31 December 1990 Internal T.I. 9024567 F - Partnership Interest Acquired on Amalgamation

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:  24(1) Partnership interest Acquired on Amalgamation

We are writing in response to your memoranda, dated September 11, and October 19, 1990, regarding the above-noted taxpayers.

It is our view that the adjusted cost base of a partnership interest can be negative and that subparagraph 54(a)(iv) does not apply to prevent the adjusted cost base ("ACB") of a partnership interest from being negative immediately before an amalgamation as there is no disposition at that time. Further, section 257 of the Act applies only to 1985 and subsequent taxation years, and therefore did not apply at the times of the amalgamations in question.

We agree with your view that a negative ACB of a partnership interest to a predecessor corporation becomes the cost thereof to the amalgamated corporation ("Amalco") pursuant to paragraph 87(2)(e), as it read for pre-January 16, 1987 amalgamations. We disagree with the argument advanced by the taxpayer that the definition of "amount" in subsection 248(1) precludes "the amount that was the adjusted cost base to the predecessor corporation" from being a negative number for purposes of paragraph 87(2)(e). We agree with your comment that the definition of "amount" appears merely to require that an amount be expressed in monetary terms. We would also add that section 257 refers to a "negative amount" suggesting that, but for the application of that provision, an amount could be negative.

We also agree that the adjustments to ACB made by the predecessor corporation, under section 53 of the Act, are not considered to be adjustments of Amalco.

However, it is our opinion that immediately after a pre-January 16, 1987 amalgamation when a negative ACB has become the cost to Amalco, Amalco will be subject to the provisions of subsection 40(3), which will result in a deemed gain to Amalco. For example, if the ACB of the partnership interest to a predecessor is negative $100, so that the cost to Amalco becomes negative $100 by virtue of paragraph 87(2)(e), then subsection 40(3) would deem there to be a gain to Amalco in the amount of $100, being the amount by which:

This conclusion appears to be supported by the decision in Canterra Energy Ltd v. The Queen, 87 DTC 5019 (FCA). Any amount deemed by subsection 40(3) to be a gain is added to the ACB of the partnership interest, by virtue of paragraph 53(1)(a).

You requested that we comment on a technical interpretation issued on January 16, 1985 by the Corporate Rulings Division, a copy of which interpretation was attached to your October 19 memorandum. We believe that the interpretation correctly responds to the question that was raised therein, i.e. the consequences of the disposition by Amalco of the partnership interest. However, it fails to explain the consequences of the application of subsection 40(3) immediately after the amalgamation.

Please contact us should you have any questions concerning our comments.

Yours truly,

for DirectorReorganizations and Non-resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

ISSUE SHEET

References:

87(2)(e), 54(a)(iv), 100(2), 40(1), 40(3)

Issues:

If a corporation (the "Predecessor Corporation"), holding a partnership interest has been required to deduct, pursuant to paragraph 53(2)(c), amounts in computing the ACB of the partnership interest in excess of the cost of the partnership interest plus the amounts required to be added thereto pursuant to paragraph 53(1)(e), does such a "negative" ACB flow through to "Amalco" after a pre-January 16, 1987 amalgamation to which subsection 87(1) applies, or does the "negative" ACB disappear?

Will subsection 100(2) apply to Amalco when it disposes of the partnership interest in a manner that causes Amalco to include as its gain the amount of the "negative ACB" of the Predecessor Corporation?

(N.B. The issues addressed herein do not arise on amalgamations occurring after January 15, 1987 as a result of the introduction of paragraph 87(2)(e.1) and subsection 100(2.1))

Discussion:

These issues were discussed in the context of an advance income tax ruling request concerning 24(1) which request the taxpayer ultimately agree to withdraw. The position statement, as noted in Decision Summary 6041-3 prepared by G.C. Boehmer, dated July 16, 1986, includes the following comments:

     "... the negative ACB of a partnership interest does not simply disappear on an amalgamation of the corporate partner. From a policy viewpoint, we have been advised by Current Amendments that the negative ACB should flow through to the amalgamated corporation for realization as gain when it disposes of the partnership interest.

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I wish to discuss the issues under the following topics:

-     can there be a negative ACB of a partnership interest?

-     if it is possible to have a negative ACB, does it flow through to Amalco on an amalgamation?

-         how will subsection 100(2) apply to Amalco on a subsequent sale by Amalco of the partnership interest?

Negative ACB Possible?

Yes

It is our position that a partnership interest can have a negative ACB at any time except at the time of its disposition. [see subparagraph 54(a)(iv)].

It is our view that section 257 is not applicable in the calculation of ACB, because it is overridden by specific provisions of subsection 54(a), the wording of which assumes that the ACB of a property can be less than nil [see subparagraph 54(a)(iv)].

The department previously took the position (in Decision Summary 6041- 3, referred to above) that the ACB of a partnership interest could not be negative partly because of section 257 and the FCTD decision in Canterra Energy.

The Canterra Energy decision has since been overturned on appeal.

(Since section 257 is only applicable to, 1985 and subsequent taxation years.    24(1)

Does Negative ACB Flow Through to Amalco?

It is our position that paragraph 87(2)(e) applies to deem the negative ACB of the partnership interest owned by the Predecessor Corporation to be the cost of the partnership interest to Amalco. This position follows from a technical reading of that provision.

Application of 100(2) to Amalco on Subsequent Disposition?

A subsequent disposition of the partnership interest by Amalco will be subject to the provisions of subsection 100(2). However, we submit that only the cost of the partnership interest to Amalco and those adjustments to the ACB of the partnership interest under subsections 53(1) and 53(2) that were made to the partnership interest while it was owned by Amalco will be used in the determination of the gain to Amalco under subsection 100(2).

Under corporate law Amalco may, in fact, be a continuation of the Predecessor Corporation. However, where there has been an amalgamation, as defined in subsection 87(1), the rules in the remainder of section 87 apply. Paragraph 87(2)(a) provides that for purposes of the Act, the corporate entity formed as a result of the amalgamation shall be deemed to be a new corporation the first taxation year of which shall be deemed to have commenced at the time of the amalgamation.

21(1)(b)

It is therefore our view that the adjustments made to the ACB of the partnership interest by the Predecessor Corporation under subsections 53(1) and 53(2) are not considered to be adjustments made to the ACB under these subsections by Amalco, so that only those adjustments made to the ACB of the partnership interest under subsections 53(1) and 53(2) while the partnership interest was owned by Amalco are relevant in the determination of the gain under subsection 100(2).

Application of 40(3)

It is our view that subsection 40(3) will apply to cause Amalco to recognize a gain on the partnership interest immediately after it becomes property of Amalco in situations where the partnership interest had a negative ACB to a predecessor corporation. This is because the cost to Amalco will be a negative amount. (Since the sum of all amounts required by subsection 53(2) to be deducted will be zero and the cost will be negative, the amount by which zero exceeds a negative amount will be positive. For example, the amount by which zero exceeds -5 is 5. See the FCA decision in Canterra).

                                           Lois A. McCarron-McGuire