18 October 2011 External T.I. 2011-0401381E5 - Capital Cost Allowance for a 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: 1. Whether the deemed non-arm's length acquisition rule in Regulation 1100(2.21) applies to the deemed acquisition of depreciable property by a partnership that occurs immediately after the particular time pursuant to subparagraph 96(8)(a)(ii). 2. Whether the exception to the half-year rule in Regulation 1100(2.2) applies to a deemed acquisition of depreciable property that occurs pursuant to subparagraph 96(8)(a)(ii). 3. Whether paragraph 13(27)(f) would apply to an acquisition of depreciable property by a partnership.

Position: 1. No. 2. No. 3. No.

Reasons: 1. Paragraph 96(8)(a) does not deem a taxpayer to have disposed of and acquired or reacquired a property. It deems the partnership only to have acquired the property. 2. In a situation where a deemed acquisition of property has occurred under paragraph 96(8)(a), none of the exceptions in Regulation 1100(2.2) would be met. 3. Paragraph 13(27)(f) applies only to property acquired by certain public corporations or their subsidiaries.

XXXXXXXXXX 							2011-040138
								Kathryn McCarthy
								(613) 828-9377
October 18, 2011

Dear XXXXXXXXXX :

Re: Capital Cost Allowance for a Partnership

This is in response to your letter of March 30, 2011, concerning the application of subsection 96(8) of the Income Tax Act (the "Act").

Briefly, in your letter you described a situation where a person resident in Canada becomes a member of a partnership that was a foreign partnership (i.e., a partnership with no Canadian resident partners) immediately before that time (the "particular time"). As a result of the Canadian resident becoming a member of the partnership, you indicate that subsection 96(8) of the Act will, inter alia, apply to deem that partnership to have acquired any depreciable property of a prescribed class that it owned immediately before that particular time (other than taxable Canadian property) immediately after that particular time at a capital cost equal to the lesser of its fair market value at that time or its capital cost as otherwise determined (and assuming that the anti-avoidance rule in subsection 96(9) of the Act does not otherwise apply).

Your question is whether the particular partnership would be able to rely on subsection 1100(2.21) of the Income Tax Regulations (the "Regulations") to prevent the application of the half year capital cost allowance rule in subsection 1100(2) of the Regulations on the deemed acquisition where the partnership had otherwise owned and used such depreciable property continuously and without interruption for more than 365 days.

In an unrelated question, you wanted to know whether for the purposes of subsection 13(26) of the Act (the "available for use rule"), paragraph 13(27)(f) of the Act would apply to an acquisition of depreciable property (other than a building) by a partnership where the only partners of that partnership were a corporation that was a "public corporation" whose shares are listed on a "designated stock exchange", as those terms are defined in subsection 89(1) and subsection 248(1) of the Act, respectively, and that public corporation's wholly-owned subsidiary.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving specific taxpayers. 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. For more information about how to obtain a ruling, please refer to Information Circular IC 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This IC and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at www.cra-arc.gc.ca. Should the situation involve specific taxpayers and transactions that have already been completed, you may wish to submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. However, we are prepared to provide the following general comments, which may be of assistance.

Subsection 1100(2.21) of the Regulations generally applies where a provision of the Act deems a taxpayer to have disposed of a property and acquired or reacquired a property. The acquisition or reacquisition is deemed for the purposes of paragraph 1100(2.2)(e) of the Regulations (and certain other provisions of the Regulations) to have been made from a non-arm's length person. However, in circumstances where paragraph 96(8)(a) of the Act applies to depreciable property held by the partnership, since the partnership is not deemed to have disposed of and to have acquired or reacquired such property (i.e., there is only a deemed acquisition), subsection 1100(2.21) of the Regulations would not apply.

Subsection 1100(2.2) of the Regulations also provides an exception to the half-year capital cost allowance rule applicable to depreciable property acquired in a taxation year in certain situations. However, where a deemed acquisition of depreciable property has occurred under paragraph 96(8)(a) of the Act none of the exceptions in subsection 1100(2.2) of the Regulations would appear to apply.

Lastly, subsection 13(27) of the Act generally establishes the time at which certain depreciable property (other than a building) is considered to have become available for use by a taxpayer for the purposes of determining, under subsection 13(26) of the Act, the time at which capital cost allowance may first be claimed. In particular, paragraph 13(27)(f) of the Act generally provides that a depreciable property (other than a building) acquired by a taxpayer that is a public corporation or the public corporation's "subsidiary wholly-owned corporation", as that term is defined in subsection 248(1) of the Act, will be considered to be available for use at the end of the year in which the property commences to be depreciated for accounting purposes. In our opinion, paragraph 13(27)(f) of the Act would not apply where depreciable property is acquired by a partnership even if the only members of the partnership are corporations described in that paragraph.

We trust the foregoing comments are of assistance.

Yours truly,

Sandy Parnanzone
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch