3 October 1994 External T.I. 9419965 - 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.

		941996
XXXXXXXXXX	F.B. Fontaine

Attention: XXXXXXXXXX

October 3, 1994

Dear Sirs:

Re: Transitional Rules - Negative Adjusted Cost Base

This is in reply to your facsimile transmissions dated August 5, 1994 and September 12, 1994 concerning the application of the transitional rules announced on March 30, 1994 with respect to the February 22, 1994 Budget proposal concerning negative adjusted cost bases for partnership interests.

You have advised that:

(A)a final prospectus was filed on XXXXXXXXXX (the "Prospectus") with the applicable securities regulatory authorities under the Securities Act (Ontario) (the "Securities Act") with regard to an offering of units of a partnership;

(B)the Securities Act provides that a distribution of securities under a prospectus cannot continue beyond 12 months from the later of the date of issuance of the preliminary receipt for the prospectus and the date of the last renewed prospectus;

(C)under the offering described in the Prospectus, a total of XXXXXXXXXX

(D)the partnership wishes to continue the distribution of the units described in the offering and filed a renewed prospectus (the "Renewal Prospectus") on XXXXXXXXXX in accordance with the Securities Act;

(E)the Renewal Prospectus is basically an update of the information contained in the Prospectus and contains current financial information, recent business activities, etc.. The Renewal Prospectus specifically refers to the fact that XXXXXXXXXX units of the original XXXXXXXXXX units were sold under the Prospectus and that only the remaining XXXXXXXXXX units are available for sale. The Renewal Prospectus contains no material changes from the information contained in the Prospectus.

You ask whether the transitional rules would apply in respect of the capital being raised under the Renewal Prospectus in the circumstances described in (A) to (E) above.

Our comments are as follows:

Draft legislation issued by the Department of Finance under News Release 94-084 dated September 27, 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. The draft legislation contains certain transitional relief such that the general rule does not apply where:

(i)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,

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

(iii)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).

The transitional relief provided in the draft legislation include, inter alia, that pursuant to certain documents (a) capital raised by a partnership will not be considered to be a substantial contribution to the partnership after February 22, 1994 and (b) a partner acquiring an interest in a partnership will be deemed to have been a partner on February 22, 1994 and that the partnership will be deemed to have been carrying on its business before February 22, 1994 until the earlier of the closing date, if any, stipulated in the document and January 1, 1995.

For the purpose of the transitional relief, the documents referred to in the draft legislation include:

-a prospectus, preliminary prospectus or registration statement filed with a public authority in Canada pursuant to the securities legislation of Canada or any province, and, where required by law, accepted for filing by such public authority, before February 22, 1994 provided that:

(a)the funds are raised before 1995; and

(b)the funds are expended in accordance with the document before 1995 (or March 1995 in the case of certain certified productions).

Based on our understanding of the situation as outlined in (A) to (E) above and provided that there are otherwise no substantial partnership borrowings and the funds are raised before 1995 and expended in accordance with the document before 1995, it is our opinion that the transitional rules would apply to the capital raised under the Renewal Prospectus.

The above opinions are subject to the proviso that legislation is enacted substantially in the form of the transitional relief as contained in the draft legislation. Also, these 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 to you.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Policy and Legislation Branch