3 April 1992 Income Tax Severed Letter 9209550 - Old FTS Partnership Allocation of CEE

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.

April 3, 1992
SUBJECT:  F.T.S. PARTNERSHIPS - SUBPARA. 66.1(6)(A)(IV)   
             AND (V).

Question by:     Dawn Temple, Tax Avoidance Section
                 Calgary D.O.
QUESTION
The "old" flow-through share rules are contained in
subparagraph 66.1(6)(a)(v) which states that Canadian
exploration expense ("CEE") of a taxpayer means any expense
incurred after May 6, 1974 that is:

(v) any expense referred to in any of subparagraphs (i) to (iii.1) incurred by the taxpayer pursuant to an agreement in writing with a corporation, entered into before 1987, under which the taxpayer incurred the expense solely as consideration for shares, other than prescribed shares, of the capital stock of the corporation issued to him or any interest in such shares or right thereto,

Where a partnership enters into a flow-through share agreement with an exploration corporation, a partner receives his share of the partnership's CEE pursuant to subparagraph 66.1(6)(a)(iv) which read as follows prior to June 17, 1987:

(iv) his share of any expense referred to in any of subparagraphs (i) to (iii.1) incurred by a partnership in a fiscal period thereof, if, at the end of that period he was a member thereof,

There appears to be a technical "glitch" here because the partnership was entitled to its CEE under subparagraph (v) and subparagraph (iv) only refers to allocations of CEE referred to in subparagraphs (i) to (iii.1). Accordingly, there is no provision to permit the CEE of the partnership that was earned under subparagraph (v) to be allocated to the partners.

COMMENTS

Subparagraph (v) does not contain any provisions which change the character of the expenses from their original character. The original character of expenses referred to in subparagraph (i) to (iii.1) for purposes of subparagraph (v) is the same as that for subparagraph (iv). Consequently, subparagraph 66.1(6)(a)(iv) operates for partners to receive their share of the CEE incurred by partnerships in consideration for flow-through shares.

                     ISSUE SHEET

1992 Calgary D.O Enquiries                 John Chan
Issue: "Old" F.T.S. Partnerships           7-920955
        - 66.1(6)(a)(iv) & (v)             March 31, 1992

This request is for comments with respect to a strictly technical argument that a partnership's CEE earned under a flow-through share agreement pursuant to subparagraph 66.1(6)(a)(v) is CEE of the partnership solely by virtue of that subparagraph. Hence the argument that partners cannot receive a share of this CEE because subparagraph (iv) does not specifically refer to subparagraph (v).

                         21(1)(b)                 

There is no doubt that where a partnership incurs expenses referred to in subparagraphs 66.1(6)(a)(i) to (iii.1), such expenses would be CEE incurred by the partnership solely by virtue of those subparagraphs. Partners would then receive their respective share thereof pursuant to subparagraph (iv).

Where the partnership incurs expenses in consideration for shares of a corporation and these expenses would otherwise qualify for treatment as CEE, such expenses are not included in the partnership's CEE by virtue of subparagraph 66.1(6)(a)(vi). In other words, expenses which are CEE by virtue of subparagraphs (i) to (iii.1) would be disqualified from treatment as CEE if the expenses were incurred in consideration for shares of a corporation. This is not so where all of the requirements of the flow-through share provisions of subparagraph (v) have been satisfied. Thus, subparagraph (v) is the exception to subparagraph (vi).

Note, however, that subparagraph (v) does not contain any provisions which change the character of the expenses from their original character, i.e., the original character being expenses referred to in subparagraph (i) to (iii.1).

Consequently, subparagraph 66.1(6)(a)(iv) operates for partners to receive their share of the CEE incurred by partnerships in consideration for flow-through shares because such CEE referred to in subparagraph (v) is identical to that in (iv).

This position has been adopted in advance rulings given to 1986 and prior years' flow-through share partnerships such as 24(1)Document Disclosed Pursuant to The Access To Information Act Document Divulgué en vertu de la loi sur l'accès à l'information