10 May 1994 External T.I. 9408765 - GRANDFATHERING NEGATIVE ACB

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.

    					940876
XXXXXXXXXX									C. R. Brown

Attention: XXXXXXXXXX

May 10, 1994

Dear Sirs:

Re: Proposed Legislation on Negative Adjusted Cost Base

This is in reply to your letter dated April 7, 1994 with respect to the "transitional relief relating to the February 22, 1994 budget proposals concerning negative partnership adjusted cost base and convertible debt" (the "Release").

In your letter you indicated that your client had distributed several offering memoranda prior to February 22, 1994 and that certain closings had taken place sometimes for the amount of the offering memorandum and sometimes for partial amounts. In some cases the closing was to take place after February 21, 1994. You also indicated that your client has acquired "certified productions" that exceed the amounts of the offering memoranda in place on February 22, 1994. In the past you had obtained advance income tax rulings on similar transactions. Included with your submission were copies of offering memoranda and other relevant documents.

You have requested our views on the following issues:

1.Would an amendment to one of the offering memoranda that was distributed prior to February 22, 1994, requiring a minimum subscription of $XXXXXXXX per unit per investor as opposed to $XXXXXXXX per investor and involving no other changes constitute a sale of securities "substantially in accordance with the offering memorandum"?

2.Would the amendment of one of the offering memoranda circulated prior to February 22, 1994 permitting an offering for an amount greater than the original maximum offering price (in order to permit the inclusion of films acquired by a film partnership prior to February 22, 1994) and involving no other changes other than the change mentioned in paragraph 1 above constitute the sale of securities "substantially in accordance with the offering memorandum"?

3.Would the amendment of one of the offering memoranda circulated prior to February 22, 1994, involving the increase in the maximum offering amount to accommodate productions which were not subject to an acquisition agreement prior to February 22, 1994, and involving no other changes other than that mentioned in 1 above, constitute a sale of securities "substantially in accordance with the offering memorandum"?

Resolution 6 of the Notice of Ways and Means Motion to amend the Income Tax Act, contained in the federal budget released on February 22, 1994, provides that a gain will be realized where, at the end of a fiscal period, a limited partner holds a partnership interest that has a negative adjusted cost base. This general rule does not apply where;

(a)at the end of the relevant fiscal period, the partnership continued to carry on the business that was carried on by it on February 22, 1994,

(b)the limited partner held the partnership interest on February 22, 1994, and

(c)there has been no substantial contribution of capital to the partnership or substantial partnership borrowings after February 21, 1994 (other than in certain limited circumstances).

On March 30, 1994, the Minister of Finance issued a news release (the "News Release") which clarifies the operation of the transitional relief set out in (a), (b) and (c) above. The News Release indicates, inter alia, that a limited partner is exempt from the application of the proposed amendments respecting the negative adjusted cost base, by virtue of the transitional relief under the following circumstances:

A.an offering memorandum was distributed before February 22, 1994 containing a complete description of the securities contemplated in the offering as well as the terms and conditions of the offering of securities,

B.solicitations in respect of the sale of the securities contemplated by the offering memorandum were made before February 22, 1994 and funds are raised before 1995 substantially in accordance with the offering memorandum,

C.the funds so raised are expended before 1995 in accordance with the offering memorandum (or March 1995 in the case of certain certified productions),

D.the limited partnership units are issued on or prior to December 31, 1994 in accordance with the offering memorandum, and

E.the funds raised by and in accordance with the offering memorandum are expended in the manner contemplated in the offering memorandum.

It is our view that in order for the conditions in B and D to be met the offering amount must be no greater than the amount set out in the offering memoranda distributed prior to February 22, 1994. Consequently, it is our view that if the arrangement is amended in the manner stated in 2 and 3 the issue of limited partnership units would not be in accordance with the offering memorandum. Accordingly, the limited partners and the partnership would not be entitled to the transitional relief. We would not view an amendment to increase the minimum subscription price to be substantial unless it increases the amount of the offering memorandum as stated prior to February 22, 1994.

The above comments are restricted to the issue of whether the requirements stated in B and D above are met and we offer no comments respecting any other conditions which must be met in order to qualify for the transitional relief. Furthermore, these opinions are subject to the proviso that legislation is enacted substantially in the form of the transitional relief as clarified by the Release.

The above opinions are not rulings and accordingly they are not binding on Revenue Canada, Customs, Excise and Taxation.

We trust these comments will be of assistance.

Yours truly,

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