10 September 2001 External T.I. 2001-0089205 - PARTNERSHIP;CDA;CAPITAL GAINS

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: computation of partner's taxable capital gain

Position: formula in 96(1.7)

Reasons: formula in 96(1.7)

		2001-008920
XXXXXXXXXX 	Denise Dalphy, LL.B.
(613) 957-9231
September 10, 2001

Dear XXXXXXXXXX:

Re: Subsection 96(1.7)

We are writing in reply to your letter dated June 13, 2001 wherein you enquired about our interpretation of subsection 96(1.7) of the Income Tax Act (the "Act").

Our understanding of the facts of the hypothetical situation described in your aforementioned letter is as follows:

1. X Co, a Canadian-controlled private corporation, has a fiscal year end of April 30.

2. X Co is a 50% corporate partner of a partnership (the "Partnership"), which has a December 31 year end.

3. X Co has no income other than its share of profits from Partnership for its taxation year that ended April 30, 2001.

4. The only income of Partnership for its 2000 fiscal year is a net inclusion under subparagraph 40(1)(a)(ii) and (iii) of $100.

OUR COMMENTS

We agree with your analysis that the calculation of X Co's taxable capital gain pursuant to the formula in subsection 96(1.7) is as follows:

A x B = $37.50 x 1/2= $25
C 3/4

Where

• the inclusion rate in A is 3/4 as a result of the deeming rule in 38(i) of the Act
• the inclusion rate in B is 1/2 [the rationale is that subparagraph (d) of the coming into force provision for the amendments made to paragraph 38(1) in 2001, c.17, s.22 do not apply to this situation, since subsection 96(1) of the Act provides for an allocation of the taxable capital gain of the Partnership for its fiscal period ending December 31, 2000 to X Co in its taxation year ending April 30, 2001].
• the inclusion rate in C is 3/4, which is the inclusion rate used for the Partnership.

With respect to the capital dividend account ("CDA") of X Co, the share of the capital gain allocated to X Co ($25) would be included in computing X Co's CDA in X Co's taxation year (2001) which includes the end of the Partnership's fiscal period (December 31, 2000) in which the capital gain was realized.

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

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