8 March 2010 External T.I. 2009-0334031E5 - Whether subsection 96(1.01) applies.

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 subsection 96(1.01) should be applied in a particular situation even though the former partner retains a 0.1% interest.

Position: No.

Reasons: The preamble to subsection 96(1.01) describes a taxpayer that ceases to be a member of the partnership.

XXXXXXXXXX 							2009-033403
J. Gibbons, CGA
March 8, 2010

Dear XXXXXXXXXX :

Re: Proposed Subsection 96(1.01)

This is in reply to your email of July 27, 2009, concerning the application of proposed subsection 96(1.01) of the Income Tax Act (the "Act"). In particular, you have concerns about how this provision applies with respect to a series of hypothetical transactions that you have outlined in your letter.

You describe the following hypothetical example:

• In year 1, a partnership ("GP1") has two corporate partners ("Aco" and "Bco"), with Aco having a 90% interest and Bco having a 10% interest.
• At the beginning of year 1, the adjusted cost base (the "ACB") of Aco's and Bco's interest in GP1 are both nil.
• In year 1, GP1 earns $10 million, of which $9 million is allocated to Aco and $1 million to Bco based on their respective capital interests.
• At the end of year 1, Aco transfers its 90% interest in GP1 to another partnership ("GP2") in return for a partnership interest in GP2, while Bco transfers 9.9% of its interest in GP1 to GP2 in return for a partnership interest in GP2. The transfers take place pursuant to subsection 97(2) of the Act, with the elected amounts set at the ACB of the partnership interest.
• In year 2, GP1 distributes $9,990,000 to GP2 and $10,000 to Bco based on the partners' capital interests in the partnership at the time of the distribution.

Pursuant to proposed subsection 96(1.01) of the Act, the ACB of Aco's interest in GP1 before the transfer to GP2 is $9 million. However, since subsection 96(1.01) doesn't apply to Bco after the transfer, its ACB before the transfer remains nil. Since the agreed amount for the subsection 97(2) transfers are set at cost, GP2's interest in GP1 at the beginning year 2 is also $9 million. Thus, after the distribution of the $10 million income to GP2 and Bco in year 2, i.e, $9,990,000 and $10,000 respectively, the ACB of GP2's interest would be - $990,000 ($9,000,000 minus $9,990,000) whereas the ACB of Bco's interest would be $990,000 ($1,000,000 - $10,000).

In your view, the better result would be to apply subsection 96(1.01) of the Act to Bco also, so that the ACB of its interest in GP1 before the transfer to GP2 would be $1 million. Accordingly, pursuant to subsection 97(2) of the Act, the agreed amount for the transfer of Bco's interest in GP1 to GP2 could be set at $990,000.

Our comments

Written confirmation of the 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 submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Nonetheless, we were able to provide you with the following general comments.

After the particular transfers described above, Bco continues to hold a 0.1% interest in GP1. Accordingly, subsection 96(1.01) of the Act would not apply to it since the preamble to subsection 96(1.01) of the Act requires that the "taxpayer ceases to be a member of the partnership." Before this provision was introduced, double taxation could arise in some circumstances where a partnership interest was sold or a partner died. However, in the hypothetical situation described in your letter, there is no element of double taxation.

It should be noted that it is a question of fact whether section 103 of the Act is applicable. In this regard, paragraph 5 of archived IT-338R2, Partnership Interests - Effects on Adjusted Cost Base Resulting from the Admission or Retirement of a Partner, states that, although a partnership agreement may provide that partnership income be allocated in a certain manner if the partners have contributed property to a partnership using subsection 97(2) of the Act, any such agreed allocation of partnership income may be subject to the anti-avoidance provisions in section 103.

We trust these comments will be of assistance.

Yours truly,

G. Moore
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch