Section 43

After Monsieur acquired a duplex in January 2011, he used the two units for renting to a third party and as his personal residence, respectively. In July 2019 he ceased to rent out the first unit, and appropriated it to his residence.

He disposed of the duplex in December 2022. By making a s. 45(3) election respecting his change of use under s. 45(1)(c) (as permitted by the 2019 Budget changes), he was deemed to have not disposed of the unit that had been used for rental purposes. After noting that it was necessary to report the preconverted living unit and the expanded unit separately in claiming the principal residence exemption, CRA stated:

… [A]n allocation of the adjusted cost base ("ACB") and the proceeds of disposition of a property based on the size of each unit is, in some cases, that of a reasonable allocation. However, the allocation does not need to be based on area. All factors that may affect the value of any unit in the building must also be considered.

Where a partner disposes of some of its units of a partnership during the year, is there an ACB adjustment for the entire amount of the income allocated to that partner for the fiscal period? After noting that "all of the units that a partner holds in a partnership constitute a single property, i.e. the partner's interest in the partnership" so that, for example, a disposition of "40% of its partnership units…constitutes a partial disposition of its partnership interest," CRA stated:

Where the partial disposition occurs during the fiscal period of the partnership and thus the ACB adjustment for that fiscal period is not reflected in the ACB of the partnership interest for purposes of computing the gain or loss on the partial disposition, it is our view that the ACB of the remaining partnership interest will be increased by that ACB adjustment.

"[T[he phrase 'at that time' as used in subsection 43(1) of the Act, would, in our view, refer to the time immediately before the particular triggering event that resulted in the application of the subsection which was the partial disposition of the property."

Before going on to find that there was a pro rata recognition of capital gain when 20% of a partner’s units were redeemed, CRA stated:

[A]ll the units that a partner holds in a partnership are one and the same property, that is, the partner's interest in the partnership. Therefore, when a partner has 20% of his or her units redeemed by the partnership, there is a partial disposition of the partner’s partnership interest.

Over the years, A made advances (the "Debt") to Aco which it wholly owned, and then sold all the shares of A to an arm’s length purchaser, as well as the Debt for nominal consideration. What are the consequences of the repayment by Aco of the Debt held by B?

CRA indicated that if the Debt was capital property, its partial or full repayment would give rise to capital gains having regard to its nominal ACB and ss. b)(i) and (ii) of "disposition" in s. 248(1), as well as s. 43(1).

A partnership has several members, some of whom hold partnership interests which participate in both income and capital of the partnership. The partnership agreement will be amended to provide for the issuance of two partnership interests: the first, to provide for participation only in income; and the second, to provide for participation only in capital. If only the income share is subsequently disposed of, would that constitute a partial disposition of property? CRA stated:

The CRA accepts that a partner's interest in a partnership may take the form of various shares in the partnership. However, such an interest remains a single property. Accordingly, on a partial disposition of the interest, the adjusted cost base ("ACB") of the interest in the partnership is determined under subsection 43(1). Under paragraph 53(2)(d), the ACB of the retained portion of the interest is equal to the ACB of the entire interest less the ACB of the portion subject to the partial disposition.

If farmland is divided into two lots, one of them with road access, how should the ACB be apportioned between the two parts? CRA responded:

The allocation of the ACB by sq. m. does not always give an acceptable result. All relevant factors surrounding a particular situation must be considered. The value assigned to portions of farmland by a professional appraiser at the time the property was acquired is a factor that could be considered in determining the portion of the ACB that is reasonable to assign to the disposed of part.

In an arrangement in which a creditor is entitled to all the income and losses following conversion of its loan into an interest in a film partnership, it is arguable that the continuing limited partner has partly disposed of his partnership interest because his entitlement to share in profits and losses has been reduced to nil. Although the issue is considered to be arguable, RC will consider the proceeds of disposition of the interest to be equal to the amount of the liability converted.

What are the tax implications to a creditor which receives a payment on account of a debt obligation’s principal amount that is greater than the obligation’s adjusted cost base? CRA responded:

When the creditor receives a payment on account of the outstanding principal amount of a debt obligation, the creditor is considered to have disposed of a portion of that obligation with the amount of the payment constituting the proceeds of disposition of that portion.

…[T]he adjusted cost base applicable to the part disposition would be equal to that proportion of entire adjusted cost base of the debt obligation immediately prior to the part disposition that the payment received is of the outstanding principal amount of the obligation at that same time.

Where there is a partial repayment of a debt acquired by a taxpayer on capital account and at a discount, the taxpayer must use the part disposition method, i.e., part of the debt is considered to be disposed of each time a payment is received, resulting in a capital gain.