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: Taxation of partnership wind-up involving renounced resource expenditures.
Position: General comments provided.
Reasons: Insufficient facts to conclude on this hypothetical scenario.
June 27, 2006
Vancouver Tax Service Office HEADQUARTERS
John Lund Allan Nelson
Complex Business Enquiries (613) 443-7253
2006-017419
Winding Up of Limited Partnership and Resource Expenditures
Technical Interpretation
We are writing in response to your March 1, 2006, facsimile transmission, which asked for our comments regarding the appropriate income tax treatment in a situation involving a limited partnership wind-up and the allocation of resource expenses to the former partners.
Conclusion
Based on the limited information provided and the assumptions noted below, it is possible that after the Partnership winds up each partner will have
(a) an undivided interest in the flow-through shares with an adjusted cost base of nil,
(b) $100 of available cumulative Canadian exploration expense, and
(c) no capital gains from either the disposition of their interest in the Partnership, or any allocation of Partnership capital gains from the disposition of the flow-through shares.
Background
An external client provided you with the following hypothetical set of facts and asked for your views concerning the proper income tax treatment. We modified the hypothetical facts slightly to highlight what appear to be the two key aspects of your questions: the partnership wind-up and the flow through of the renounced resource expenses.
Hypothetical Facts
- on January 1, 20xx, a new limited partnership ("Partnership") is created having a December 31 year end;
- each individual partner acquires their respective interest in the Partnership for $100. Say for illustration purposes there are 4 partners and $400 of capital is raised by the Partnership;
- at this point in time, each partner's adjusted cost base of their interest in the Partnership is $100;
- on March 31, 20xx, the Partnership uses its $400 of capital to purchase 4 flow-through shares (as defined in subsection 66(15) of the Income Tax Act and referred to in this memorandum as the "FTS") of "Opco";
- on June 30, 20xx, Opco renounces $400 of Canadian Exploration Expenses ("CEE") to the Partnership, all in accordance with subsection 66(12.6) of the Act. The effective date of the renunciation is also June 30, 20xx; and
- on September 30, 20xx, the Partnership winds up, the Partnership's only assets (i.e., the FTS) are distributed to the partners and the Partnership ceases to exist. Subsection 98(3) of the Act applies to the distribution of the Partnership's assets to the 4 partners.
Questions
You have asked us the following questions:
1. Is the renounced CEE allocated to the partners only at the end of the Partnership's fiscal period?
2. If so, what is the adjusted cost base of an interest in the Partnership for the purposes of the subsection 98(3) election?
3. Can the Partnership wind up with the result each partner has
a. an interest in the FTS with an adjusted cost base of $0,
b. an allocation of $100 of renounced CEE, and
c. no capital gains at that time from either the disposition of their interest in the Partnership, or an allocation of the Partnership's capital gains from the disposition of the FTS?
There are many unknown facts in the above hypothetical scenario that, once determined, could result in us having a different answer regarding the appropriate tax treatment. However, we will provide you with the following general comments, which may be of assistance to you.
Subsection 66.3 of the Act deems the Partnership to have acquired the FTS at a cost of nil. Consequently, the Partnership's adjusted cost base of each share is nil and its cost amount of each share, as defined in paragraph 248(1)(b), is also nil.
Effective June 30, 20xx, Opco renounces $400 of CEE to the Partnership pursuant to subsection 66(12.6) of the Act [note that subsection 66(16) provides that the Partnership is deemed to be a person for those purposes]. Subsection 66(12.61) of the Act provides that this renounced CEE is deemed to be $400 of CEE incurred by the Partnership on June 30, 20xx. We have assumed the filing requirements in subsection 66(12.69) are met.
Subparagraph 96(1)(d)(ii) of the Act provides that the income or loss of the partnership is computed as if no deduction were permitted under section 66.1 [deduction in respect of CEE]. Pursuant to paragraph (h) of the definition of CEE in subsection 66.1(6), the partners who are members of the Partnership at the end of the Partnership's fiscal period are allocated their $100 pro rata share of the total CEE that was deemed incurred by the Partnership [we have assumed that 66.8 does not apply to reduce the CEE]. By virtue of subsection 99(1) of the Act, the fiscal period of the Partnership is considered to end immediately before the time that the Partnership ceases to exist.
Subsection 66(18) provides that each partner's $100 of CEE is deemed to be made or incurred by that partner at the end of Partnership's fiscal period that included June 30, 20xx.
Each partner's $100 of CEE is included in their cumulative Canadian exploration expense as defined in subsection 66.1(6) of the Act under element A and is deductible in computing the partner's income for a taxation year in accordance with subsection 66.1(3) of the Act.
It is stated as a fact that when the Partnership ceases to exist, paragraph 98(3)(a) applies. Consequently, each partner's proceeds of disposition of their Partnership interest is deemed to be $100. This figure is computed as the greater of (i) their $100 adjusted cost base of their Partnership interest1 , and (ii) the nil amount of money received on the cessation of the Partnership, plus the partner's 25% of the Partnership's nil cost amount of the FTS immediately before its distribution.
Paragraph 98(3)(b) applies so that the cost to each partner of their undivided interest in each FTS is deemed to be nil (i.e., equal to the partner's 25% of the Partnership's nil cost amount of the FTS).
Paragraph 98(3)(f) applies so that the Partnership is deemed to have disposed of each FTS for nil proceeds (i.e., equal to the Partnership's nil cost amount of each FTS immediately before its distribution).
Consequently, the application of subsection 98(3) of the Act to this wind-up results in (i) the partners having no gain or loss on the disposition of their Partnership interests [proceeds of $100 minus adjusted cost base of $100], (ii) each partner's cost of their undivided interest in the FTS will be nil, and (iii) the Partnership will have no gain or loss on the disposition of the FTS to the partners [nil proceeds of disposition and nil adjusted cost base].
We hope the above comments are of assistance to you.
If you have additional questions on this matter, please feel free to contact us.
Robin Maley
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch
ENDNOTES
1 We note that clause 53(2)(c)(ii)(C) of the Act provides for a reduction in computing a partner's adjusted cost base of their Partnership interest at any particular point in time by an amount in respect of each fiscal period of the Partnership ending before that time, equal to that partner's share of the CEE, if any, incurred by the Partnership in the fiscal period. In our case, the Partnership did not incur CEE in any prior fiscal period. Consequently, there is no reduction to the $100 adjusted cost base of each partner's Partnership interest under this clause.
However, on July 18, 2005, the Department of Finance announced proposed amendments to subsection 99(1) of the Act. The Explanatory Notes indicate that in order to accommodate the calculation of adjusted cost base under section 53, amended subsection 99(1) will provide that the fiscal period of a partnership is considered to end immediately before the time that is immediately before the particular time. The amendment, if applicable in our case, would result in clause 53(2)(c)(ii)(C) applying to reduce the adjusted cost base of each partner's Partnership interest by an amount equal to their $100 share of the Partnership's CEE. Paragraph 98(3)(a) would then yield proceeds of disposition for each partner's Partnership interest of nil [computed as the greater of (i) their nil revised adjusted cost base of their Partnership interest, and (ii) the nil amount of money received on the cessation of the Partnership, plus the partner's 25% of the Partnership's nil cost amount of the FTS immediately before its distribution]. The application of subsection 98(3) of the Act to this wind-up would still result in the partners having no gain or loss on the disposition of their Partnership interests [i.e., nil proceeds of disposition minus nil adjusted cost base].
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