12 June 1992 Income Tax Severed Letter 9216375 - Increase in Adjusted Cost Base of a Partnership Interest

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

SUBJECT: INCREASE IN ADJUSTED COST BASE OF A PARTNERSHIP INTEREST SECTION: 66.2(5)(a)(iv), 66.4(5)(a)(ii), 53(1)(e)(vii.1), 53(2)(c)(ii), 96(1)(d)]

1992 CPTS ROUNDTABLE

QUESTION

• 3. The draft amendments to the Income Tax Act released by the Department of Finance in December 1991 proposed that subparagraphs 66.2(5)(a)(iv) and 66.4(5)(a)(ii) be amended so that a taxpayer may elect to have his share of a partnership's Canadian development expenses (CDE) and Canadian oil and gas property expenses (COGPE) incurred in a fiscal period excluded in determining the taxpayer's own CDE and COGPE, respectively. Consequential amendments to subparagraph 53(1)(e)(vii.1) provide for an increase in the adjusted cost base of the partnership interest to offset the reduction in adjusted cost base to the partnership unit that otherwise occurs pursuant to paragraph 53(2)(c)(ii). Paragraph 96(1)(d) requires a partnership to compute its income or loss without reference to subsection 66.1(1), 66.2(1) or 66.4(1) and as if no deduction were permitted by subsection 65(1) or section 66, 66.1, 66.2 or 66.4. Unless paragraph 96(1)(d) is amended, it would appear that no one may have the benefit of deducting the CDE and COGPE. What is the objective of these amendments? Will paragraph 96(1)(d) be amended to accommodate the proposed amendments to subsections 66.2(5) and 66.4(5)?

ANSWER

• 3. Our understanding is that the objective of the amendments to subparagraphs 66.2(5)(a)(iv), 66.4(5)(a)(ii) and 53(1)(e)(vii.1) is to allow a taxpayer to have an option of capitalizing his share of a partnership's CDE and COGPE as a part of the adjusted cost base of his partnership interest. The taxpayer may wish to do so where, without reference to the election, the present value of the tax savings from his share of the partnership's CDE and COGPE is expected to be lower than the present value of tax payable as a consequence of his share of those deductions resulting in a reduction of the adjusted cost base of the taxpayer's interest in the partnership. This is most likely to be the case where the taxpayer disposes of a partnership interest shortly after the fiscal year end of the partnership in which the partnership has incurred significant amounts of CDE or COGPE. The problem has become significant because of the increase in the capital gains inclusion rate from 1/2 to 3/4.
• We have been advised by the Department of Finance that changes to paragraph 96(1)(d) to allow the partnership to deduct CDE and COGPE under the above circumstances are not contemplated.

Prepared by: Peter Lee

ISSUE SHEET

1991 CPTS Roundtable Peter Lee
Question 3 5-921637
June 12, 1992

Issues

• 1. What is the objective of amending subparagraphs 66.2(5)(a)(iv), 66.4(5)(a)(ii) and 53(1)(e)(vii.1) as proposed by Department of Finance in December 1991?
• 2. Whether paragraph 96(1)(d) might be amended to allow the partnership to deduct Canadian development expenses and Canadian oil and gas property expenses in a situation wherein an election under the proposed amendments would be made?

Analysis and Positions Taken

• 1. Our understanding of the objective of the amendments to subparagraphs 66.2(5)(a)(iv), 66.4(5)(a)(ii) and 53(1)(e)(vii.1) is to allow a taxpayer to have an option to capitalize his share of a partnership's Canadian development expenses and Canadian oil and gas property expenses as a part of the adjusted cost base of his partnership interest in a situation wherein he can not utilize the deductions with respect to such expenses or he does not want to carry forward such resource pools beyond the time he disposes of his partnership interest.
• 2. We have been told by Drew Burnett of Current Amendment that the Department of Finance decided many years ago that the resource expenses should be deductible only at the level of partners and not at the level of partnership. Accordingly, it would be quite unlikely that the Department of Finance would consider amending paragraph 96(1)(d) to allow a partnership to deduct Canadian development expenses and Canadian oil and gas property expenses in a situation wherein an election under these proposed amendments would be made. Furthermore, if the partnership was allowed to deduct such expenses (i.e. such deductions would be passed on to the partners), it would be unfair to those taxpayers who did not elect because the adjusted cost base of their respective partnership interest would be reduced. But, for those taxpayers with the election, the adjusted cost base of their respective partnership interest would not be reduced. Consequently, there are no "lost" deductions. The amount that would otherwise be claimed by the taxpayer as CDE or COGPE has been "claimed" by the taxpayer, at his option, in reducing his capital gain on his partnership interest.

John Chan discussed the question and answer with Mr. John Bentley at his office on June 10, 1992 and he does not have any concerns about the question and answer.

The question and answer was reviewed by Simon Thompson of the Department of Finance on June 10, 1992. His suggestions (see his FAX attached) have been incorporated in the answer to the question.

The question and answer was reviewed by John Kurrant, Oil & Gas Specialist on June 12 and he said that he does not have any concerns.