8 November 1990 Internal T.I. 9030847 F - Recapture of Resource Allowances Taking Place at Partnership Level

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:  Question 16, 24(1) Liaison Meeting - November 20, 1990

Issues

(a)     Whether the provisions of subsection 59(3.3) apply to a partnership or to its members, and

(b)     Whether, if all of the partners who were such when the original costs were incurred are replaced, the answer is any different.

Background

Subsection 59(3.3), which today operates only in very limited circumstances, having been generally, but not completely, phased out, operates to "recapture" portions of certain resource allowances (the earned depletion base, supplementary depletion base, frontier exploration base, and mining exploration depletion base) where the taxpayer incurring certain costs, generally of property includable in the particular resource allowance base, disposes of that property for proceeds.

It would not seem to matter whether this recapture took place at the partnership or at the partner level so long as the same parties were partners at all relevant times.

The matter is complicated by the facts that the membership of a partnership changes from time to time and the allowances are only claimable by partners, rather than by the partnership.

Subsection 59(3.3) cannot be applied to those partners who were deemed to have incurred the costs pursuant to subsection 1206(3) of the Regulations but who have ceased to be partners, as they will not have had an amount "receivable" on the property disposition.

In the same vein, subsection 59(3.3) cannot be applied to the "new partners" as they will not have disposed of property the cost of which was added in computing their resource allowance bases.

Accordingly, if recapture of the resource allowances does not take place at the partnership level in circumstances where the membership of partnership changes, no recapture would occur for purposes of the Act.

Portions of subsection 59(3.3) deal with dispositions of depreciable property of a prescribed class of the taxpayer. As the partnership appears to be the owner of the property for purposes of the Act, recapture will take place only if it is at the partnership level.

If subsection 59(3.3) applies at the partnership level, partners who did not benefit from the allowance sought to be recaptured are subject to its recapture. (Of course, they also share in the proceeds of disposition of the property, while the departed partner does not).

Technical Analysis

Subsection 1206(3) of the Regulations deems partners to have acquired property or incurred expenses included in the bases for the allowances where the property was acquired or expenditure incurred by the partnership. The partnership is not deemed not to have acquired the property or incurred the expenditure, and, arguably, has a "base" for the various allowances.

The partnership is precluded, by paragraph 96(1)(d) of the Act, from making a deduction under subsection 65(1) in respect of the allowances. This paragraph does not prevent the partnership from having a base for the allowances, nor does it, or any other provision, except the partnership from the application of the provisions of subsection 59(3.3) of the Act.

Conclusions

Subsection 59(3.3) applies to the partnership rather than to the partners. (This is consistent with our answer to Question 1 at the 24(1) Round table, which was informally approved by Simon Thompson of Finance). This position ensures that recapture of the various resource allowances takes place which result conforms with the policy intent underlying subsection 59(3.3).

Given the rationale for our conclusion, it does not matter whether there is complete, partial, or no continuity of partners.

November 20, 1990  24(1)  Liaison Meeting

16.     Application of Subsection 59(3.3) in the Case of a Partnership

We understand that Revenue Canada believes that subsection 59(3.3) should be applied at the partnership level and not at the partner level. Therefore, if subsection 59(3.3) is applicable, that amount should be added to the income of the partnership. We would appreciate if Revenue Canada would elaborate on its position by commenting on the following questions.

Questions:

(a)     A partnership is not a person or a taxpayer but is deemed to be one for the purposes of certain specific provisions of the Act. Is it proper to insist that subsection 59(3.3) be applied at the partnership level?

(b)     If a partnership is treated as a taxpayer for the purposes of subsection 59(3.3), will the partnership be treated as the same taxpayer even after all the partners to whom the original eligible costs were allocated have left the partnership?

Answers:

(a)     In our view, yes. Subsection 1206(3) of the Regulations to the Act deems partners to have acquired property and incurred expenditures acquired and incurred by their partnership. It does not deem the partnership not to have the resource allowance bases (i.e. the earned depletion base, supplementary depletion base, frontier exploration base and mining exploration base) set out in Part XII of the Regulations. Paragraph 96(1)(d) denies the partnership a deduction for any of the allowances, but does not deny that the partnership may have such bases. Nothing in the law precludes subsection 59(3.3) from applying to partnerships. The fiction that the partnership is a person and a taxpayer is relevant wherever computation of the partner's income is concerned. The applicability or inapplicability of subsection 59(3.3) is certainly relevant to the computation of a partner's income.

(b)     The partnership will continue to be considered the taxpayer which acquired the property or incurred the expenditure for the purposes of subsection 59(3.3) even where all parties who were partners when the property was acquired or the expenditure incurred have ceased to be such. Our basis for considering subsection 59(3.3) applicable at the partnership level is not such that this factor would alter the result.