27 May 1994 External T.I. 9407285 - PARTNERSHIP - GENERAL

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.

XXXXXXXXXX		5-940728

Attention: XXXXXXXXXX

May 27, 1994

Dear Sirs:

Re: Partial Disposition of a Partnership Interest

This is in reply to your letter dated March 18, 1994, wherein you requested our opinion as to the proper tax treatment resulting from the hypothetical fact situation described below. 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").

In your letter you described the following fact situation:

1?a limited partnership (the "Partnership") is established for investment purposes;

2?there are 100 outstanding partnership units (the "units");

3?a partner ("Partner A") owns 25 units of the Partnership;

4?the units are valued on a day to day basis based on the underlying fair market value of the assets of the Partnership;

5?under the Partnership agreement, a partner may call for the redemption of all or a portion of his units at the then current fair market value;

6?a partner who has units redeemed partway through the year will have allocated to him by virtue of the Partnership agreement income and capital earned and accrued up to the date of redemption;

7?Partner A's cost of his units at the beginning of the current fiscal period is $100 each;

8?Partner A has 5 units (the "redeemed units") redeemed midway through the Partnership's current fiscal period for proceeds equal to the fair market value at that time, being $150 per unit;

9?pursuant to the Partnership agreement, $50 of income per unit will be allocated to Partner A at the end of the current fiscal period with respect to the 5 units which were redeemed during the year.

Your comment and question

In your letter, you mentioned that from a strict reading of paragraph 53(1)(e) of the Act, the adjusted cost base of the redeemed units for Partner A could not be increased by the amount of the income that will be allocated to him at the end of the Partnership's fiscal period because the adjusted cost base of an interest in a partnership is only increased by income allocated for fiscal periods ending before the relevant time. You concluded that if Partner A is not permitted to increase the adjusted cost base of the 5 units redeemed by the amount of income allocated to him with respect to those units for the current fiscal period, then he will have a capital gain of $50 per unit for each redeemed unit together with an allocation of $50 of income for the year with respect to each unit.

You asked if the Department would agree that Partner A has a single partnership interest notwithstanding that the partnership interest is represented by partnership units and therefore the redemption of the partnership units partway through the year would be treated as merely a return of capital and therefore would not trigger a capital gain at that time.

Our opinion

This Directorate is of the opinion that the units held by Partner A will represent, in aggregate, one property that is his partnership interest in the Partnership.

Each unit will not have a separate adjusted cost base within the meaning of the Act and the adjusted cost base of a partner's partnership interest will be the aggregate of his cost for his units adjusted by subsections 53(1) and 53(2) of the Act.

A redemption of some, but not all, of the units of Partner A will be considered to be a partial disposition of Partner A's partnership interest per paragraph 54(c) of the Act and not a distribution of his share, or part of his share, of the Partnership capital. The proceeds of disposition will be the redemption price and the adjusted cost base of the units redeemed will be computed in conformity with the rules contained in section 43 of the Act.

When a partner disposes of his partnership interest by redeeming his sole unit or all his units during a fiscal period, subsection 98.1 of the Act may apply to deem the partner not to have disposed of his partnership interest before the end of the fiscal period of the partnership in which he ceased to be a member. This will allow that the income (or loss) allocated to him according to the terms of the partnership agreement for that fiscal period be added to or deducted, under the provisions of paragraph 53(1)(e) or paragraph 53(2)(c) of the Act, from the adjusted cost base of the partnership interest held by him immediately before the disposition for the purpose of determining his gain or loss from the disposition of this partnership interest.

Section 98.1 of that Act does not apply when a partner disposes of only part of his partnership interest. Therefore, it is the Department's opinion that the adjustment for the allocation of income (or loss) for the fiscal period of the partnership in which the redemption of some units occur will be made on the remaining units and no adjustment can be made with respect to the redeemed units since at the end of that fiscal period the partner no longer holds any redeemed units. This seems to be an anomaly and we will bring this to the attention of the Department of Finance for their consideration.

This opinion does not constitute an advance ruling and as such is not binding on the Department.

We trust these comments will be of assistance to you.

Yours truly,

for Acting Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch