5 May 1989 Income Tax Severed Letter 5-7814 - [Subsection 66.8(2) of the Income Tax Act]

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.

REVENUE CANADA TAXATION MEMORANDUM

DATE May 5, 1989

TO Current Amendments & Regulations Division

Bill Bryson Acting Director

FROM Rulings Directorate Resource Industries Section Frank S. Gillman 957-4363

SUBJECT: Subsection 66.8(2) of the Income Tax Act

We are writing to request your views regarding the intention of subsection 66.8(2) as it applies in the following scenario:

FACTS

1. Partnership A is involved in the business of operating oil and gas wells and is engaged in the exploration for and the development and production of oil, natural gas and other petroleum substances;

2. Partnership A's first fiscal period ends on December 31, Year 1;

3. Partnership B becomes a partner of Partnership A before the end of Partnership A's first fiscal period;

4. Partnership B's first fiscal period ends on October 31, Year 2;

5. For Year 1, Partnership A incurred Canadian exploration expense (CEE);

6. The at-risk amount on October 31, Year 2 of Partnership B in respect of its interest in Partnership A was such that the provisions of subsection 66.8(1) of the Act required the reduction of any amount of CEE allocated to Partnership B on such date. Consequently, no amount of CEE was allocated to the limited partners of Partnership B at the end of that partnerships first fiscal period;

7. On November 2, Year 2, Partnership B which holds no assets except for its interest in Partnership B is dissolved;

8. Upon such dissolution, the interest held by Partnership B in Partnership A is distributed proportionately to the limited partners of Partnership B;

9. Each of the limited partners of Partnership B consequently becomes a partner of Partnership A immediately after the dissolution of Partnership B and holds an interest in Partnership A which is equal to his proportionate share of the interest Partnership B held in Partnership A;

10. Partnership A incurs during its second fiscal period ending December 31, Year 2, CEE.

We have been asked for a technical interpretation as to whether subsections 66.8(2) and (3) of the Act will allow the limited partners of Partnership A (who became members thereof by virtue of the dissolution of Partnership B) (the "Limited Partners"), to add to their share otherwise determined of CEE incurred by Partnership A during its second fiscal period, their share of the amounts that were required to be reduced in accordance with 66.8(l)(b) of the Act in respect of CEE incurred by Partnership A during its first fiscal period and allocated to Partnership B (the "Add Back").

In the present case, given a strict interpretation of the mechanics of the subsections, it is our view that the Add Back would not be available to the Limited Partners as a result of Partnership B dissolving prior to the end of the second fiscal period of Partnership A. As a result, it appears to us that the Limited Partners would never be entitled to the Add Back notwithstanding that they may be fully at-risk for their interest in Partnership A.

Would you please advise if the above result was intended to be obtained.

Should you have any questions or require additional information, please contact the writer.

Yours truly,

Director General Rulings Directorate Legislative and Intergovernmental Affairs Branch