29 October 2002 External T.I. 2002-0146335 - ACR OF PARTNERSHIP INTEREST

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

whether addition to ACB of partnership interest may be accelerated to avoid capital gain

Position:

no.

Reasons:

Administrative relief per ITTN # 5 & 9 is only contemplated in the context of a ruling request----in this case the taxpayer has a timing problem & not a double tax problem therefore even if taxpayer sought an ATR we would not give the relief requested

XXXXXXXXXX
2002-014633
Lena Holloway, CA
October 29, 2002

Dear XXXXXXXXXX:

Re: Calculation of Adjusted Cost Base Of a Partnership Interest

We are writing in reply to your letter of June 11, 2002, requesting a technical interpretation on the calculation of the adjusted cost base ("ACB") of a partnership interest. The facts presented in your letter relate to a taxpayer who retired from a partnership on September 30, 2001. At December 31, 2001, the taxpayer still had a residual interest in the partnership.

Your letter analyzed the tax consequences applicable to the taxpayer as follows:

The taxpayer's interest in the partnership will continue as a residual interest pursuant to section 98.1 of the Income Tax Act (Canada) (the "Act") as his rights under the partnership agreement were not satisfied upon retirement.

The ACB of a partnership interest rolls into the ACB of a residual interest in the partnership. At December 31, 2001 the ACB of the taxpayer's residual interest was negative. Paragraph 98.1(1)(c) of the Act stipulates that a negative ACB in a residual interest at the end of a fiscal period is deemed to be a capital gain to the taxpayer in his taxation year.

Therefore, the taxpayer was taxed once in 2001 on his professional income and again in 2001 on the capital gain resulting from the negative ACB of his residual interest at December 31, 2001. The double taxation arises because the taxpayer's 2001 partnership income does not get added to his ACB of the partnership interest pursuant to paragraph [53(1)(e)] until January 1, 2002. Therefore, the taxpayer will need to report a capital loss in 2002, resulting from the addition of 2001 partnership income, and carry back this loss to 2001.

In your opinion, the timing of the addition to the ACB of the taxpayer's partnership interest places undue hardship on him. Accordingly, you have requested that the Canada Customs and Revenue Agency allow the addition to ACB to occur in 2001 rather than immediately after the end of the year. In support of your request, you refer to our position in Income Tax Technical News ("ITTN") No. 5 and 9. You also note that, due to factors beyond his control, the taxpayer was unable to request an advance ruling.

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 prepared to provide the following comments.

In ITTN No. 9, dated February 10, 1997, we clarified our position with respect to adjustments to the ACB of a partnership interest as follows:

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.

(emphasis added)

Our position, as articulated in ITTN No. 5 and 9, is intended to deal with the inequities of double taxation that may occur, for example, where a taxpayer retires in a particular year and is not a member of the partnership in the following year. In this case, the taxpayer no longer owns a partnership interest and cannot benefit from the ACB adjustment provided in paragraph 53(1)(e). If, on the other hand, the taxpayer's rights under the partnership agreement have not been terminated until the following year (i.e. the residual partnership interest is disposed of when the partner receives final payment from the partnership), the problem is not double taxation. Rather, the problem is the timing of the adjustment to the ACB of the taxpayer's partnership interest, which may result in a capital gain in a particular year and a capital loss in the following year (such as in the circumstances described in your letter). In this situation, the relief discussed in ITTN No. 5 and 9 would not be available.

We trust the above comments are of assistance.

Yours truly,

D. Boychuk
for Director
Business and Partnerships Division
Income Tax Rulings Directorate