3 October 1989 Ministerial Correspondence 74314 F - Review of Revision of IT-138R

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.

SUBJECT:  Review of Revision of IT-138R

This is in reply to your memorandum of August 28, ,1989 in which you requested our comments regarding your draft of interpretation Bulletin 138R2.  Our comments follow the order of the paragraphs in the bulletin rather than being in order of significance.

Page l

1.     Line 20 (Application) - 27-183 was dated October 28, 1974 and not October 22.

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2.     Line 1 (paragraph 2) - For clarity, we suggest replacing the word "deal" with "transact."

3.     Line 34 (paragraph 5) - Reference is made to income retaining its "nature and character" whereas on lines 41 and 42 of page I of this bulletin and in paragraph 1 of IT-l38R reference is made to "source and nature." is this change in wording intentional?

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4.     Line 38 (paragraph 8) - To clarify the circumstances under which the dividend will result in a lower capital gain on disposition of a partner's partnership interest, we recommend adding at the end of the sentence the words "to the extent the dividend has not been paid out to the partner."

5.     Line 40 (paragraph 8) - We recommend adding, after "capital dividend account," the words "by virtue of subparagraph 89(1)(b)(ii) of the Act."

6.     Lines 44 and 46  - reference to "Kay 25" should read as "Kay 24" and the reference to subparagraph "89(1)(b)(iv)" should read as "89(1)(b)(v)."

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7.     Line 8 (paragraph 9) - It may add clarity to add the words "by them" following the words "businesses carried on."

8.     Line 43 (paragraph 13) - Since the "portion" becomes the respective gain or loss, we suggest replacing the words "to be taken into account in computing" with "which will be."

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9.     21(1)(b)

10.      Line 17 (paragraph l3) - it may be clearer to use the words "divided by" in place of "over."

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11.      Line 10 (paragraph 21) - We suggest adding the word "non-depreciable" at the end of the line.  Although the words you have used in this sentence track the language employed in subsection 80(1) of the Act, the additional descriptor clarifies the effect of the prescribed regulation.

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12.     Lines 10 to l3 (paragraph 25) - In paragraph 101(d) of the Act, the restriction is that the deductible amount cannot exceed 4/3 of the taxpayer's taxable capital gain from the disposition.  Therefore, we recommend replacing lines 10 to 13 with the following:

     ".... partner, to the extent that the amount does not exceed 4/3 of the taxpayer's share of the taxable capital gain on the disposition of the farmland.  For taxation years and fiscal periods ..."

13.     Line 17 (paragraph 26) - The words "... taxation years and ..." should be inserted immediately before "fiscal periods."

14.     Line 21 (paragraph 26)  - The reference to (paragraph) "24 above" should be "25 above."

15.     Lines 19 and 20 (paragraph 26) - it may be clearer to a reader if the substitution of the fractions read as "2/3 in place of 3/4, and 3/2 in place of 4/3."

16.     Line 25 (paragraph 26) - The word "fractions" should be replaced with "rules" since this provision does not apply to all corporations.

17.     21(1)(b)

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18.     Lines l to 8 (paragraph 29) - The sentence which describes the restriction is difficult to read and therefore we suggest replacing lines 1 to 8 with the following:

     "... periods ending after December 15, 1987.  However, where a taxpayer acquired his partnership interest before December 16, 1987, or after December 15, 1987 pursuant to an obligation in writing entered into before December 16, 1987, this restriction will not apply in respect to expenditures made before December 16, 1987 or expenditures made after December IS, 1987 and before 1989 pursuant to an obligation in writing entered into by the partnership before December 16, 1987.  For complete details, refer to the application provisions in the Act."

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19.     Line 12 (paragraph 32) - Following the words "where the member," we recommend the insertion of the words "or a person who does not deal at arm's length with the member."

20.     Lines 17 and 22 (paragraph 32) - Since the purpose of subsection 96(2.4) is to determine whether a particular member is a limited partner, we suggest replacing the words "a limited partner" with "a member." Also note that this will be consistent with the use of "member" in the first sentence of the paragraph.  Similarly, in line 18 we suggest replacing the word "taxpayer" with "member."

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21.     Line 6 (paragraph 33) - The word "met" should be "meet" to be consistent with the tense of the other verbs in the sentence.

22.     Line 28 (paragraph 35) - it would be more precise to refer to "deemed cost" rather than "cost."

23.     Line 44 (paragraph 37) - The reference to the at-risk amount should be to the at-risk amount less the reductions referred to in the preceding sentence. Therefore we suggest using "reduced at-risk amount" in place of "at-risk amount" in line 44, with the parenthetical description `(the "reduced at-risk amount")' added to the end of the sentence on line 42.

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24.     Lines 5 and 6 (paragraph 38) - Since the business is supposed to be actively carried on, we recommend replacing the words "which carried on a business or rented or leased" with "which actively carried on a business or which rented or leased."

25.     Line 7 (paragraph 38) - The word "continues" should be "has continued." Also, the word "changes" should be narrowed to "increases in its capital or indebtedness."

26.     Various references in the bulletin to specific partners (e.g. "the" partner) and partnerships could be generalized (e.g. "a" partner).  For instance, it is stated in line 37 of page 1 that "the general rule is that partnership..." and this should refer to "a partnership."

27.     The various references in the bulletin to resource "expenditures" should be reworded as resource "expenses" in order to be consistent with the language used in the Act.  The following occurrences of `such have been identified:

     Page 1, line 28 (Summary). Page 7, line 26 (paragraph 23). Page 11, lines 44 and 47 (paragraph 37).

We hope these comments will be useful to you.

B.W. DathDirectorBusiness and General DivisionSpecialty Rulings DirectorateLegislative and intergovernmentalAffairs Branch