31 August 1992 Administrative Letter 9222076 F - Whether Partnership Interest Is CDN Resource Property

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.

August 31, 1992

Appeals and Referrals DivisionResource Industries SectionDon BeamishSection Chief

Attention: D. Evanson

Canadian Resource Property - Partnership Interests

This is in reply to your memorandum of July 21, 1992 in which you requested our views on your draft memorandum to the Calgary District Office in connection with 24(1) During your recent discussion with Jim Gauvreau, it was agreed that it is not necessary for us to comment on your draft memorandum; instead, we would address the principal issue which concerns whether an interest in a partnership should be considered as a Canadian resource property for purposes of the successor rules.

In general terms, the first successor and second successor rules as they applied to taxation years ending before February 18, 1987 (the "old successor rules") provided for the computation of the first or second successor's deduction by reference to production from Canadian resource property in respect of which the successor had an interest; or had a right to take or remove petroleum or natural gas or a right to take or remove minerals from the Canadian resource property (hereafter referred to as the "right to take")

-      see for example, subparagraphs 66.1(4)(b)(ii) and (5)(b)(ii) pertaining to the first and second successor's deduction, respectively, of successored Canadian exploration expense ("CEE").

The Department's longstanding position with respect to partnership interests and the old successor rules has been publicly stated at the 1986 Revenue Canada Roundtable, Canadian Tax Foundation, Question 54 as follows:

It is the Department's position that an interest in a partnership, the underlying property of which consists of Canadian resource property, is not a Canadian resource property for purposes of either a section 85 election or the successor and second successor provisions.

23..  Under the old successor rules, therefore, a first or second successor corporation was not permitted to claim a successor deduction with respect to income from Canadian resource properties owned by a partnership, simply because it was the partnership, not the successor corporation, that had an interest in the Canadian resource properties and the right to take.

Under the "new successor rules" contained in section 66.7, applicable to taxation years ending after February 17, 1987, the successor corporation computes its successor deductions by reference to its income that may reasonably be regarded as attributable to production from the particular property - see for example, subparagraph 66.7(3)(b)(i) pertaining to the successor's deduction of successored CEE - and there is no requirement for the successor to have an interest in the Canadian resource property or a right to take, the successor need only have acquired the Canadian resource properties under circumstances such that the provisions of section 66.7 apply.

Paragraph 66.7(10)(j) was introduced with the new successor rules and it provides, in general terms, that where control of a corporation has been acquired after January 15, 1987 and at that time the corporation was a member of a partnership that owned a Canadian resource property, the corporation would, inter alia, be deemed to have owned its percentage share of the partnership's property.  This paragraph confirms that in the absence of a specific deeming provision, a successor corporation does not have an interest in the underlying property of a partnership of which it is a partner.

If you require any further assistance or wish to discuss the above, please contact the writer.

Yours truly,

Section ChiefResource Industries SectionManufacturing Industries, Partnerships and Trusts DivisionRulings Directorate