24 January 2001 Internal T.I. 2000-0059517 - DISPOSITION OF PARTNERSHIP AT DEATH

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. What is the adjusted cost base and fair market value of an interest in a partnership at the date of death of partner?

Position:

1. Comments provided re: adjusted cost base. Partnership interest is not a Canadian resource property, therefore 70(5) applies, not 70(5.2). Valuation question - consider looking at the net asset value.

Reasons:

1. In accordance with legislation.

		January 24, 2001

	Hamilton TSO 14	HEADQUARTERS
	Jim McDermott	Allan Nelson
	V&E, Business Enquiries Section	(613) 443-7253

		2000-005951

ACB and FMV of Interest in Resource Limited Partnership at Date of Death

We are writing in response to your facsimile to us dated November 30, 2000, concerning the above-noted topic.

Background Facts

The client, XXXXXXXXXX , inherited XXXXXXXXXX units in a Limited Partnership from her mother upon her mother's death in XXXXXXXXXX . The Limited Partnership is XXXXXXXXXX

XXXXXXXXXX

You have advised the client of the requirements of paragraph 70(5.2)(a) and referred her to paragraphs 15-18 of Interpretation Bulletin IT- 125R4, entitled "Dispositions of Resource Properties".

Your Views

With reference to the above information, it is your preliminary view that the client's mother will be deemed to have disposed of all her capital properties, including resource properties, immediately before her death in XXXXXXXXXX , for proceeds of disposition equal to their fair market value at that time. Additionally, the client will inherit these same properties at the fair market value. Furthermore, the disposition of a Canadian resource property by her mother results in a reduction to the cumulative Canadian development expense (CCDE) under F of the definition of CCDE in subsection 66.2(5). If a debit balance remains, a deduction in an amount not exceeding 30% of the residual CCDE may he claimed in the year of death under subsection 66.2(2). No further deduction is allowed for any unclaimed balances.

Additional Assistance Requested

You have asked us to review the information provided to the client by the Limited Partnership to determine if they have given her enough information in order for her to determine the fair market value and adjusted cost base of her mother's resource property as at her date of death in XXXXXXXXXX

Our Comments

Assumptions

Whether or not a partnership ceases to exist upon the death of a partner depends on the partnership agreement and provincial partnership law. In order to respond to your queries, we have assumed that the death of the client's mother did not cause the partnership to cease to exist or the fiscal period of the partnership to end. We have also assumed that the partnership agreement specifies that income/loss from the Limited Partnership is allocated to partners of record at the end of any particular fiscal period. If these assumptions are incorrect, then our responses would be different.

Canadian Resource Property Considerations

First of all, it has been the long-standing view of the Department/Agency that an interest in a partnership, the underlying property of which is a Canadian resource property (as defined in subsection 66(15) of the Act), is not a Canadian resource property itself (1). This would be our view for an interest in the Limited Partnership as well. The relevant partnership interests are separate properties from their underlying properties [i.e., the underlying properties held by the Limited Partnership are the flow-through shares of various resource corporations. These corporations in turn hold interests in Canadian resource properties.]

Fair Market Value

Subsection 70(5) of the Act applied to deem the mother to have disposed of her interest in the Limited Partnership at an amount equal to the fair market value of such interest immediately prior to her death in XXXXXXXXXX . The client was also deemed to have acquired the interest in the Limited Partnership at the same amount [Subsection 70(5.2) of the Act does not apply since the Limited Partnership interest is not a Canadian resource property. Therefore, there is no reduction to the mother's CDE under F of the definition of CCDE.] XXXXXXXXXX Although the net asset value of these units is not necessarily equal to the fair market value of the units (taking into account the lack of resale market for these units in XXXXXXXXXX ), it does give some indication as to what a reasonable fair market value figure would be. You may want to discuss these valuation issues further with your Business Valuation Section.

Adjusted Cost Base

Adjustments to the adjusted cost base of a partnership interest in respect of income or loss of the partnership will be made in accordance with subparagraph 53(1)(e)(i) or 53(2)(c)(i) of the Act, respectively. That is, in calculating the adjusted cost base of a partner's partnership interest at the end of a fiscal period of the partnership, only the partnership's income ending before that time will be taken into account. Consequently, the mother's share of the Limited Partnership's loss for the XXXXXXXXXX fiscal period will not be an adjustment in calculating the adjusted cost base of her Limited Partnership interest until after the end of the XXXXXXXXXX fiscal period. However, the XXXXXXXXXX Limited Partnership's loss will decrease the mother's adjusted cost base of her interest in the Limited Partnership prior to her death in XXXXXXXXXX . (2)

The mother's share of CEE and CDE for XXXXXXXXXX must be adjusted to reflect the changes you have noted above [i.e., reduction in CEE to $XXXXXXXXXX for XXXXXXXXXX year, and increase in allocation of CDE to $XXXXXXXXXX ]. These adjustments will not only reduce the deductions she may claim in computing her net income for XXXXXXXXXX , but they will also result in a net increase in her adjusted cost base of her Limited Partnership units, in accordance with clauses 53(2)(c)(ii)(C) and (D) of the Act [i.e., the overall reduction in resource expenditures allocated to her for XXXXXXXXXX will result in a smaller reduction to her adjusted cost base in the Limited Partnership interest].

Mother's Unused CDE Pool

Also in her tax return for XXXXXXXXXX , the mother would be entitled to claim a deduction in respect of her unused cumulative CDE [carryforward from XXXXXXXXXX - refer to subsection 66.2(2) and paragraph 66.2(5)(f) at the definition of CDE and subsection 66.2(5) at the definition of CCDE]. Thereafter, the mother is not able to deduct any unused amount in her CCDE pool.

Client's CDE Pool

As explained above, by virtue of the application of subsection 70(5) of the Act, it is the client who owns the Limited Partnership interest at the end of the XXXXXXXXXX and the XXXXXXXXXX taxation years of the Limited Partnership. Therefore, it is the client and not the mother who is allocated the CDE from the Limited Partnership for those years. These allocations form part of the client's CCDE pool which she can claim in accordance with subsection 66.2(2) of the Act [Also refer to paragraph 66.2(5)(f) at the definition of CDE and subsection 66.2(5) at the definition of cumulative Canadian development expense]. The client's adjusted cost base of her interest in the Limited Partnership is reduced by the amount of CDE allocated to her [refer to clause 53(2)(c)(ii)(D) of the Act] and by her share of the Limited Partnership's losses.

We hope the above will be of assistance to you.

If you have any additional queries on this matter please feel free to contact us.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

(1) For example, see the 1986 Revenue Canada Roundtable, Canadian Tax Foundation, Question 54, where we stated it is the Department's position that an interest in a partnership, the underlying property of which consists of Canadian resource property, is not a Canadian resource property for purposes of either a section 85 election or the successor and second successor provisions.

(2) See Income Tax Technical News No. 5.

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