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 partnership that is a member of a partnership can make an election under subsection 40(3.12)?
Position: No.
Reasons: Subsection 40(3.12) refers to corporations, individuals (other than trusts) and testamentary trusts.
XXXXXXXXXX
2012-044970
J. Gibbons, CGA
July 3, 2012
Dear XXXXXXXXXX:
Re: Subsection 40(3.12) and Tiered Partnerships
This is in reply to your email dated May 29, 2012, concerning the above-noted issue.
In particular, you wish to know whether a partnership (the “top partnership”) that is itself a member of another partnership (the “bottom partnership”) can elect under subsection 40(3.12) of the Income Tax Act (the “Act”). In general, this elective provision allows certain partners to treat a positive adjusted cost base (“ACB”) in an interest in a partnership as a loss from the disposition of that interest, but only to the extent by which previous deemed gains under subsection 40(3.1) of the Act exceed previous amounts elected under subsection 40(3.12) of the Act.
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. Also, where the particular transactions are completed, the inquiry should be addressed to a particular Tax Services Office. Nonetheless, we are prepared to offer the following general comments.
The ACB of a top partnership’s interest in a bottom partnership may become negative solely as a result of the timing difference between when a distribution of income from the bottom partnership is deducted from that ACB (i.e., at the end of the taxation year in which the distribution is made) and when the income of the bottom partnership is added to that ACB (i.e., after the end of the taxation year in which the income is earned). Thus, if the top partnership is a limited partner or is a member who was a specified partner for the period described in subsection 40(3.1) of the Act, the negative ACB at the end of a taxation year will be deemed to be a gain from the disposition of the top partnership’s interest in the bottom partnership at the end of that taxation year. Although subsection 40(3.12) of the Act alleviates this timing difference in the following taxation year for certain partners, by allowing them to elect to treat a positive ACB of their partnership interest as a loss on the disposition of that interest, subsection 40(3.12) only provides that corporations, individuals (other than trusts) and testamentary trusts can elect under this provision.
An election under subsection 40(3.12) of the Act cannot be made by a partnership that is itself a member of a partnership. In this regard, it is our view that there is no legislative authority to look through the top partnership and treat the partners of that partnership as partners of the bottom partnership.
We note that a request to amend subsection 40(3.12) of the Act to allow partnerships to elect under that provision was included in a document of various technical amendments that was submitted to the Department of Finance by a joint committee of the Canadian Institute of Chartered Accountants and the Canadian Bar Association in 2006.
We trust these comments will be of assistance.
Yours truly,
G. Moore
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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