9 May 2001 External T.I. 2001-0070695 - PARTNERSHIP ; ACB

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: Whether double taxation incurred due to timing of 53(1)(e)(i) bump can be avoided by obtaining technical opinion.

Position: no

Reasons: The law is clear re timing in 53(1)(e)(i). We would consider administrative relief only via advance ruling, where all facts are provided and it is clear that it would be appropriate.

		2001-007069
XXXXXXXXXX 	Denise Dalphy, LL.B.
(613) 957-9231
May 9, 2001

Dear XXXXXXXXXX:

Re: Adjusted Cost Base (“ACB”) of a Partnership Interest

We are writing in reply to your facsimile transmission of February 19, 2001 wherein you enquired about income tax consequences relating to retiring partners.

You have advised us of the following factual situation:

1. A limited partnership (the "Partnership”) settles an outstanding lawsuit and as a result, the Partnership receives certain settlement proceeds (the "Settlement Proceeds”).

2. It has been agreed by the partners that approximately 90% of the Settlement Proceeds will be distributed to the partners on a pro-rata basis during the Partnership's 2001 calendar year.

3. All of the limited partners have a nominal cost base in their respective Partnership interests.

4. After 90% of the Settlement Proceeds are distributed, all but one of the limited partners (the "Selling Partners”) will retire from the Partnership and sell their respective limited partnership interests to one remaining limited partner (the “Remaining Partner”) for nominal consideration.

5. Notwithstanding the disposition by each limited partner, a partnership agreement will be entered into to provide that the Selling Partners will be entitled to receive their pro-rata share to the remaining 10% of the Settlement Proceeds on the last day of the Partnership's 2001 year end. The partnership agreement: will also authorize the Partnership to allocate its 2001 Partnership income to all partners including former partners (i.e., the Selling Partners). Once the remaining 10% of the Settlement Proceeds are distributed, each partner's capital interest in the Partnership will be satisfied in full.

6. After the Selling Partners dispose of their respective interests in the Partnership to the Remaining Partner, the Partnership will continue to exist with the Remaining Partner as the sole limited partner.

7. Aside from the Settlement Proceeds there are no other assets of the Partnership. The Partnership is however involved in other outstanding litigation and consequently may receive future damage awards or settlement proceeds from this litigation. Only the general partner and the Remaining Partner would be entitled to any future damage awards or settlement amounts received by the Partnership Moreover, any expenses incurred after the distribution of 90% of the Settlement Proceeds would be allocated to the general partner and the Remaining Partner.

OUR COMMENTS

Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. If, however, the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.

We do not share your view that there is a technical deficiency in subparagraph 53(1)(e)(i) of the Act. However, we do recognize that there is a possibility of double taxation in some situations, and, as we have previously stated (see, for example, the attached excerpt from Income Tax Technical News), we are willing - in the context of an advance income tax ruling, where all relevant facts are available – to consider applying the law so that double taxation is avoided.

In the situation that you have asked us to consider, which we understand involves actual proposed transactions, you have not requested an income tax ruling nor do we not have all of the relevant facts. In particular, it is not clear whether the rights of the Selling Partners to receive their pro-rata share of the remaining 10% of the Settlement Proceeds would be allocations of income to be made to a retired partner within the meaning of subsection 96(1.1) of the Act, or would be subject to the application of paragraphs 96(1)(f) and 98.1(1)(b) of the Act.

Administrative relief has not been provided with respect to payments that fall within the ambit of either subsection 96(1.1) or paragraph 98.1(1)(a). In particular, subparagraph 53(1)(e)(i) of the Act specifically carves out subsection 96(1.1) amounts, and where paragraph 98.1(1)(a) of the Act applies a taxpayer continues to have an ACB until full payment has been made for the disposition of his or her partnership interest.

Finally, where an interest in a partnership was retained for the purpose of avoiding the negative ACB rules in the Act, we would have to consider whether the general anti-avoidance rule in section 245 of the Act would apply.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

Excerpt from Issue No. 9, dated February 10, 1997, of the Income Tax Technical News:

“Calculation of the Adjusted Cost Base of a Partnership Interest

In the Technical News No. 5, dated July 28, 1995, we mention that in computing the adjusted cost base (ACB) of a partner's partnership interest at a particular time, only the partnership's income or loss for fiscal periods ending before that time will be taken into account. It also indicates that we will continue to consider requests for opinions on specific provisions of the law relating to the calculation of the ACB.

We would like to clarify our position. In circumstances where there is a possibility of double taxation, we are prepared, in the context of a ruling request, to apply the law in a manner such that a taxpayer is not taxed twice on the same amount. For example, if a partner dies or leaves the partnership, we may consider certain adjustments in situations where double taxation arises.

The Department of Finance agrees with our position and is currently reviewing the relevant provisions of the law to establish if legislative amendments are necessary.”