17 June 1993 Income Tax Severed Letter 9315100 - Cost of Canadian Resource Property Distributed

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.

                   DISSOLUTION OF A PARTNERSHIP

QUESTION 13

In order to get the "rollover" under subsection 98(3) upon the distribution of partnership property to partners, undivided interests in each property must apparently be distributed to each partner.

(a)       Does Revenue Canada insist that each partner
          acquire an undivided interest in each property, in
          the case of Canadian resource properties, or may
          specific properties be allocated to specific
          partners?  For example: assume a partnership has 2
          partners who share profits as to 50% each, and has
          two oil and gas gross-overriding royalty interests
          of equal value; can one royalty interest be
          distributed to each partner, or must each partner
          receive a 50% undivided interest in each royalty
          interest?

(b)       Cumulative Canadian oil and gas property expense
          cannot be allocated to specific properties; it is
          generally an accumulation of unamortized costs of
          oil and gas properties which are Canadian resource
          properties less proceeds of disposition of same,
          with no amount allocated to any specific property. 
          What is the cost to each partner of his interest(s)
          in such Canadian resource property distributed by a
          partnership where a subsection 98(3) election has
          been made?

DEPARTMENT'S POSITION

(a)       As alluded to above, in order for the rules found
          in subsection 98(3) of the Act to apply, it is a
          requirement that all of the partnership property be
          distributed to persons who were members of the
          partnership immediately before it ceased to exist
          such that, immediately after the partnership ceases
          to exist, each such person has the appropriate
          undivided interest in each such property.  A
          distribution in any other manner would not satisfy
          the requirements of that subsection.

(b)       Where the provisions of subsection 98(3) of the Act
          apply to a distribution of partnership property,
          the cost to a former partner of the undivided
          interest in a particular property so received is
          deemed to be the amount determined under paragraph
          98(3)(b) of the Act.

          Pursuant to the provisions of subparagraph
          98(3)(b)(i) of the Act, the cost of an undivided
          interest in a particular Canadian resource property
          obtained as described above would include the
          relevant "percentage" of the cost amount to the
          partnership of that property immediately before its
          distribution.  However, in our view, the "cost
          amount" (pursuant to paragraph (f) of the
          definition of that term found in subsection 248(1)
          of the Act) of a Canadian resource property to the
          partnership would have been nil.  Therefore, the
          amount resulting under subparagraph 98(3)(b)(i) of
          the Act would also be nil.

          Assuming that the current wording of subparagraph
          98(3)(b)(ii) of the Act is applicable, such
          provision would not be relevant since it could only
          apply with regard to capital property.

          Therefore, the cost of an undivided interest in a
          Canadian resource property acquired as described
          above by a former member of the partnership would
          be nil.  It should be noted that this is not an
          anomalous result as the cost of the Canadian
          resource property to the partnership would have
          already been allocated to the partners and
          proportionately included in the cumulative Canadian
          oil and gas property expense pool of each partner.

A.A. Cameron June 2, 1993 931510 CPTS June 17, 1993