16 February 1998 External T.I. 9727145 - ADJUSTMENTS TO ACB OF EXEMPT PARTNERSHIP INTERESTS

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:

1. When are adjustments made to the partnership acb's to reflect operating losses in a scenario involving exempt interests in the partnership?

2. How can partnership interests lose their exempt interest status?

Position:

1. In computing the ACB of a partner's exempt interest in a partnership at any time, a reduction is required for that partner's share of the partnership's operating loss for fiscal periods ending before that time.

2. Subject to certain exceptions noted 96(2.5) of the Act, an exempt interest in a partnership can lose that status where after February 25, 1986, there has been a substantial contribution of capital to the partnership or a substantial increase in the indebtedness of the partnership.

Reasons:

1 & 2 Our understanding and reading of 53(2)(c)(i) and 96(2.5), respectively.

		972714
XXXXXXXXXX                                     Allan Nelson
                                             (613) 957-9768
Attn.:XXXXXXXXXX

February 16, 1998

Dear Sirs:

Re: Technical Interpretation Request
Exempt Interests in a Partnership

This is in reply to your letter of October 3, 1997, and our subsequent telephone conversations on February 4 and 6, 1998 (Nelson/XXXXXXXXXX), concerning the taxation of a partner with an exempt interest in a limited partnership.

Your questions appear to relate to a specific factual situation. 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, as suggested during our telephone conversations, the transaction has 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.

As requested during our telephone conversations we confirm our views as follows:

1. In computing the adjusted cost base of a partner's exempt interest in a partnership at any time, subparagraph 53(2)(c)(i) of the Act would require a reduction equal to the amount of that partner's share of the partnership's operating loss for fiscal periods ending before that time. This reduction would be required (i) whether or not the partner had deducted the loss(es) in computing their income for the year in which the particular loss was incurred, pursuant to section 3 of the Act, or (ii) whether the partner had deducted the loss(es) in computing their taxable income pursuant to paragraph 111(1)(a) of the Act;

2. Any of the partner's undeducted losses may be carried forward or backward and deducted in computing taxable income in accordance with paragraph 111(1)(a) of the Act; and

3. As you know, subsection 96(2.5) of the Act defines exempt interest for the purposes of the limited partnership loss rules. Subject to certain exceptions noted therein, an exempt interest in a partnership can lose that status where, after February 25, 1986, there has been a substantial contribution of capital to the partnership or a substantial increase in the indebtedness of the partnership.

In accordance with paragraph 22 of Information Circular 70-6R3, the above comments are only general expressions of opinion on the application of the Income Tax Act to hypothetical situations, and as such should not be construed as advance income tax rulings, nor are they binding on the Department.

Yours truly,

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