23 January 2004 External T.I. 2003-0027231E5 - Disposition of Resource Property by Partnership

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: What is the effect on the resource pools of a member of a partnership where the partnership disposes of a Canadian Resource property in circumstances where the partner has successor expenses related to the property

Position: The net proceeds from the disposition first reduce the successored cumulative Canadian oil and gas property expense relating to the property. Any excess proceeds reduce the cumulative Canadian oil and gas property expense of the taxpayer unless the taxpayer makes a designation under subparagraph 66.7(4)(a)(iii). In the event the taxpayer makes a subparagraph 66.7(4)(a)(iii) designation, the excess proceeds reduce the successored cumulative Canadian development expenses relating to the property before reducing the cumulative Canadian oil and gas property expense of the taxpayer.

Reasons: Application of expenses determined mechanically under the above-noted provisions

Daryl P. Boychuk
XXXXXXXXXX (613) 957-2059
2003-002723
January 23, 2004

Dear XXXXXXXXXX:

Re: Disposition of Canadian Resource Property by Partnership

We are writing in response to your letter of June 27, 2003 wherein you requested our views on the appropriate application of the proceeds of disposition of a Canadian resource property ("CRP") against the resource pools of a member of a partnership in circumstances where the partner has resource expenses successored to the CRP. Specifically, you have asked us to confirm that the proceeds of disposition would be applied to the partner's resource pools in the following order:

1. Successored cumulative Canadian oil and gas property expense;

2. Successored cumulative Canadian development expense if a designation under subparagraph 66.7(4)(a)(iii) is made;

3. Cumulative Canadian oil and gas property expense;

4. Successored cumulative Canadian development expense (if no designation under subparagraph 66.7(a)(iii) is made); and

5. Cumulative Canadian development expense.

For the purpose of this letter, you have asked us to assume that the partner transferred the CRP to the partnership or that control of the partner was acquired in circumstances to which subsection 66.7(10) applied. In responding to your query, we have also assumed that the partner's share of the proceeds of disposition is attributable to that portion of the CRP that is deemed by subparagraph 66.7(10)(j)(i) to have been owned by the partner immediately before the acquisition of control.

Our Comments

Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments.

Where a taxpayer is a member of a partnership and the partnership disposes of a CRP, the taxpayer's share of the amount that would, but for paragraph 96(1)(d), be relevant in computing the cumulative Canadian oil and gas property expense ("CCOGPE") of the partnership, is deemed by subsection 66.4(6), to be an amount referred to in the description of F in the definition of CCOGPE in respect of the taxpayer. In the circumstances described above, the taxpayer is required to deduct, in computing its CCOGPE account, the amount by which the taxpayer's share of the net proceeds of disposition of the CRP exceed the total of any successored CCOGPE available to the taxpayer in respect of the property and, if the taxpayer makes a designation under subparagraph 66.7(4)(a)(iii), the amount so designated under that subparagraph. Assuming that the CCOGPE of the taxpayer is negative at the end of the year, the negative balance would be deducted in computing the taxpayer's cumulative CDE account.

To the extent that the taxpayer's share of the proceeds of disposition of the CRP exceeds the taxpayer's successored CCOGPE, and the taxpayer does not make a designation under subparagraph 66.7(4)(a)(iii), the excess proceeds would be deducted in computing the taxpayer's CCOGPE. Any negative balance in the taxpayer's CCOGPE account at the end of the year would, to the extent the negative balance exceeded the successored cumulative CDE in respect of the CRP, be deducted in computing the taxpayer's cumulative CDE account.

We trust the forgoing adequately addresses your concerns.

Yours truly,

Daryl Boychuk, LL.B
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate