29 February 2024 Internal T.I. 2024-1003171I7 - Application of subsection 152(1.7)

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 limited partners can be reassessed beyond the normal reassessment period for their 2011 taxation year to include any amount in respect of the disposition of their partnership units, given that no determination of the partnership was made for 2011 under subsection 152(1.4), and 2011 was also not part of the period discussed in the Minutes of Settlement.

2. If the 2011 reassessments of the limited partners are permitted, whether the Minister authorized to reassess the entire capital gain, or the authority of paragraph 152(1.7)(b) is limited to a consequential adjustment of the increased gain resulting from the increased losses redetermined over the 2001 to 2010 taxation years of the limited partners.

Position: 1. Yes.

2. The full capital gain may be (re)assessed.

Reasons: 1. In our view, subsection 152(1.4) authorizes the Minister to determine the correct ACB per LP unit of a member of LP, as it is an amount that is relevant in determining the taxable income of a member of LP for “any taxation year,” including the year in which the member realizes a taxable capital gain (or deemed taxable capital gain) with respect to their interest in LP.

2. Given that the redetermination issued to the partnership under subsection 152(1.4) encompasses a redetermination of the ACB of a unit of the partnership, and a member’s revised at-risk amount includes the initial capital contributed by the member, it is our view that it is reasonable to conclude that the Minister has the authority under paragraph 152(1.7)(b) to (re)assess the entire taxable capital gain in 2011, calculated in accordance with the Act.

										February 29, 2024	

	XXXXXXXXXX								HEADQUARTERS
						   		        	Income Tax Rulings Directorate
      Tax and Charities Appeals Directorate			Julia Clarkson	    

Attention: Jelena Pajkovic, Manager 2024-100317

Reassessments authorized by paragraph 152(1.7)(b)

Unless stated otherwise, all statutory references in this document are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) (the Act), as amended to the date hereof.

This is in reply to your email of January 4, 2024, in which you request guidance on the Minister’s authority to reassess a taxable capital gain upon the disposition in 2011 of a tax shelter’s limited partnership units by its members, where the 2001 to 2010 taxation years of the members were reassessed under paragraph 152(1.7)(b) in accordance with issued Minutes of Settlement that supported revisions to deductions claimed under section 20. More specifically, you have requested whether:

• the members can be reassessed beyond the normal reassessment period for their 2011 taxation year to include any amount in respect of the disposition of the limited partnership (LP) units, given that no determination of LP was made for 2011 under subsection 152(1.4), and 2011 was also not part of the period discussed in the Minutes of Settlement
• if permitted to reassess, the Minister is authorized to reassess the entire capital gain, or only the portion of the gain resulting from the increased losses redetermined over the 2001 to 2010 taxation years of the members.

Our comments

Limitations on the Minister’s authority to reassess a taxpayer are in place under the Act. One of the main reasons for this is to provide taxpayers with some finality with respect to their taxes. Exceptions to those limitations are in place to recognize the challenges of a self-reporting system, and allow the Minister to reassess in instances where a taxpayer's reporting has resulted in an assessment that is more favourable to the taxpayer than it should have been. (endnote 1)

The income or loss of a partnership is taxable in the hands of its members. In addition, a member’s share of the income or loss of a partnership impacts the adjusted cost base (ACB) of the member’s interest in that partnership after the end of the fiscal period of the partnership. A member’s at-risk amount in respect of an interest in a limited partnership, as defined in subsection 96(2.2), is impacted by changes to the ACB of that interest in the limited partnership. A negative ACB of a limited partnership interest can result in a deemed capital gain being realized by the relevant member in that partnership under subsection 40(3.1).

Subsection 152(1.4) authorizes the Minister to “determine any income or loss of the partnership for the fiscal period and any...other amount, or any other matter, in respect of the partnership for the fiscal period that is relevant in determining the income, taxable income or taxable income earned in Canada of, tax...payable by...any member of the partnership for any taxation year under this Part.” It is worth noting that Parliament has considered that more than one taxation year may be impacted by the determination of the partnership.

In our view, the wording of subsection 152(1.4) is sufficiently broad to authorize the determination of the ACB of a limited partnership unit. Given the potential for a deemed capital gain should the ACB become negative, and the impact of the member’s at-risk amount when determining what, if any, deduction may be taken from taxable income for the year with respect to the partnership, it is clear that the ACB of a member’s interest in a partnership is relevant for the calculation of taxable income and tax payable for each taxation year in which the member holds that interest.

The wording of paragraph 152(1.7)(a) is similar to subsection 152(1.4), noting that a determination made under subsection 152(1.4) is binding on the Minister and each member of the partnership “for any taxation year.” Again there is an indication that Parliament has considered that more than one taxation year may be impacted by the determination of the partnership. Therefore, a redetermination issued under subsection 152(1.4) will bind the Minister and the members of the partnership “for the purposes of calculating the taxable income,” and other items, “for any taxation year”.

The authority of the Minister to recognize amounts determined or redetermined under subsection 152(1.4) through an assessment of the members of the partnership is governed by paragraph 152(1.7)(b). Notwithstanding subsections (4), (4.01), (4.1) and (5), paragraph 152(1.7)(b) authorizes the Minister to assess tax, interest and penalties “in respect of any member of the partnership and any other taxpayer for any taxation year as may be necessary to give effect to the determination or redetermination or a decision of the Tax Court of Canada, the Federal Court of Appeal or the Supreme Court of Canada.” This wording is far reaching, and provides for a reassessment after the normal reassessment period of a taxation year provided that the remaining conditions of the provision are met.

While a reassessment issued to a member of a partnership under paragraph 152(1.7)(b) is conceptually comparable to a reassessment issued under subsection 152(4.3), the wording of subsection 152(1.4) and paragraph 152(1.7)(b) are broader than that of subsection 152(4.3). Subsection 152(4.3) essentially only allows reassessments of subsequent taxation years to reflect changes consequential to the particular balance changed. Subsections 152(1.4) and (1.7) allow reassessments of any taxation year of a member of a partnership to give effect to potentially numerous changes of amounts or matters in respect of a partnership.

We note that it is possible that a reassessment being issued to a member of a partnership under paragraph 152(1.7)(b) could also be supported by subparagraph 152(4)(a)(i), if it is correcting “any misrepresentation that is attributable to neglect, carelessness or wilful default” or “any fraud in filing the return or in supplying any information” under the Act.

Accordingly, in our view, subsection 152(1.7) supports the reassessment of the 2011 taxation year of a member of LP, beyond the normal reassessment period for the year, to reflect a capital gain that gives effect to the revised amount of that member’s share of losses from LP. The 2001 to 2010 reassessments of a member of LP recognized a revised ACB in the calculation of the member’s at-risk amount and any authorized deduction of losses in respect of LP in those taxation years. Therefore, the changes to the ACB should equally be recognized in the calculation of the capital gain in the 2011 taxation year. As a reassessment made under paragraph 152(1.7)(b) is not subject to subsection 152(5), the capital gain can be assessed in 2011 even if it was not previously reported by the member.

The following comments address whether the Minister may reassess the member of the partnership with respect to the entire capital gain or only the portion of the gain that directly results from the member’s share of the increased losses of LP redetermined under subsection 152(1.4) (the Increased Gain).

Subsection 152(1.7)(b) provides that the assessment of the member of the partnership can only be made to the extent that it is necessary to give effect to the determination or redetermination that was previously made at the partnership level under subsection 152(1.4).

As supported by many court decisions, it is important to note that the Minister is obliged to assess in accordance with the law. (endnote 2) For the situation at hand, this supports the conclusion that the reassessed amount should reflect the correct capital gain, as is required under the Act.

In that regard, the Act details how the ACB of an LP unit is to be calculated. The ACB of a capital property is not a direct component of taxable income, but as discussed above it indirectly impacts any deduction with respect to a limited partnership through the member’s at-risk amount for that partnership, and any capital gain (or capital loss) that may become a component of the taxable income (or the non-capital loss, limited partnership loss or net capital loss) of a taxpayer.

In correcting the 2001 to 2010 losses of LP through redeterminations issued to LP under subsection 152(1.4), the Minister also redetermined “another amount,” being the ACB of an LP unit. That revised ACB was used to calculate the at-risk amount of a member’s interest in LP, and any amount that the Minister was authorized to reassess as a deduction from taxable income in respect of LP for the member’s 2001 to 2010 taxation years. In that regard, the broad wording of subsection 152(1.7) provides for the reassessment of the members’ 2011 taxation year to reflect the Increased Gain. The Increased Gain is clearly reflecting the additional share of losses reflected in the partnership’s redetermination.

The New St. James principle (endnote 3) has been used to support recognizing the correct tax balance, such as a non-capital loss, undepreciated capital cost or capital cost of a depreciable property, or investment tax credit balance in a particular taxation year despite the tax balance having been assessed incorrectly in a different, statute-barred taxation year. (endnote 4) A somewhat modified application of the New St. James principle supports the view that the ACB used in the 2011 taxation year should be calculated using the correct amounts. If the calculation of the ACB of an LP unit can recognize the amounts reassessed for 2001 to 2010, it can equally recognize the other components of the ACB of an LP unit (the Remaining Gain) required under the legislation. Based on the information that we have been provided, the Remaining Gain is mainly attributable to the initial capital contributed by the members to purchase the units in LP.

In our view, subsection 152(1.4) authorizes the Minister to determine the correct ACB per LP unit of a member of LP, as it is an amount that is relevant in determining the taxable income of a member of LP for “any taxation year,” including the year in which the member realizes a taxable capital gain (or deemed taxable capital gain) with respect to their interest in LP.

In addition, given that the redetermination issued to LP under subsection 152(1.4) encompasses a redetermination of the ACB of a unit of LP, and an LP member’s revised at-risk amount includes the initial capital contributed by the member, it is our view that it is reasonable to conclude that the Minister has the authority under paragraph 152(1.7)(b) to (re)assess a taxable capital gain in 2011, calculated in accordance with the Act to “give effect to” an ACB per LP unit that reflects both the Increased Gain and the Remaining Gain.

We trust our comments are of assistance.

Yours truly,

Gillian Godson
Section Chief, Administrative Law Section I
Specialty Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

1 This is a paraphrasing of comments made in paragraphs 13 and 20 of the decision for College Park Motors Ltd. v Canada (2009 TCC 409), as cited in paragraph 21 (footnote 3) of the decision for Chaloux et al v The Queen (2015 TCC 284).

2 See, for example, paragraph 23 of the decision for Coastal Construction & Excavating Ltd v R, ([1996] 3 CTC 2845).

3 The New St. James principle has been cited many times, including in paragraphs 39 and 40 of the (informal) decision for Atlantic Thermal Star Limited v The Queen (2016 TCC 135), and paragraph 12 of the decision for Sherway Centre Limited v The Queen, ([2002] 1 CTC 2259).

4 See the decisions for Renaud v The Queen (2006 TCC 354), Gaouette v The Queen ([2004] 2 CTC 2851), and Coastal Construction & Excavating Ltd v R (supra).