Iberville Developments – Federal Court of Appeal confirms that the starting ACB of a partnership interest was determined exclusively under s. 97(2)(b)

A corporate taxpayer having shopping centres with a cost amount and fair market value of $14M and $130M, respectively, contributes the properties under s. 97(2) to a newly-formed LP in consideration for boot of $14M and units with a FMV of $116M. This is a barter exchange so that on general principles, the cost of the units is $116M. S. 97(2)(b) provides that “immediately after” the disposition of the property to the LP, the elected amount of $14M minus the boot of $14M “shall be added” to the ACB of the partnership interest, so that such interest’s ACB is now increased by that amount (which, on these numbers, is nil). The shopping centres are shortly thereafter sold to third parties at a gain (reflecting their low rollover basis), with such gain (mostly, capital gain) allocated to the partners (mostly, to the taxpayer). Subsequently, the partnership is wound up, and the taxpayer realizes a capital loss of around $116M.

Noël CJ agreed with Boyle J below that transactions only somewhat more complex than this did not produce a double adjustment to the ACB of the units under general cost principles and under s. 97(2)(b), as described above. After noting that such a double increase would represent “an absurd result,” Noël CJ stated:

[T]he appellant’s partnership interest had already been acquired when the shopping centres were transferred, thereby eliminating any possibility that, in addition to the subsection 97(2) adjustment, the partnership interest could be increased under section 54 by the “cost”, i.e. the fair market value, of the transferred property … .

In other words, the taxpayer only had a 100% partnership interest both before and after the drop-down transactions (“the Act tracks the partnership interest as a whole rather than as individual units”), so that there was no cost for an increased partnership interest on the drop-downs (there was no such increase), and the only cost base adjustment to be made on the s. 97(2) drop-downs were under s. 97(2)(b).

What if no s. 97(2) election is made? He stated:

Upon transferring capital property to a partnership under subsection 97(1), a partner triggers the application of subparagraph 53(1)(e)(iv) which provides that the adjusted cost base of a partner’s partnership interest is increased by an amount commensurate with its contribution. The fact that the partner receives units in exchange for the properties is not relevant to the computation of the adjusted cost base of its partnership interest as Subdivisions C (capital gains) and J (partners and partnerships) do not recognize the issuance of new units in a partnership as a tax event or changes in the relative interest in a partnership as the acquisition of distinct property.

Thus, it would appear that the issuance of partnership units on a drop-down is irrelevant to the ACB of the partnership interest, whether the drop-down occurs on a non-rollover basis under s. 97(1) or a rollover basis under s. 97(2).

Neal Armstrong. Summary of Iberville Developments Limited v. Canada, 2020 FCA 115 under s. 97(1) and s. 97(2)(b).