29 June 1995 External T.I. 9504765 - "SUBSTANTIAL" RE 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.

Principal Issues:

Whether conversion of partnership's debt for units of the partnership amounts to a substantial capital contribution for the purpose of determining whether the partners' negative ACB would be a gain in computing their income.

Position TAKEN:

Apparent specific proposed transaction. Only general opinion given that 40(3.16)(a)(iv) may exclude transaction as "substantial" if the requirements are met.

Reasons FOR POSITION TAKEN:

Proposed transactions are subject of advance rulings.

XXXXXXXXXX950476

June 29, 1995

Dear Sir:

Re: Subsection 40(3.1), (3.16) to (3.18) of the Income Tax Act (the "Act")

This is in reply to your letter of February 16, 1995 concerning the application of the above-noted provisions of the Act.

Generally, it is our view that subparagraph 40(3.16)(a)(iv) of the Act provides that "an amount will not be considered to be substantial where the amount was used to repay a loan, debt or contribution of capital that had been received or incurred in respect of any such expenditure". An expenditure referred to in this subparagraph would be pursuant to an agreement referred to in paragraph 40(3.16)(a) of the Act that was entered into before February 22, 1994. Where an agreement was entered into by a partnership before February 22, 1994 to incur an expenditure that was contemplated under that agreement and that expenditure also resulted in a debt incurred by the partnership, subparagraph 40(3.16)(a)(iv) of the Act would apply to a repayment of the debt using a capital contribution to the partnership. However, in certain circumstances, other provisions of the Act, such as sections 80 to 80.04, may have application.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2, this opinion is not a ruling and, accordingly, it is not binding on Revenue Canada, Taxation.

Yours truly,

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