5 December 1989 Ministerial Correspondence 57814A F - Request for Technical Interpretation - PartnershipStacking

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.

Dear Sirs:

Re: Request for Technical Interpretation Partnership Stacking

We are writing in reply to your letter of April 7, 1989, wherein you requested our opinion regarding certain transactions structured with more than one tier of partnership and the flow through of resource expenditures there through.

You presented us with the following fact situation:

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.      Partnership A has incurred during its first fiscal period Canadian exploration expenses ("CEE"), Canadian development expenses ("CDE") and Canadian oil and gas property expenses ("CCGPE"), within the meaning of paragraphs 66.1(6)(a), 66.2(5)(a) and 66.4(5)(a), respectively, of the Act.

6.      Partnership 8, which holds no assets except for its interest in partnership A is dissolved on November 2, Year 2.

7.      Upon such dissolution, the interest held by partnership 8 in partnership A is distributed proportionately to the partners of partnership B.

8.      Each of the partners of partnership 8 consequently become a partner of partnership A immediately after the dissolution of partnership 8 and holds an interest in partnership A which is equal to his proportionate share of the interest partnership 8 held in Partnership A. Partnership A incurs during its second fiscal period ending December 31, Year 2, CEE, CDE and COGPE.

You requested the following technical interpretations regarding the above described scenarios:

A.      Assuming a partner of Partnership 8 is fully at-risk in respect of his interest in Partnership 8 as provided for under subsection 96(2.2) of the Act and is not a dealer contemplated in subsection 66(5) of the Act, is it the Department's position that such partner's share of CEE, CDE and COGPE allocated to Partnership B on December 3l, Year 1, in respect of such expenses incurred by partnership A, be considered CEE, CDE and COGPE of such partner for his taxation year in which Partnership B's first fiscal period ends?

B.      Assuming the at-risk amount on December 31, Year 1, 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 amounts of COGPE, CDE and CEE allocated to Partnership B on such date, is it the Department's position that subsections 66.8(2) and (3) of the Act will allow a partner of Partnership A (who became a member thereof by virtue of the dissolution of Partnership 8) to add to his share, otherwise determined, of COGPE, CDE and CEE incurred by Partnership A during its second fiscal period, his share of the amounts that were required to be reduced in accordance with paragraph 66.8(1)(b) of the Act in respect of the COGPE, CDE and CEE incurred by Partnership A during its first fiscal period and allocated.

Commentary

While we are unable to provide confirmation of the tax effects in a hypothetical situation, we do offer the following general comments for your assistance.

Query A

Subject to the at-risk rules found at section 66.8 of the Act, subparagraphs 66.1(6)(a)(iv), 66.2(5)(a)(iv) and 66.4(5)(a)(ii) of the Act provide that a taxpayer's CEE, CDE or COGPE respectively includes his share of specified CEE, CDE or COGPE incurred by a partnership in a fiscal period thereof provided that he is a member thereof at the end of that fiscal period.

Where a partnership which has incurred CEE, CDE or COGPE in a fiscal period, subsequently sells units of itself to investors prior to the end of that period, the CEE, CDE or COGPE will be considered to have been incurred by such investors (i.e. partners) at the end of that fiscal period of the partnership provided they are members thereof at the end of that period.

However, the use of a partnership in the manner described above where the investor is another partnership may result in an abuse or misuse of the provisions of the Act, and accordingly the application of subsection 245(2) of the Act may be appropriate in certain circumstances depending upon the facts of a particular situation. This would primarily depend on whether the transaction was tax motivated or arranged primarily for a bona fide purpose other than to obtain a reduction, avoidance or deferral of tax or other amount payable under the Act.

Query B

It is the Department's opinion that subsection 66.8(2) of the Act does not permit the carry forward of a taxpayer's share of a class of expenses for the benefit of a taxpayer other than the taxpayer whose share of expenses is decreased as a result of the operation of subsection 66.8(1)(b) of the Act.

Paragraph 66.8(3)(b) of the Act makes it clear that a partnership which is a member of another partnership is regarded as a taxpayer. Consequently, in a situation where such a partnership is dissolved, the Act does not provide for the four meters of the partnership to benefit from any possible carry forward of expenses under subsection 66.8(2) of the Act.

The above comments are only expressions of opinion and as such should not be construed as advance income tax rulings nor are they binding on the Department.

Yours truly,

J.T. GauvreauSection ChiefResource Industries SectionBilingual Services and ResourceIndustries DivisionRulings Directorate