Principal Issues: Is the allocation of foreign tax by a partnership to a partner regarded as a capital withdrawal by the particular partner, which would reduce the adjusted cost base (ACB) of its partnership interest?
Position: Yes, see reasons.
Reasons: Paragraph 53(2)(c) does not explicitly provide for a deduction in computing the ACB of a partner’s interest in a partnership for the amount of any non-business income tax paid by the partner, or for any amount deducted under either subsection 20(12), 20(11) or 126(1). However, if the partnership pays the foreign tax on behalf of the partner under an agreement or the foreign tax is withheld on behalf of the partner from foreign income paid to the partnership, such amount may be considered to be received by the partner on account or in lieu of payment of, or in satisfaction of, a distribution of the partner’s share of the partnership profits or partnership capital, such that subparagraph 53(2)(c)(v) would reduce the ACB of the partner’s interest in the partnership for the amount of any non-business income tax paid by the partnership on behalf of the partner (to the extent not deducted by the partnership in computing its income). The reduction in ACB for foreign taxes paid on behalf of a partner generally occurs prior to the addition to the ACB for the allocation of foreign income to the partner which is made on the first day of the following fiscal period. Where the deductions under section 53(2) (including for foreign taxes paid by the partnership) exceed the additions under section 53(1), any negative ACB would be taxed as capital gain for a limited partner or specified member under paragraph 40(3.1)(a).
