17 September 1996 External T.I. 9625255 - ACB OF PARTITIONED 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.

Principal Issues:

ACB OF NEW INTEREST UPON A PARTITION OF A PROPERTY.

Position:

ACB OF NEW INTEREST EQUAL TO ACB OF UNDIVIDED INTEREST IN PROPERTY BEFORE THE PARTITION.

Reasons:

248(21)(b) DEEMS NEW INTEREST TO BE A CONTINUATION OF UNDIVIDED INTEREST IN PROPERTY BEFORE PARTITION.

									962525
XXXXXXXXXX							Wm. P. Guglich

Attention: XXXXXXXXXX

September 17, 1996

Dear Sirs:

Re: Allocation of Costs on a Partition

This is in reply to your letter of July 22, 1996 concerning the allocation of costs, on a partition of a property where subsection 248(21) of the Income Tax Act (the "Act") applies.

You described the following hypothetical situation:

?Three parties each jointly own a 1/3 undivided interest in a property.

?The property will be subdivided into lots 1, 2 & 3, each having a fair market value of $1,000, and partitioned so that each party will have 100% ownership of one lot.

?Prior to the subdivision, $1,500 in total costs was accumulated to the property. The costs were incurred as follows:

Lot 1 $300
Lot 2 $500
Lot 3 $700

You indicate that there are two approaches to allocating the accumulated costs to the respective lots, namely:

?Pro-rate the accumulated costs to the respective lots on the basis of the fair market values of the individual lots (i.e., $500 to each lot).

?Allocate the actual cost to each lot (i.e., Lot 1 - $300, Lot 2 - $500 and Lot 3 - $700).

OUR VIEWS

It appears that the interpretation you seek relates to a proposed transaction to be undertaken by a specific taxpayer and, therefore, we bring to your attention Information Circular 70-6R2 dated September 28, 1990 issued by Revenue Canada, Taxation. Confirmation with respect to proposed transactions involving specific taxpayers will only be provided in response to a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling for a particular taxpayer with respect to specific transactions which are contemplated, a written request for an advance income tax ruling can be submitted in accordance with the Information Circular. Nevertheless, we can offer the following general comments.

Subsection 248(21) of the Act refers to a partition of a property, that was owned jointly, so that each co-owner has a new interest in the property. Where the conditions in the preamble of subsection 248(21) of the Act are met, paragraph 248(21)(b) deems the new interest of each such person to be a continuation of that person's undivided interest in the property before the partition.

While the property is jointly owned, each co-owner would be required to keep a record of the cost of his or her individual undivided interest in the property. The cost would include, inter alia, the amount expended to acquire the undivided interest, improvements and other expenditures of a capital nature. Although each co-owner may have an equal 1/3 undivided interest in the property, their respective costs of such undivided interests may not necessarily be the same. For example, the co-owners' initial costs of acquiring their respective undivided interests may not be the same and, depending on the arrangement between the co-owners, the amount of their capital expenditures relating to such undivided interest may not be the same.

Section 54 of the Act defines "adjusted cost base" ("ACB") by reference to the capital cost of depreciable property and, in the case of other property, the cost to the taxpayer of the property. An amount can only be added to the ACB of a co-owner's undivided interest to the extent a cost respecting the undivided interest is incurred by the co-owner.

The effect of paragraph 248(21)(b) of the Act is that each co-owner's cost of the new interest in the property would be the same as the cost of the undivided interest in the property before the partition. In effect, each co-owner would determine the cost of his or her undivided interest in the property before the partition and this would be the cost of his or her new interest after the partition.

In your hypothetical situation, the $1,500 of accumulated costs should have been allocated to the respective costs of the individual undivided interests as those costs were incurred.

We trust our comments will be of assistance to you.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch