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 ‚mis,
peut ne pas repr‚senter la position actuelle du ministŠre.
XXXXXXXXXX 5-933538
Attention: XXXXXXXXXX
April 20, 1994
Dear Sirs:
Re: Winding-up of a Limited Partnership
This is in reply to your letter dated November 30, 1993, wherein you requested our opinion concerning the tax consequences flowing from the winding-up of a limited partnership. We apologize for the delay in replying to your request.
The particular circumstances outlined in your letter appear to be actual transactions involving specific taxpayers.
As mentioned in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, as amended by Special Release
dated September 30, 1992, it is not the practice of this Department to provide opinions with respect to proposed
transactions other than in the form of advance income tax rulings. On the other hand, the tax consequences of completed transactions are best determined by our District Offices in the course of tax audits. This Directorate is therefore not in a position to give a definitive response to your inquiry. However, we are prepared to offer you the following general comments which may be of some assistance.
Unless as otherwise stated, all references to statute are to the Income Tax Act, S.C. 1970-71-72, c. 63 as amended consolidated to June 10, 1993 (the "Act").
Subsection 98(2) of the Act provides that subject to subsections 85(3), 98(3) and 98(5) of the Act, where a partnership has disposed of property to a taxpayer who was, immediately before that time, a member of the partnership, the partnership shall be deemed to have disposed of the property for proceeds equal to its fair market value at that time and the taxpayer shall be deemed to have acquired the property at an amount equal to that fair market value.
Consequently, if the fair market value of all the depreciable properties of a prescribed class is less than the undepreciated capital cost of that particular class, a terminal loss may result from the disposition of all the properties of that class by the partnership to its members.
The terminal loss realized by the limited partnership will be allocated to its partners in accordance with the partnership agreement. The deductibility by a limited partner of his/her share of the terminal loss could be restricted by the at-risk rules provided in subsection 96(2.1) of the Act.
Regarding a transfer of a condominium unit by the partnership to the limited partner in satisfaction of his/her share of the partnership capital, this will necessarily reduce the adjusted cost base of his/her partnership interest under subparagraph 53(2)(c)(v) of the Act and, therefore, his/her at-risk amount. Since the distribution to the limited partner will occur before the end of the partnership final fiscal period, the at-risk amount of the limited partner at the end of the final fiscal period of the partnership will have to take into account this capital distribution.
Under circumstances similar to those described in your letter, it would appear that the provisions of paragraph 98.1(1)(b) of the Act would apply to deem the limited partner not to have disposed of his/her partnership interest before the end of the final fiscal period of the partnership for the purposes of computing his/her capital gain or loss resulting from the disposition of his/her partnership interest. As a result, this will allow the final allocation of partnership income or loss between the partners to be added to, or deducted from, the adjusted cost base of the partners' interests under subparagraph 53(1)(e)(i) or 53(2)(c)(i) of the Act, respectively. If the adjusted cost base of a partner's interest is negative after the foregoing
adjustments, the amount by which it is negative is deemed to be a capital gain by virtue of paragraph 98.1(1)(c) of the Act.
The foregoing comments may be summarized as follows:
1) The transfer of a condominium unit to a limited partner is deemed to occur for proceeds equal to its fair market value;
2) The adjusted cost base of a limited partner's interest will be reduced by an amount equal to the fair market value of the condominium unit received by him/her;
3) A limited partner will be allowed to deduct his/her share of the loss (including any terminal loss realized by reason of the application of subsection 98(2) of the Act) realized by the limited partnership in its final fiscal period to the extent of his/her at-risk amount at the end of that final fiscal period. Such at-risk amount will take into account the deduction under subparagraph 53(2)(c)(v) of the Act with respect to the condominium unit received by the limited partner in satisfaction of his/her share of the partnership capital;
4) Any loss deductible by a limited partner will reduce his/her adjusted cost base under subparagraph 53(2)(c)(i.1) of the Act;
5) Any negative adjusted cost base after the foregoing adjustments will be deemed to be a capital gain under paragraph 98.1(1)(c) of the Act.
It is our opinion that subsection 85(5.1) of the Act would not be applicable to deny the deduction of the terminal loss
realized by the limited partnership since immediately after the transfer of the condominium units to the limited partners, the limited partnership will no longer be in existence (even if under paragraph 98.1(1)(c) of the Act the limited partners are deemed not to have disposed of their interest).
This opinion does not constitute an advance ruling and as such is not binding on the Department.
Yours truly,
for Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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