18 May 1994 External T.I. 9329915 - WHETHER 53 APPLIES TO INVENTORY

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:

Whether section 53 applies in computing any income or loss on the disposition of a limited partnership interest which is not a capital property ?

Position TAKEN:

53 applies only to capital properties.

Reasons FOR POSITION TAKEN:

Consistant with Finance an Legal.

5-932991
XXXXXXXXXX M. Querry

Attention: XXXXXXXXXX

May 18, 1994

Dear Sirs:

Re: Partnership interest

We are replying to your letter of October 14, 1993, wherein you requested our views on whether a taxpayer should consider the rules in section 53 of the Income Tax Act (the "Act") in computing any income or loss on the disposition of a limited partnership interest. You also asked whether the partnership interest should be regarded as a capital property of the taxpayer. We apologize for the delay in responding to your letter.

Whether an interest in a partnership is a capital property or not is a question of fact which can only be determined upon a complete review of all of the relevant circumstances surrounding a particular situation. However, we can provide the following comments.

Although the definition of "adjusted cost base" in paragraph 54(a) of the Act may apply to any property, it is our view that the concept of adjusted cost base would not be relevant in the calculation of the taxable income of a taxpayer where specific rules in the Act are applicable. Such would be the case in the calculation of the income from a business or property pursuant to section 9 of the Act, or in the valuation of inventory property under section 10. Furthermore, it is our opinion that Subdivision c of the Act is applicable only in respect of capital properties.

We are also of the opinion that the income or loss from a business for purposes of section 9 of the Act should generally be determined in accordance with Generally Accepted Accounting Principles to the extent that such principles are not overridden by "ordinary commercial principles" or by specific provisions and represent the "truer picture" of the taxpayer's revenue. This position is supported by the courts.

In West Kootenay Power and Light Company Limited v. The Queen, 92 DTC 6023, the Federal Court of Appeal has reaffirmed this principle as follows:

The approved principle is that whichever method presents the "truer picture" of a taxpayer's revenue, which more fairly and accurately portrays income, and which "matches" revenue and expenditure, if one method does, is the one that must be followed.

In a situation where a limited partnership interest is not a capital property of a taxpayer, we are of the opinion that, in accordance with these principles, any income or loss incurred by the partnership, to the extent of the taxpayer's share, should respectively be added or substracted in the computation of the cost of his interest, for the purposes of section 9 of the Act. This would represent, in our views, the "truer picture" of the taxpayer's income for a taxation year.

Unless as otherwise stated, all references to statute are to the Income Tax Act (S.C. 1970-71-72, c.63 as amended) consolidated to June 10, 1993.

The above comments are an expression of opinion only and, as explained in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

We trust these comments will be of assistance to you.

Yours truly,

for Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch