11 January 1990 External T.I. 74320 F - Partnerships and the "Successor" Rules and Partnerships and Resource Allowance

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: Partnerships and the "successor" rules and partnerships and resource allowance

This is reply to your memorandum of September 7, 1989, in which you requested our comments regarding two situations brought to your attention by the Calgary District Office.

Successor Rules

The first matter deals with the issue of whether a partner in a partnership owning Canadian resource properties may be considered to have an interest in those properties for purposes of applying the "successor rules", and revives the former "seeding" issue under those rules.

Our understanding of the facts is as follows:

24(1)

In reply to Calgary's comment thereon, we did not respond to the question of which of a partner or partnership to which he belongs owns property used by the partnership raised at the last Canadian Petroleum Tax Society Round Table as we were granted less than three working days to answer all questions relating to the Round Table and we accordingly refused to answer any questions the answers to which were not fully obvious. We have no plans to answer any of the questions which were not dealt with at the Round Table when it was held.

With respect to this matter, we suggest that problems inherent in the application of the successor rules where partnerships are involved arise from the ownership of the resource properties and not from some fuliginous view of what types of income retain their identities on passing through a partnership.

In common law, there are cases suggesting that the partner owns the property, and cases suggesting that the partnership owns the property. In our view, the former view is more likely correct. Paragraph 96(1)(c) of the Act seems to alter this conclusion, however, where the computation of income, or any of the other items set out in the preamble of subsection 96(1), of a partner is concerned. In such situations, paragraph 96(1)(c) creates a fiction that , for the purposes, the property used in partnership activities is owned by the partnership, which fiction overrides the common law situation. The resource pools will, of course, always be the partners, and not the partnerships. Clearly, there is potential for difficulty in making a claim where the successor rules come into play.

In our view, whenever a partner has to examine his current or future ability to make a claim with respect to a resource pool, the fiction that the partnership owns the property used in the partnership activities prevails. As such, on the change of control of the principal partner of the partnership, the partnership would be considered the owner of the property used in the partnership.  The principal partner would then own the 10% interest in the properties which it retained initially, and any claims it could make with respect to its then existing resource pools would be, for taxation years ending before the partnership was wound up, be limited to income from the 10% interest in these properties. The interest in the partnership is itself not a Canadian resource property (See Q. 54, Revenue Canada Round Table, 1986 Conference Report, Canadian Tax Foundation).

The wind-up of the partnership would not change this result under the law as it now reads. At the time of the transaction, however, the rules relating to successor arrangements were significantly different. Under those rules, where a taxpayer held any interest in a resource property, no matter how small, and increased its interest in the resource property, or acquired the balance of the resource property could also be sheltered by a claim with respect to the successored pools. This deficiency in the successor rules was remedied by amendments made in 1987. 

Your specific questions, and our replies then are:

Question 1:

24(1)

Question 2:

24(1)

Question 3:

24(1)

Resource Allowance

24(1)   21(1)(b)

24(1)

This argument would differ slightly in that it would suggest that, notwithstanding subsection 1210(2) of the Regulations, which will receive further comment below, a partnership does not, and cannot, take a deduction under paragraph 20(1)(v.1) of the Act. Such a deduction is calculated by reference to "resource profits", which the preamble to subsection 1204(1) of the Regulations suggests accrue only to a "taxpayer".  Notwithstanding the fiction created by paragraph 96(1)(a) of the Act for certain purposes that a partnership is a person, unquestionably a partnership is not a taxpayer.

24(1)

21(1)(b)

While we do not have sufficient information to comment, if the matter will proceed to court, it mat be worthwhile to examine whether the partnership may be considered a partnership, and whether it in fact carries on the activities in question.

In response to the question which Mr. Kassam raises in the penultimate paragraph of his memorandum, the payment of all operating costs by a dominant partner would not alter our views except that we would then more strongly doubt that a partnership had been created or was in operation.

DirectorBilingual Services and Resource Industries DivisionRulings Directorate