19 April 1990 Ministerial Correspondence 57744 F - Adjustments to Cost Base - Partnership Interest Deduction

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.

April 19, 1990

19(1)

Re:  Subparagraph 53(2)(c)(v) of the Income Tax Act (the "Act")

We are writing in response to your letter of March 28, 1989.  We regret that we were unable to provide an earlier reply.

In your letter you asked us to consider the application of subparagraph 53(2)(c)(v) of the Act in the calculation of the adjusted cost base ("ACB") of an interest in a partnership which, in your example, would calculate its income in a foreign currency. The partners would maintain all of their accounts (including their investment in the partnership) in Canadian dollars and would record their share of income from the partnership for tax purposes in Canadian dollars using the exchange rate in effect at the end of the partnership's fiscal period.  Each partner would enter into a currency futures contract (a hedge) to close on the anticipated date of distribution of the income from the partnership and would convert the U.S. dollar distributions received from the partnership to Canadian dollars upon receipt.

In your opinion, the amount of the subparagraph 53(2)(c)(v) reduction in respect of the distribution to a partner of income from the partnership should be the amount of the distribution converted to Canadian dollars at the hedge rate, notwithstanding that the exchange rate at the date of conversion of the U.S. dollar distribution to Canadian dollars would differ from the hedge rate.

Our Comments

Subparagraph 53(2)(c)(v) requires the taxpayer to reduce the ACB of his partnership interest for

     ...any amount received by the taxpayer after 1971 and before that time as, on account or in lieu of payment or in satisfaction of, a distribution of his share (other than a share referred to in subsection 96(1.1)) of the partnership profits or the partnership capital...

The position of Revenue Canada, Taxation ("RCT") is that capital transactions should be recorded at the rate of exchange on the date of the transaction as noted in paragraph 13 of IT-95R.  The same approach was relied upon recently in the decision in Gaynor v MNR 87 DTC 279.  It is therefore our view that, in your example, the adjustment required by subparagraph 53(2)(c)(v) would be made using the exchange rate prevailing at the time the partner receives the distribution of his share of partnership profits.

The hedge is considered to be a separate transaction so any gain or loss on the hedge arrangement would not affect the amount of the reduction in ACB of the partnership interest.  RCT's published position (1984 Round Table question 63) is that the characterization as income or capital of the gain or loss on the hedge is generally dependent on the nature of the underlying transaction.  This approach requires a determination of the character of the distribution and whether it is received on capital account or income account.  The nature of the taxpayer's business may influence this characterization.

Where the taxpayer holds his partnership interest as capital property and is not in the business of buying and selling currency futures contracts, the gain or loss on the hedge transaction would ordinarily be considered to be on capital account unless the taxpayer had chosen to report such gains and losses on income account, pursuant to the comments in the first sentence of paragraph 6 of IT-95R.  Where the partner is in the business of buying and selling currency futures contracts, any gain or loss with respect to the hedge would be on income account.

This opinion is provided pursuant to the practice referred to paragraph 24 of Information Circular 70-6R.

Yours truly,

for DirectorFinancial Industries DivisionRulings Directorate