11 August 1998 External T.I. 9819935 - ELIGIBLE CG BALANCE, P/S TO SOLE PROP

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: partnership rollover and capital gains balance

Position: 53(1)(r) bumps acb (re ECGB) before 98(5) roll

Reasons: wordings of Act

XXXXXXXXXX 981993
Denise Dalphy

Attention: XXXXXXXXXX

August 11, 1998

Dear Sir/Madam:

Re: Subsection 98(5) of the Income Tax Act (the “Act”)

This is in reply to your letter dated July 23, 1998 on the above-noted issue. In particular, you have requested the Department’s views on the interaction of subsection 98(5) of the Act and an exempt capital gains balance.

It appears that the interpretations you seek may relate to a specific taxpayer. To the extent that your queries relate to completed transactions, it is appropriate that a determination be made by the relevant Tax Services Office. Where interpretations are sought on transactions that are seriously contemplated in the near future, you may consider requesting an advance income tax ruling. The process for requesting advance rulings is described in Information Circular IC-70R3 dated December 30, 1996. Notwithstanding the foregoing, we are prepared to offer the following comments.

Where a taxpayer’s situation falls within the ambit of the preamble of subsection 98(5) of the Act, the provisions therein will automatically apply and subparagraph (a) will deem the proprietor’s proceeds of disposition to be an amount computed with reference to the proprietor’s adjusted cost base of his partnership interest immediately before the particular time (the Canadian partnership ceased to exist) and the total cost amount to the partnership, immediately before the particular time (the Canadian partnership ceased to exist), of each partnership property received by the proprietor. The application of the provision is automatic, not elective.

Paragraph 53(1)(r) of the Act increases the adjusted cost base of a property that is an interest in a flow-through entity by an amount determined by the formula A x B/C. All of the variables include a reference to “at that time” (or “taxation year that includes that time”).

The relevant time is discussed in the preamble of paragraph 53(1)(r), which refers to “property is an interest in... a flow-through entity... and immediately after that time (emphasis added) the taxpayer disposed of all of the taxpayer’s interests in,...the entity...”. Accordingly, the basis bump occurs immediately before the disposition and would affect the computations in subsection 98(5) of the Act. That is, in applying subsection 98(5), the acb of the partnership interest and the deemed proceeds of disposition of the partnership interest would both reflect the paragraph 53(1)(r) increase.

Finally, with respect to a disposition under paragraph 53(1)(r) of the Act where no rollover provisions apply, it is not apparent that this provision would only be of benefit where there has been a decline in the value of a flow-through entity. Paragraph 53(1)(r) of the Act may also benefit a taxpayer who disposes of a partnership interest that has maintained or increased in value. Of course, where there is a disposition of a partnership interest that has increased in value since the 1994 deemed disposition, a capital gain may be triggered, however any such gain that would arise would be less than the gain that would have arisen without the paragraph 53(1)(r) bump.

If you would like to discuss proposed changes to the Act, you should contact the Tax Policy Division of the Department of Finance.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R3, the above comments do not constitute an income tax ruling and accordingly are not binding on the Department. Our practice is to make this specific disclaimer in all instances in which we provide an opinion.

Yours truly,

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