7 December 1990 Income Tax Severed Letter - Partnership Interest Acquired on Amalgamation

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.

Subject: XXX Partnership interest Acquired on Amalgamation

We are writing in response to your memoranda, dated September 11, and October 19, 1990, regarding the above-noted taxpayers.

It is our view that the adjusted cost base of a partnership interest can be negative and that subparagraph 54(a)(iv) does not apply to prevent the adjusted cost base (“ACB”) of a partnership interest from being negative immediately before an amalgamation as there is no disposition at that time. Further, section 257 of the Act applies only to 1985 and subsequent taxation years, and therefore did not apply at the times of the amalgamations in question.

We agree with your view that a negative ACB of a partnership interest to a predecessor corporation becomes the cost thereof to the amalgamated corporation (“Amalco”) pursuant to paragraph 87(2)(e), as it read for pre-January 16, 1987 amalgamations. We disagree with the argument advanced by the taxpayer that the definition of “amount” in subsection 248(1) precludes “the amount that was the adjusted cost base to the predecessor corporation” from being a negative number for purposes of paragraph 87(2)(e). We agree with your comment that the definition of “amount” appears merely to require that an amount be expressed in monetary terms. We would also add that section 257 refers to a “negative amount” suggesting that, but for the application of that provision, an amount could be negative.

We also agree that the adjustments to ACB made by the predecessor corporation, under section 53 of the Act, are not considered to be adjustments of Amalco.

However, it is our opinion that immediately after a pre-January 16, 1987 amalgamation when a negative ACB has become the cost to Amalco, Amalco will be subject to the provisions of subsection 40(3), which will result in a deemed gain to Amalco. For example, if the ACB of the partnership interest to a predecessor is negative $100, so that the cost to Amalco becomes negative $100 by virtue of paragraph 87(2)(e), then subsection 40(3) would deem there to be a gain to Amalco in the amount of $100, being the amount by which:(a) all subsection 53(2) deductions from Amalco's ACB $ 0

exceeds

• (b) the aggregate of

(i) the cost to Amalco $-100
(ii) all subsection 53(1) addition
to Amalco's ACB) -100
$100

This conclusion appears to be supported by the decision in Canterra Energy Ltd v. The Queen, [[1987] 1 C.T.C. 89] 87 DTC 5019 (FCA). Any amount deemed by subsection 40(3) to be a gain is added to the ACB of the partnership interest, by virtue of paragraph 53(1)(a).

You requested that we comment on a technical interpretation issued on January 16, 1985 by the Corporate Rulings Division, a copy of which interpretation was attached to your October 19 memorandum. We believe that the interpretation correctly responds to the question that was raised therein, i.e. the consequences of the disposition by Amalco of the partnership interest. However, it fails to explain the consequences of the application of subsection 40(3) immediately after the amalgamation.

Please contact us should you have any questions concerning our comments.