7 December 1990 Income Tax Severed Letter - Negative ACB of Paartnership Interest

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.

ISSUE SHEET

References: 87(2)(e), 54(a)(iv), 100(2), 40(1), 40(3)

Issues:

If a corporation (the “Predecessor Corporation”), holding a partnership interest has been required to deduct, pursuant to paragraph 53(2)(c), amounts in computing the ACB of the partnership interest in excess of the cost of the partnership interest plus the amounts required to be added thereto pursuant to paragraph 53(1)(e), does such a “negative” ACB flow through to “Amalco” after a pre-January 16, 1987 amalgamation to which subsection 87(1) applies, or does the “negative” ACB disappear?

Will subsection 100(2) apply to Amalco when it disposes of the partnership interest in a manner that causes Amalco to include as its gain the amount of the “negative ACB” of the Predecessor Corporation?

(N.B. The issues addressed herein do not arise on amalgamations occurring after January 15, 1987 as a result of the introduction of paragraph 87(2)(e.1) and subsection 100(2.1))

Discussion

These issues were discussed in the context of an advance income tax ruling request concerning XXX which request the taxpayer ultimately agreed to withdraw. The position statement, as noted in Decision Summary 6041-3 prepared by G.C. Boehmer, dated July 16, 1986, includes the following comments:

“... the negative ACB of a partnership interest does not simply disappear on an amalgamation of the corporate partner. From a policy viewpoint, we have been advised by Current Amendments that the negative ACB should flow through to the amalgamated corporation for realization as a gain when it disposes of the partnership interest.

XXX

I wish to discuss the issues under the following topics: - can there be a negative ACB of a partnership interest? - if it is possible to have a negative ACB, does it flow through to Amalco on an amalgamation? - how will subsection 100(2) apply to Amalco on a subsequent sale by Amalco of the partnership interest?

Negative ACB Possible?

Yes

It is our position that a partnership interest can have a negative ACB at any time except at the time of its disposition. [see subparagraph 54(a)(iv)]

It is our view that section 257 is not applicable in the calculation of ACB, because it is overridden by specific provisions of subsection 54(a), the wording of which assumes that the ACB of a property can be less than nil [see subparagraph 54(a)(iv)].

The department previously took the position (in Decision Summary 6041- 3, referred to above) that the ACB of a partnership interest could not be negative partly because of section 257 and the FCTD decision in Canterra Energy.

The Canterra Energy decision has since been overturned on appeal.

(Since section 257 is only applicable to 1985 and subsection taxation years. XXX

Does Negative ACB Flow Through to Amalco?

It is our position that paragraph 87(2)(e) applies to deem the negative ACB of the partnership interest owned by the Predecessor Corporation to be the cost of the partnership interest to Amalco. This position follows from a technical reading of that provision.

Application of 100(2) to Amalco on Subsequent Disposition?

A subsequent disposition of the partnership interest by Amalco will be subject to the provisions of subsection 100(2). However, we submit that only the cost of the partnership interest to Amalco and those adjustments to the ACB of the partnership interest under subsections 53(1) and 53(2) that were made to the partnership interest while it was owned by Amalco will be used in the determination of the gain to Amalco under subsection 100(2).

Under corporate law Amalco may, in fact, be a continuation of the Predecessor Corporation. However, where there has been an amalgamation, as defined in subsection 87(1), the rules in the remainder of section 87 apply. Paragraph 87(2)(a) provides that for purposes of the Act, the corporate entity formed as a result of the amalgamation shall be deemed to be a new corporation the first taxation year of which shall be deemed to have commenced at the time of the amalgamation.

XXX

It is therefore our view that the adjustments made to the ??? partnership interest by the Predecessor Corporation under subsections 53(1) and 53(2) are not considered to be adjustments made to the ACB under these subsections by Amalco, so that only those adjustments made to the ACB of the partnership interest under subsections 53(1) and 53(2) while the partnership interest was owned by Amalco are relevant in the determination of the gain under subsection 100(2).

Application of 40(3)

It is our view that subsection 40(3) will apply to cause Amalco to recognize a gain on the partnership interest immediately after it becomes property of Amalco in situations where the partnership interest had a negative ACB to a predecessor corporation. This is because the cost to Amalco will be a negative amount. (Since the sum of all amounts required by subsection 53(2) to be deducted will be zero and the cost will be negative, the amount by which zero exceeds a negative amount will be positive. For example, the amount by which zero exceeds -5 is 5. See the FCA decision in Canterra.)