15 February 2007 External T.I. 2006-0214151E5 - Disposition 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.

Principal Issues:

Whether a capital loss is available in respect of the disposition of a partnership interest in a partnership on dissolution.

Position:

Question of fact.

Reasons:

In the year the Partnership is dissolved and the partners has no proceeds of disposition; a capital loss would result to the extent of any positive ACB of the partnership interest held. If the ACB is negative, a capital gain would result.

								2006-021415
XXXXXXXXXX 							D. Tiu
(613) 957-8961
February 15, 2007

Dear XXXXXXXXXX:

Re: Disposition Of Partnership Interest

We are writing in response to your November 3, 2006 inquiry on the above subject and further to our subsequent telephone discussions (XXXXXXXXXX /Tiu). You inquired whether you are able to claim a capital loss in respect of the disposition of your partnership interest in the XXXXXXXXXX (the "Partnership"). You provided the following information:

• Your family held one unit of the Partnership (Unit #XXXXXXXXXX ) allocated as follows:

XXXXXXXXXX.

• XXXXXXXXXX. In XXXXXXXXXX, the Partnership sold all of its assets to an unrelated third party and shortly thereafter, distributed substantially all of the available partnership cash to holders of about XXXXXXXXXX units of partnership interest outstanding at the time. The only residual activity of the Partnership after that time was in dealing with certain claims from former employees. Since XXXXXXXXXX, each partner was assessed an aggregate of $XXXXXXXXXX per unit in additional contributions to cover the unfunded cost of settling all outstanding former employee claims. As at XXXXXXXXXX, you have paid this aggregate additional contribution of $XXXXXXXXXX in respect of the one unit held by you and your family.
• Since XXXXXXXXXX, attempts were made by the remaining officer of the Partnership to have the unit holders vote on a formal dissolution of the Partnership. Although several similar attempts were made between XXXXXXXXXX and XXXXXXXXXX, the XXXXXXXXXX majority of the votes required to dissolve the Partnership was never achieved. The final attempt to dissolve the Partnership was in XXXXXXXXXX.
• The last communication dated XXXXXXXXXX that you received from the Partnership indicated that the final T5013 Statement that will be issued by the partnership would be for XXXXXXXXXX.

The particular situation in your letter clearly relates to a factual one, involving one or more taxpayers. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we are prepared to provide the following general comments.

Our Comments

Disposition of Partnership Interest

As stated in paragraph 1 of the Interpretation Bulletin IT-460, Dispositions - Absence of Consideration, a disposition can generally be regarded as an event or transaction where possession, control and all other aspects of property ownership are relinquished. Although there is usually a corresponding acquisition of the property by another person and consideration flowing to the person disposing of the property, it is the Canada Revenue Agency's ("CRA") view that neither of these characteristics need always be present for the purposes of the definition of "proceeds of disposition" in section 54 of the Income Tax Act (the "Act"). In our view, the dissolution of a partnership could trigger the disposition of the partnership interests in a partnership for nil proceeds of disposition.

In your situation, your description of the formal dissolution of the Partnership remains unclear. However, the XXXXXXXXXX letter from the Partnership suggests that the Partnership may have ceased to exist sometime thereafter.

Capital gain or loss on disposition of partnership Interest

Assuming that you are able to establish that the Partnership has in fact dissolved and that no residual distribution is forthcoming, the capital gain or loss resulting from the disposition of the one unit held by you and your family would be the difference between the proceeds of disposition and the adjusted cost base of the unit as at the date of dissolution.

Adjusted cost base ("ACB") of a partnership interest

The ACB of a partnership interest acquired after 1971 is calculated by adding to the original cost of acquiring the interest all relevant amounts prescribed in paragraph 53(1)(e) of the Act and deducting the amounts set out in paragraph 53(2)(c). The general purpose of the adjustments to ACB contained in the two subparagraphs is to prevent amounts which would be received by a taxpayer tax-free had he or she not received them through a partnership and amounts on which he or she has already paid tax as a partner from bearing capital gains tax when the taxpayer disposes of his or her partnership interest.

Some of the concepts covered in the two sets of adjustments within the two subparagraphs that may be relevant in the scenario you described are:

• Income or loss of the partnership as reported in the annual T5013 statement issued to unit holders adjusted where applicable under the special rules in subparagraph 53(1)(e)(i) or 53(2)(c)(i) (in your case for instance, the whole of the XXXXXXXXXX capital gain on the disposition by the partnership of its capital property that year has to be included in computing the income of the partnership pursuant to clause 53(1)(e)(i)(A)).
• Distributions received from the partnership (i.e., amounts paid to you by the partnership).
• Contributions made the partnership (e.g., the aggregate assessment for additional contribution of $XXXXXXXXXX you paid between XXXXXXXXXX and XXXXXXXXXX).
• Deemed capital gains on negative ACB reported. Under regular rules pertaining to partnership interests, where a member's ACB of the interest becomes negative, there is no immediate income tax consequence. However, under subsection 40(3.1), where the member is a limited partner, or a specified member of the partnership, and the member's ACB of the interest is negative at the end of a fiscal period of the partnership, the negative amount results in a deemed capital gain to the member (in your case, it may be useful to determine whether you are, or may be deemed by the Act to be a limited partner for any relevant fiscal year).
• Election made to utilize capital gains exemption (e.g., you indicated that sometime in XXXXXXXXXX, you and/or your family elected to report a capital gain in respect of the partnership interest in order to utilize the capital gains exemption available to you and your family).

In the year the Partnership is dissolved (XXXXXXXXXX or after), you and your family may be able to claim a capital loss but only to the extent of any remaining positive ACB of your partnership unit. If the remaining balance of the ACB were negative, a capital gain would result. In addition, if you and your family are a limited partner or deemed by the Act to be so, you and your family would have an obligation to report a capital gain for each tax year that the ACB was negative at the year end of the partnership pursuant to subsection 40(3.1).

We hope that our comments will be of assistance.

Yours truly,

Gwen Moore
Section Manager
For Division Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch