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: Who is entitled to deduct Canadian exploration expense (CEE) in the situation where an individual subscribes for units of a limited partnership in a particular calendar year; prior to the end of that year, the individual dies and the units are acquired by the individual's estate, which holds the units on December 31 of that year. On December 31 of that year, the limited partnership allocates CEE that has been renounced to the partnership (as a result of holding flow-through shares) to its partners as of that date?
Position: Subject to the limitation in subsection 66.8(1), the estate can deduct the CEE in its tax year that includes the partnership's fiscal period ending December 31, as it will be a partner on the date that the CEE is allocated by the limited partnership to its partners.
Reasons: CEE can only be allocated to the persons that are partners at the end of the partnership's fiscal year, pursuant to paragraph (h) of the definition of CEE in subsection 66.1(6). Subsection 66.8(1) restricts the amount of CEE allocated to a limited partner to the partner's at-risk amount less investment tax credit allocated to partner from the partnership. The estate is considered to have legal title to the partnership units.
2006-021620
XXXXXXXXXX Catherine Bowen
(613) 957-8284
January 19, 2007
Dear XXXXXXXXXX:
Re: Limited partnership units held by an individual at time of death
This is in reply to your electronic message of November 29, 2006 regarding the above-noted subject. In a subsequent telephone conversation (XXXXXXXXXX/Bowen), you indicated that during 2006, an individual, who was a resident of Canada for purposes of the Income Tax Act (the "Act"), purchased partnership units in a limited partnership that invested in flow-through shares issued by one or more principal-business corporations. The expressions "flow-through share" and "principal-business corporation" are both defined in subsection 66(15) of the Act. Prior to December 31, 2006, the individual died and the limited partnership units became part of the individual's estate and were held by the estate on December 31, 2006. The amount of Canadian exploration expense, as defined in subsection 66.1(6) of the Act, that was renounced to the limited partnership effective as at December 31, 2006 (as a result of the partnership's investment in the flow-through shares) was allocated on a pro-rata basis to the persons who were partners of the partnership at the end of its fiscal period on December 31, 2006. The beneficiary of the estate is not the individual's spouse, common-law partner or a testamentary trust established for the benefit of the individual's spouse or common-law partner. The estate and the beneficiary of the estate are resident in Canada for purposes of the Act. The partnership units were held as capital property by the deceased.
Written confirmation of the income tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular 70-6R5 dated May 17, 2002 issued by the Canada Revenue Agency. A fee is charged for this service.
Although we are unable to provide any comments with respect to your particular fact situation otherwise than in the form of an advance income tax ruling, the following general comments may be of assistance.
Executor's Year
On the death of an individual, the individual's property generally comes under the control of an executor or other personal representative and is held in an estate, which is a testamentary trust (as defined in subsection 108(1) of the Act) for purposes of the Act. It is the executor's role to administer the estate, which involves determining and paying creditors and distributing the remaining assets of the estate to the beneficiaries as soon as possible. Generally, the law provides the executor with a year (often referred to as the executor's year) to administer an estate, during which time the beneficiaries cannot demand the distribution of property held by the executor. The first tax period of an estate begins on the day after the person dies, and ends at any time selected within the next twelve months. It is not necessary that the tax year of an estate end on December 31.
Disposition of property upon death
Under paragraph 70(5)(a) of the Act, any capital property that is owned by an individual at the time of death is generally deemed to be disposed of by the deceased for proceeds of disposition equal to its fair market value (FMV) immediately before the individual's death. If these deemed proceeds of disposition exceed the adjusted cost base (ACB) of that property at that time, there will be a resulting capital gain to be reported in the individual's income tax return for the year of death. Conversely, if the deemed proceeds of disposition of a capital property are less than the ACB of that property, there will be a resulting capital loss to be reported. The ACB of limited partnership units held by an individual as capital property at the time of death will generally be equal to the original cost of the units to the individual, including any costs, such as commissions or legal fees, to acquire the units, as well as any adjustments to the ACB of the units described in paragraphs 53(1)(e) and 53(2)(c) of the Act which have been made prior to the death of the individual.
The estate is then deemed, pursuant to paragraph 70(5)(b) of the Act, to have acquired the capital property at a cost equal to its FMV immediately before the death of the individual. This deemed cost will be the initial ACB of the property to the estate at the time of acquisition. Where an estate acquires limited partnership units as a consequence of an individual's death, the ACB of those units may be subject to subsequent adjustments pursuant to paragraphs 53(1)(e) and 53(2)(c) of the Act as described below.
By virtue of subsection 70(6) of the Act, the rules in subsection 70(5) of the Act will not generally apply where the capital property will, as a consequence of the individual's death, be acquired by a Canadian resident which is the individual's spouse, common law partner or a trust created under the individual's will for the benefit of the individual's spouse or common law partner.
Allocation of CEE from the partnership to the partners at its year- end
Where a limited partnership owns flow-through shares issued by a principal-business corporation, any Canadian exploration expense ("CEE") renounced by the corporation under subsection 66(12.6) of the Act to the partnership in a particular fiscal period of the partnership can not be deducted by the partnership by virtue of subparagraph 96(1)(d)(i) of the Act. Instead, pursuant to paragraph (h) of the definition of CEE, such CEE can only be allocated to those persons who are partners of the partnership at the end of that fiscal period of the partnership. Subject to section 66.8 of the Act, which is described below, CEE allocated to a partner in a fiscal period of the partnership
- is deemed for the purpose of the definition of "cumulative Canadian exploration expense" in subsection 66.1(6) of the Act ("cumulative CEE pool") to have been incurred by the partner at the end of the partnership's fiscal period pursuant to subsection 66(18) of the Act, and
- is added to the partner's cumulative CEE pool by virtue of element A of the definition of "cumulative Canadian exploration expense" in the partner's taxation year that includes the fiscal period end of the partnership.
Generally, unless the taxpayer is a principal business corporation, the entire balance in the taxpayer's cumulative CEE pool at the end of the taxpayer's taxation year may be deducted in computing the taxpayer's income for that year under subsection 66.1(3) of the Act.
"At-risk" Rules
Where a partner of a partnership is considered to be a limited partner (as defined in subsection 96(2.4) of the Act), subsection 66.8(1) provides that the amount of CEE that may be allocated to the partner and added to the partner's cumulative CEE pool cannot exceed the amount by which the partner's "at-risk amount" (as defined in subsection 96(2.2) of the Act) at the end of the fiscal period of the partnership exceeds the partner's share of any investment tax credits or farm losses of the partnership for that fiscal period.
Where a limited partner's share of CEE allocated from a partnership is greater than the partner's at-risk amount and is, therefore, not deductible in the year, the excess is considered to be CEE of the partner in the immediately following fiscal period of the partnership and may, again subject to subsection 66.8(1) of the Act, be allocated to the partner and added to the partner's cumulative CEE pool and be deducted in that year.
Consequently, in the situation where CEE is allocated by a limited partnership to an estate in the executor's year as described above, in computing its income for the tax year that includes the partnership's fiscal period ending December 31, 2006, the estate could deduct an amount up to the balance in its cumulative CEE pool as at the end of its tax year. In the event that the estate does not have sufficient income against which to deduct the entire balance in its cumulative CEE pool, any undeducted portion of this pool may be carried forward for deduction against the estate's income in future tax years.
Adjustments to the ACB of the partnership units
Immediately after the fiscal year-end of the partnership in which the CEE is allocated to a partner, the ACB of the partner's interest in the partnership will be reduced under clause 53(2)(c)(ii)(C) of the Act by the amount of CEE allocated by the partnership to the partner. However, if the amount allocated to the partner has been reduced as a result of the application of subsection 66.8(1) as described above, only the reduced amount will be subtracted from the ACB of the partnership units. In addition, the ACB of the partnership interest will also generally be reduced by virtue of subparagraph 53(2)(c)(i) of the Act by the partner's share of any partnership loss for that fiscal period that is allocated to the partner. Conversely, the ACB of the partnership interest will be increased by virtue of subparagraph 53(1)(e)(i) of the Act by the partner's share of any partnership income for that fiscal period that is allocated to the partner.
Distribution of property by the estate to a beneficiary
When an estate distributes capital property to a beneficiary in settlement of all or part of the beneficiary's capital interest in the estate (and the estate does not elect under subsection 107(2.001) of the Act to be deemed to have received proceeds of disposition equal to the FMV of the property at the time of disposition), the estate will be deemed by paragraph 107(2)(a) of the Act to have disposed of the property for proceeds of disposition equal to the cost amount of the property to the estate immediately before that time. Where an estate holds limited partnership units as capital property, the cost amount will be the ACB of the units at that time (as per paragraph (b) of the definition of "cost amount" in subsection 248(1) of the Act). As noted above, there will be adjustments to the ACB of the units where CEE, partnership income or losses have been allocated to the estate by the partnership.
The Canadian resident beneficiary of the estate that receives the partnership units in settlement of all or part of the beneficiary's capital interest in the estate will generally be deemed to have acquired the units at a cost equal to the ACB of the units to the estate at the time they were distributed. In addition, the beneficiary will generally be deemed under paragraph 107(2)(c) of the Act to have received proceeds of disposition for the portion of its capital interest in the estate that has been disposed equal to its deemed cost of the distributed capital property.
We trust that our comments, which are provided in accordance with the practice outlined in paragraph 22 of IC-70-6R5, will be of assistance.
Yours truly,
for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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