10 February 1997 External T.I. 9621935 - : Farm Partnership and At-Risk Adjustments

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.

Principal Issues:

1. Do draft 143.2(2) & (6) apply to limit deductibility of farming losses carried on by a limited partnership in any of the following scenarios:

(i) where a taxpayer, who holds a unit in the partnership, has a right to sell his interest in the partnership to a third party for a pre-determined price?

(ii) where the partnership has a priority right to revenues, up to a pre-determined amount, where the amount of such priority is not guaranteed in any way?

(iii) where the partnership is guaranteed a certain level of revenue?

(iv) where the partnership has a right to sell certain property of the partnership to an arm's length third party for a pre-determined price?

Position:

1. Gave qualified opinions (depending on the facts) that draft 143.2(2) & (6) may not apply to limit deductibility of farming losses carried on by a limited partnership in any of the above scenarios.

Reasons:

1. The "at-risk adjustment", defined in 143.2(2), specifically excludes expenditures which are the cost of a partnership interest to which subsection 96(2.2) applies. In the case of (i) & (iii) & (iv) the application of 96(2.2) may preclude an at-risk adjustment. In the case of (ii) there may not be any benefit that would either reduce the at-risk amount calculated pursuant to 96(2.2) or constitute an at-risk adjustment pursuant to 143.2(2).

XXXXXXXXXX

Attention: XXXXXXXXXX

Dear Sirs:

Re: Technical Opinion - Subsection 143.2(2) of the Income Tax Act

This is in reply to your letter dated June 14, 1996, and our telephone conversation on February 5, 1997 (Nelson/XXXXXXXXXX). You have asked us if any particular right described below would, in and of itself, cause draft subsections 143.2(2) & (6) of the Income Tax Act (Canada)(the "Act") to apply to limit the deductibility of farming losses incurred by a limited partnership, an interest in which will be a tax shelter investment for the purposes of section 143.2 of the Act.

You have asked us to consider scenarios where (i) a partner that acquires an interest in the partnership, receives a right (the "Partnership Interest Disposition Right") to sell his interest to a third party for a pre-determined price, (ii) under a joint venture agreement with a third party, the partnership has a priority right to a pre-determined amount of revenues (the "Priority Revenue Right"), where the amount of such priority is not guaranteed in any way, (iii) the partnership is guaranteed a certain level of revenue (the "Revenue Guarantee"), or (iv) the partnership has a right (the "Property Disposition Right") to sell certain property of the partnership to an arm's length third party for a pre-determined price.

Your questions appear to relate to specific factual situations. As noted in Information Circular 70-6R3, we do not provide opinions with respect to proposed factual transactions other than in reply to an advance income tax ruling request. If the transactions have already been completed, we recommend that you discuss the issue with your local tax services office. However, we will offer the following general comments, which we hope will be of assistance to you.

Our comments are premised on the enactment of proposed section 143.2 of the Act and the proposed amendments to subsections 96(2.2) and (2.4) of the Act, as proposed in Bill C-69 in the form which received first reading by the House of Commons on December 2, 1996.

Ordinarily we would expect that rights, such as the Partnership Interest Disposition Right, the Revenue Guarantee, and the Property Disposition Right would each be granted for the purpose of reducing the impact of any loss that the taxpayer may sustain by virtue of his being a member of the partnership or by virtue of his holding or disposing of his partnership interest. Consequently, paragraph 96(2.2)(d) of the Act would apply to reduce the partners at-risk amount by the amount or the benefit the partner is entitled to receive in respect of the particular right. Subsections 143.2(2) & (6) of the Act would not apply to reduce the losses otherwise incurred by the partnership, by virtue of the exclusion in subsection 143.2(2) of the Act for the cost of a partnership interest to which subsection 96(2.2) applies.

Although the Priority Revenue Right would not appear to confer any amount or benefit on the partners that would be subject to the application of subsections 143.2(2) & (6) of the Act, in some instances the opposite conclusion could be reached. We would need to review the relevant facts and documentation in order to make this determination in any particular situation.

In accordance with paragraph 22 of Information Circular 70-6R3, the above comments are only expressions of opinion on the application of the Income Tax Act to the hypothetical examples given, and as such should not be construed as advance income tax rulings, nor are they binding on the Department. We note that our opinions concerning the above queries are general in nature, and may have varied, if all of the relevant facts were known.

We trust our comments will be of assistance to you.

Yours truly

Chief
Partnerships Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch