2 June 1994 External T.I. 9413855 - 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.

			941385
XXXXXXXXXX	C. R. Brown

Attention: XXXXXXXXXX

June 2, 1994

Dear Sirs:

Re: Proposed Legislation on Negative Adjusted Cost Base

This is in reply to your letter dated May 26, 1994. You have requested our opinion on the status of a two-tier partnership structure, where an offering memorandum has been distributed before February 22, 1994 with respect to the units of the top-tier partnership, under the proposed legislation on negative adjusted cost base.

You mention that it is common for promoters to utilize a two-tier partnership structure to syndicate film productions. Typically, the top-tier partnership would issue its units to investors and would use the funds obtained from subscriptions to fund the second-tier partnership. The second-tier partnership would in turn acquire the film properties and undertake the business activities of the venture. It is also understood that the offering memorandum is distributed and sales are solicited before February 22, 1994. The offering memorandum describes the proposed issue of units by the top-tier partnership and the investment by that partnership in the second-tier partnership to acquire the film properties and undertake the business activities.

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 or, in certain conditions, a passive 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 or passive 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 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 and sales of the securities are solicited before February 22, 1994,

(b)the sale of securities is substantially in accordance with the offering memorandum,

(c)funds are raised before 1995 pursuant to the offering memorandum,

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

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

(f)the funds raised by and in accordance with the offering memorandum are expended in the manner contemplated in the offering memorandum.

Assuming that all the other requirements for transitional relief are met and assuming that legislation is enacted substantially in the form of the transitional relief as clarified by the Release, it is our opinion that the transitional relief would not be denied solely because of the use of the two-tier partnership structure as described above. Consequently, it is our view that, in such cases, both the top-tier and second-tier partnerships could be eligible for the transitional relief.

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.

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