apply. The single partnership interest held by Amalco represents an increase in the percentage holding of Corporation A and, therefore, this single partnership interest is not the same partnership interest held on February 22, 1994 by Corporation A even if paragraph 87(2)(e.1) applies. For the same reasons, the single partnership interest held by Amalco is not the same partnership interest held on February 22, 1994 by Corporation B. This would cause the "grandfathering" provisions of subsection 40(3.1) to no longer apply. It is also our view that a legislative amendment would be required in order to obtain the results outlined in your letter of January 7, 2000.
We trust our comments will be of assistance to you. However, as indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and, accordingly, it is not binding on the
Canada Customs and Revenue Agency.
Yours truly,
Marc Vanasse, CA
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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