22 October 1997 External T.I. 9723915 - CAPITAL ACCOUNTS OF LIMITED PARTNERS

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.

Principales Questions:

regles transitoires pour pbr negatif - contribution importante

Position Adoptée:

question de faits

Raisons POUR POSITION ADOPTÉE:

libelle 40(3.16)

				5-972391
XXXXXXXXXX		J. Desparois, M. Fisc.

Attention: XXXXXXXXXX

October 22, 1997

Dear Sir:

Re: Capital Accounts of Limited Partners

We are replying to your facsimile of April 18, 1997 sent to Mr. Phil Joly, Audit Directorate, wherein you requested a technical interpretation on subsection 40(3.1) of the Income Tax Act (the "Act").

The particular circumstances outlined in your letter appear to be actual transactions involving specific taxpayers. As explained in Information Circular 70-6R3, where a situation involves completed transactions, all relevant facts and documentation should be submitted to the appropriate Tax Services Office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Act. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation.

Subsection 40(3.1) of the Act provides that a member of a partnership is considered to have realized a gain equal to the "negative adjusted cost base" of the member's interest at the end of the fiscal period if the member is a limited partner or was since becoming a partner, a "specified member of the partnership". Subsection 40(3.1) of the Act does not apply to a member of a partnership at the end of the fiscal period of a partnership if the member's partnership interest is an "excluded interest" and the member held the interest on February 22, 1994. Subsection 40(3.15) of the Act describes those partnership interests that are considered to be excluded interests for the purpose of new subsection 40(3.1) of the Act.

An interest in a partnership at the end of a fiscal period of the partnership is an excluded interest if, at that time, the partnership actively carries on a business that was carried on by it continuously since February 22, 1994 (or earns income from a property that was owned by it throughout that period). However, a partnership interest will lose its status as an excluded interest if, after February 21, 1994, there has been a substantial contribution of capital to the partnership or a substantial partnership borrowing.

Subsection 40(3.16) of the Act describes various circumstances where contributions to, or borrowing by, a partnership will not be considered to be substantial for the purpose of the grandfathering rule in subsection 40(3.15) of the Act. Paragraph 40(3.16)(d) of the Act provides, for the purposes of subsection 40(3.15) of the Act, that a contribution of capital to the partnership will be considered not to be a substantial contribution where the contribution of capital is used for an activity that was carried on by the partnership on February 22, 1994 but not for a significant expansion of the activity nor for the acquisition or production of a film production. The determination of whether or not a contribution of capital to the partnership is used for a significant expansion of the activity of the partnership is a question of fact that can only be determined following a review of all of the relevant facts pertaining to the particular situation.

In addition, it is our opinion that the tax attributes of a particular partner's capital account are not transferable to another partner.

These comments represent our opinion of the law as it applies generally. As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and accordingly, is not binding on the Department.

Yours truly,

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