26 April 1994 9409581 - DISPOSITION OF PARTNERSHIP INTEREST

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.

Issue Sheet
A.A. Cameron
April 26, 1994
940958

Question

Question 18 for the round table at the May 1994 meeting of the Institute of Chartered Accountants of Alberta concerned a situation where all of the assets of a partnership, which are composed primarily of Canadian resource properties and related tangibles, will be distributed in a manner such that each partner receives a pro-rata undivided interest therein immediately prior to the dissolution of the partnership. Assuming an election under subsection 98(3) of the Income Tax Act (the "Act") is not made, the following questions were asked:

(a)at what point is each partner considered to have disposed of its partnership interest?

(b)will each partner obtain the increase in the adjusted cost base of its partnership interest pursuant to subparagraph 53(1)(e)(viii) and subsection 66.4(6) of the Act before the partner is considered to have disposed of his partnership interest?

Our Response

(a)Provided the assets of the partnership are distributed such that each of the partners has received the appropriate pro-rata undivided interest therein before dissolution of the partnership, the partners will dispose of their partnership interest upon dissolution based upon the terms of the partnership agreement, the relevant provincial law and the particular facts of the case.

(b)Where an amount in respect of proceeds of disposition of the type referred to in clause 66.4(5)(b)(v)(A) of the Act has arisen to the partnership at a time prior to the partner disposing of his interest therein upon dissolution, in our opinion, the provisions of subsection 66.4(6) of the Act would be applicable at that time such that a partner's share of that amount would be added in computing the adjusted cost base of that partner's interest in the partnership, at a time after such time, prior to its disposition upon dissolution.

Discussion

With regard to response (a), since the facts of the situation are that all partnership assets will have been distributed to the partners prior to the dissolution of the partnership, the provisions of paragraphs 98(1)(a) and (b) of the Act are of no effect with the disposition of the partnership interests occurring upon dissolution subject to the factors listed in the response. (It should be noted that these questions were submitted for the 1993 CPTS Conference but were not answered at that time; the response to the first question is identical to that prepared at that time - see memo dated December 7, 1993, file # 931692.)

With regard to response (b), the preamble to subsection 53(1) of the Act provides for the calculation of the adjusted cost base of a partnership interest "at any time" with subparagraph 53(1)(e)(viii) thereof including "an amount deemed, before that time, by subsection...66.4(6) to be an amount referred to in...clause 66.4(5)(b)(v)(A) or subparagraph 66.4(5)(b)(vi) in respect of the taxpayer". The amounts which may be so "deemed" relate to certain amounts which have become receivable by the partnership and which would be deducted in calculating the cumulative Canadian oil and gas property expense ("CCOGPE") of the partnership in the absence of paragraph 96(1)(d) of the Act. It should be noted that, in accordance with the preamble to paragraph 66.4(5)(b) of the Act, the amount of CCOGPE may be determined "at any time in a taxation year". In our opinion, such factors support the interpretation that an amount, which would be deductible in the calculation of CCOGPE at the time it arose, may be deemed by subsection 66.4(6) of the Act to be an amount in respect of a partner at a time prior to the end of his taxation year (with a corresponding reduction to his CCOGPE also occurring at such time). In addition, this interpretation has been reflected in a number of advance income tax ruling previously issued, e.g., #5-1074 in response to a request dated November 28, 1978; #5-365 in response to a request dated May 3, 1978.

It should be noted that this position is also consistent with that adopted with regard to a similar problem which arises in the context of the capital dividend account (the "CDA"). The preamble to paragraph 89(1)(b) of the Act refers to the CDA of a corporation "at any particular time" while, pursuant to subclause 89(1)(b)(i)(A)(I) of the Act, CDA includes a "capital gain" of the corporation realized prior to that time. However, in defining the term "capital gain", paragraph 39(1)(a) of the Act refers to "a taxpayer's capital gain for a taxation year". Notwithstanding such reference to "for a taxation year" we have traditionally interpreted these provisions as permitting the inclusion of the amount of a capital gain in the calculation of CDA prior to the end of the taxation year in which such gain arose. This position is implicit to the comments contained in paragraph 11 of Interpretation Bulletin IT-66R6.