18 May 1994 External T.I. 9412245 - GRANDFATHERING NEGATIVE ACB 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.

			941224
XXXXXXXXXX                                C. R. Brown

Attention: XXXXXXXXXX

May 18, 1994

Dear Sirs:

Re: Proposed Legislation on Negative Adjusted Cost Base

This is in reply to your facsimile transmission dated May 10, 1994. You have requested our opinion on the status of the following arrangement under the proposed legislation on negative adjusted cost base.

XXXXXXXXXX

The Limited Partnerships subscribed for the Units in the same way as other investors except that promissory notes were issued instead of the cheques required by the subscription form. The sole purpose of the Limited Partnerships subscribing for Units in XXXXXXXXXX was to, hopefully, take advantage of any transitional relief that would be offered in connection with any budget proposals pertaining to limited partnerships.

XXXXXXXXXX

It is now proposed that the Limited Partnerships offer the Units held by them to potential subscribers in precisely the same manner as the Units were offered prior to February 22, 1994. That is to say, copies of the Offering Memorandum will be submitted to each potential purchaser. The sole difference will be that purchasers will acquire Units by way of transfer from the Limited Partnerships.

The funds will be raised and expended in accordance with the Offering Memorandum before 1995.

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 "Release") which clarifies the operation of the transitional relief set out in (a), (b) and (c) above. The 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 filed before February 22, 1994,

(b)funds are raised before 1995 pursuant to 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.

With respect to the transaction described above, it is our view that provided there is no new offering memorandum or any amendment to the Offering Memorandum and the total amount to be raised by the Offering Memorandum for 1994 remains the same as the amount that it was intended to raise before February 22,1994, the fact that Units will be acquired by transfer from the Limited Partnerships, as described above, would not, in and by itself, result in the denial of the transitional relief as set out in the Release.

This opinion is also subject to the proviso that legislation is enacted substantially in the form of the transitional relief as clarified by the Release.

The above opinion is not a ruling and accordingly it is 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