27 April 2004 External T.I. 2004-0062941E5 - 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.

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 successor expenses are available to offset the proceeds of disposition of the property that are allocated to the partner.

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

2004-006294
XXXXXXXXXX Daryl P. Boychuk
(613) 957-2059
April 27, 2004

Dear XXXXXXXXXX:

Re: Disposition of Canadian Resource Property by Partnership

We are writing in response to your letter of February 10, 2004 wherein you requested our views on the appropriate application of subsection 66.4(6) and subparagraph 66.7(4)(a)(iii) with respect to the treatment 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 these resource expenses may be used to offset the proceeds of disposition of the CRP in the following circumstances:

1. Control of a taxable Canadian corporation that owns the CRP is acquired in circumstances to which paragraph 66.7(10)(c) applies. The corporation then transfers the property to a partnership of which it is a member and the partnership disposes of the property.

2. A taxable Canadian corporation acquires the CRP from an original owner in circumstances to which subsection 66.7(7) applies. The corporation then transfers the property to a partnership of which it is a member and the partnership disposes of the property.

In responding to your query, we have assumed that the corporation is a member of the partnership at the end of the fiscal period of the partnership in which the disposition of the CRP occurs. We have also assumed that the CRP in issue is a right to explore for and take petroleum or natural gas.

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.

The transfer of the CRP to the partnership would not preclude the corporation from utilizing the successored expenses that relate to the CRP. In the circumstances described above, the corporation's share of the proceeds of the partnership will be deemed by subsection 66.4(6), to be an amount referred to in the description of F in the definition of Canadian oil and gas property expense ("CCOGPE") in respect of the corporation. In applying the description of F, we agree that, subject to the rules and restrictions set out in F and in paragraphs 66.7(4)(a) and 66.7(5)(a), that the CCOGPE account of the corporation would not be reduced to the extent that there is undeducted CCOGPE of the original owner (which would include the corporation where the corporation is deemed to be the original owner) in respect of the property and, if the corporation makes a designation under subparagraph 66.7(4)(a)(iii), the amount so designated under that subparagraph.

Please note that, in our response to your initial letter (2003-002723), we mistakenly confirmed that, in the absence of an election under subparagraph 66.7(4)(a)(iii), any negative balance in the cumulative COGPE account would only reduce the corporation's cumulative CDE account to the extent that the negative balance exceeded the successored cumulative CDE in respect of the CRP. Assuming that the CRP referred to in your initial letter was an oil and gas property, we are of the view that any negative balance in the cumulative COGPE account of the taxpayer that resulted from the disposition of the CRP would reduce the taxpayer's cumulative CDE account and that such reduction would not be offset by any unused successored cumulative CDE in respect of the CRP.

We trust the forgoing adequately addresses your concerns.

Yours truly,

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