28 January 1993 Internal T.I. 9231317 F - 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.

January 28, 1993

Attention:  XXXXXXXXXX

This is in reply to your memorandum of October 14, 1992 in which you requested our views on an issue relating to an amalgamation involving the above-captioned corporation. The relevant facts are set out below.

FACTS

XXXXXXXXXX

ISSUE

What effect did the Amalgamation have on the ACB of the Partnership Interest?

Your Views

In your view, on the Amalgamation, XXXXXXXXXX ACB of the Partnership Interest should be considered to be the amount that was the ACB of that interest to the predecessor corporation, which previously held that interest, immediately before the amalgamation. Based on cases like Black and Decker (1975) 1 SCR 411 and Guaranty Properties 90 DTC 6363 (FCA), it is your view that XXXXXXXXXX should be considered to be a continuation of its predecessor corporations and therefore should be considered to have, itself, made the same adjustments to the ACB of the Partnership Interest that were made under subsection 53(2) of the Income Tax Act (the "Act") (all statutory references in this memorandum are to the Act) by the predecessor corporation which previously held that interest. Although you do not explicitly state, we assume that it is also your view that this will result in the negative portion of the ACB being realized as a gain on disposition of the Partnership Interest, under subsection 100(2).

Taxpayer's Views

The taxpayer makes a number of arguments in support of its position that the ACB of the Partnership Interest should have been set to nil on the Amalgamation. These can be listed as follows.

1.     In a technical interpretation dated January 16, 1985 the Department advised another taxpayer that, in a similar fact situation, the ACB of the amalgamated corporation's partnership interest should be considered to be nil at the time of its disposition. The taxpayer is of the view that this interpretation should apply to all taxpayers.

2.     A CCH publication, "Understanding the Taxation of Partnerships", a copy of the relevant portion of which was enclosed with your October 14 memorandum, suggests that, when a corporation holding a partnership interest with a negative ACB is amalgamated, that ACB is set to nil.

3.     Paragraph 87(2)(e.1) only applies to post-January 15, 1987 amalgamations.

4.     The case of Precision Small Parts Limited v. MNR 82 DTC 1811 (TRB) is cited in support of the taxpayer's views.

Response to Taxpayer's Views

Each of the taxpayer's points will be addressed in turn.

The opinion expressed in the January 16, 1985 technical interpretation has not represented the views of the Department since at least early 1986. In any event, as stated in Information Circular IC 70-6R2 and its predecessor IC 70-6R, unlike an advance income tax ruling, an opinion given by the Department is not binding.

The CCH publication referred to by the taxpayer reflects the views of its authors and not those of the Department. It should be noted, however, that the passage referred to by the taxpayer merely states that it has been argued that the negative ACB of a partnership interest is set to nil on amalgamation. The only stated conclusion is that, if this is indeed the case, it is "... obviously an anomalous and undeserved result."

The taxpayer is correct in concluding that paragraph 87(2)(e.1) only applies to post-January 15, 1987 amalgamations. Accordingly, in our view, it is not relevant to the situation at hand.

The Precision Small Parts case dealt with the former paragraph 125(6)(b) which provided the definition of a taxpayer's cumulative deduction account ("CDA"). The conclusion which appears to have been reached in that case is that the balance in a taxpayer's CDA could not be a negative number.

Although it is not entirely clear from the comments in your memorandum, it seems that the taxpayer's position is that, by analogy, the ACB of the Partnership Interest is also precluded from being a negative number. It is important to note, however, that the relevant wording in paragraph 125(6)(b) is quite different from the definition of ACB in paragraph 54(a). Specifically, the relevant wording in paragraph 125(6)(b) is "...the amount, if any, by which ... exceeds ...", while paragraph 54(a) refers to " cost ... adjusted ... in accordance with section 53 ...." In fact, as discussed below, the Department's view is that paragraph 54(a) specifically contemplates the existence of a negative ACB.

Our Views

In our view, on the Amalgamation, the predecessor corporation's ACB of the Partnership Interest immediately before the Amalgamation flows through to the newly amalgamated corporation for realization as a gain when it disposes of the interest. This conclusion can be supported on either of the following two bases.

Firstly, it can be supported on a strict technical reading of the Act, as illustrated by the following example.

Consider the case of a corporation that acquires a partnership interest for $10. Further assume that the corporation subsequently deducts $30 from that ACB under subsection 53(2). If the corporation subsequently sold the partnership interest for $10 it would realize a $30 gain. Ten dollars of the $30 gain would be realized under subsection 40(1) being the $10 proceeds less the ACB which is deemed to be nil under subparagraph 54(a)(iv). The remaining $20 of gain is calculated under subsection 100(2) as follows:

The amount by which

(a)     amounts deducted under 53(2) $30

exceeds

(b)     (i)     cost of partnership interest $10

and

(ii)      additions under 53(1) nil

Instead of selling the partnership interest assume that, prior to January 16, 1987, the corporation in the preceding example first amalgamates with another corporation and that the newly amalgamated corporation ("Amalco") then sells the partnership interest for $10. The same $30 gain is realized. Ten dollars would be realized in the same manner as in the above example, under subsection 40(1). The remaining $20 would be realized by virtue of the operation of subsection 100(2) as follows. The amount under paragraph 100(2)(a) would be nil, since Amalco has never deducted an amount under that provision. The amount under subparagraph 100(2)(b)(i) would be deemed to be -20 by virtue of paragraph 87(2)(e), because that paragraph provides for the Amalco to inherit the predecessor corporation's ACB. The amount under subparagraph 100(2)(b)(ii) would still be nil. The amount by which zero exceeds -20 is $20.

The same rationale should apply to result in the negative portion of the Partnership Interest's ACB being realized as a gain on its disposition by XXXXXXXXXX.

Alternatively, the same result can be obtained on a basis similar to that described in your letter, relying on the Guaranty Properties decision. On such an analysis XXXXXXXXXX, being a continuation of the predecessor corporation which formerly held the Partnership Interest, would be deemed to have made all the adjustments to the Partnership Interest's ACB that were made by that predecessor corporation. Accordingly XXXXXXXXXX would, by virtue of subsection 100(2), be required to include the negative portion of the ACB of the Partnership Interest in income on its disposition.

If you have any further questions, please contact David Palamar at (613) 957-2094.

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch