Section 53

Subsection 53(1) - Adjustments to cost base

Paragraph 53(1)(b)

Paragraph 53(1)(c)

See Also

Burman v. The Queen, 2003 DTC 1007 (TCC)

The failure of the taxpayer to draw salary from a company of which she was a shareholder did not represent a contribution of capital that could be added to the adjusted cost base of her shares.

Administrative Policy

27 October 2017 Internal T.I. 2017-0694231I7 - Subsection 247(2), surplus, and FAPI

sale of goods at undervalue to sub does not imply a contribution of capital

Where, as a result of an s. 247(2) transfer pricing adjustment respecting a transaction between Canco and CFA for the sale of goods or provision of services, an amount is included in computing Canco’s income, would there would be an increase in the adjusted cost base (“ACB”) of Canco’s shares of CFA under s. 53(1)(c)? CRA stated:

Where transfer prices differ from arm’s length terms, it can generally be considered that a benefit is conferred on the person overcharging or underpaying for goods or services. However, there is no general rule in the Act that deems such a conferral of benefit to be a contribution of capital. In this regard, it is notable that paragraph 212.3(10)(b) has specific language to achieve such a result, but that rule is only applicable in the foreign affiliate dumping context. On this basis, it is our view that the benefit conferred in the situation described cannot be considered a capital contribution by Canco to CFA for purposes of paragraph 53(1)(c).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 247 - New - Subsection 247(2) s. 247(2) transfer pricing adjustment for sales undercharges to a CFA does not decrease the ES of the CFA 157
Tax Topics - Income Tax Regulations - Regulation 5907 - Subsection 5907(2) effect on surplus balances of foreign transfer-pricing adjustment might be reversed under Reg. 5907(2) 145
Tax Topics - Income Tax Regulations - Regulation 5907 - Subsection 5907(1) - Earnings - Paragraph (a) surplus could be adjusted by transfer-pricing adjustment 128

26 May 2016 IFA Roundtable Q. 6, 2016-0642081C6 - German Organschafts

German profit transfer payment to loss subsidiary is contribution of capital

Under an “Organschaft,” a German parent (“Parentco”) and its German subsidiary (“Subco”) can enter into an agreement under which Subco agrees to annually transfer its entire profit determined in accordance with German (statutory) GAAP to Parentco, and Parentco agrees to compensate Subco for any loss incurred under German GAAP. CRA confirmed that, at least in the simple case where Parentco wholly-owns Subco through ownership of a single class of shares, the annual profit transfers will be deemed to be dividends under s. 90(2).

Under the base case scenario (where there is one class of shares wholly-owned by Parentco), CRA would view a profit transfer payment made by Parentco to Subco in respect of an accounting loss of Subco as being a contribution of capital made by Parentco to Subco for purposes of s. 53(1)(c). Such a payment would not be taken into account in computing the earnings, income or loss of either Subco or Parentco.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 90 - Subsection 90(2) profit transfer payments by German sub to its German parent deemed to be dividends under s. 90(2) 303
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(a) - Subparagraph 95(2)(a)(ii) - Clause 95(2)(a)(ii)(B) profit transfer payments made by a German sub to German parent are s. 90(2) dividends not within s. 95(2)(a)(ii)(B) after 2016 147
Tax Topics - Income Tax Act - Section 12 - Subsection 12(1) - Paragraph 12(1)(x) loss compensation payment under Organschaft 121

5 December 2003 External T.I. 2002-0165195

debt forgiveness as contribution to CFA

Canco is a corporation resident in Canada that has subsidiaries in the US and the UK. Canco has a US subsidiary ("CFA1"), which has US dollar non-interest bearing loans payable to Canco (the "CFA1 debt"). The CFA1 debt was used by CFA1 to acquire shares of CFA1's US subsidiaries which are also were CFAs and finance their active business operations.

A contribution of capital would be considered to occur that results in an addition to the adjusted cost base to Canco of its shares of CFA1when the CFA1 debt is absolutely forgiven by Canco.

92 C.R. - Q.28

Discussion of distinction between phrases "contribution of capital" and "contributed surplus"

The acquisition of par value shares at a price in excess of their par value does not entail a contribution of capital for purposes of s. 53(1)(c). Instead, the cost of the shares is determined on ordinary principles.

10 January 1992 CGA Roundtable, Q. 19, 7-912224

contribution of capital on conversion of debt to lower FMV shares

A corporation converts a debt owed to one of its shareholders, with whom it does not deal at arm’s length, to shares when the corporation is in a deficit position. The adjusted cost base of the shares received is reduced to their fair market value. Would this transaction be a contribution of capital that would increase the adjusted cost base of the shares issued pursuant to s. 53(1)? The Department responded:

The Department would consider that proportion of such part of the amount of the contribution as cannot reasonably be regarded as a benefit conferred by the shareholder on a related person (other than the corporation) to be a contribution of capital that would increase the adjusted cost base of the shares of a corporation pursuant to paragraph 53(1)(c) of the Act only if there was a real increase in the value of the shares of the corporation as a result of the conversion. Moreover… the value of the debt converted (rather than the principal amount) must be considered the amount paid to acquire the shares in determining whether the amount so paid exceeds the fair market value of the shares acquired for the purposes of paragraph 69(1)(a)… ..

September 1991 Memorandum (Tax Window, No. 9, p. 7, ¶1444)

Where a corporation issues par value shares for cash in excess of their par value, the subscriber's ACB is computed by reference to the purchase price and other cost of acquisition, and s. 53(1)(c) has no application.

88 C.R. - Q.36 (p. 53:49)

debt forgiveness as contribution of capital

[A] transaction that otherwise increase the capital of a corporation in respect of that increase may result in a contribution of capital for the purposes of paragraph 53(1)(c)....[A]n absolute forgiveness of debt owing by a corporation to a shareholder would be an example of such a transaction. The provisions of subsection 80(1) would, of course, apply to the forgivness.

The department's views on the posible effect of a contributon of capital on the adjusted cost base of the shares of a shareholder who makes the contribution are stated in question 68 of the 1987 Revenue Canada round table.

87 C.R. - Q.68 (p. 47:38)

cost denied by 69(1)(a) treated as contribution of capital

To what extent would a contributionof capital to an insolvent corporation permit an increase in the cost of shares owned by the contributor under s. 53(1)(c)? What if the taxpayer instead purchases additional shares? The Departent responded:

Provided that there is some increase in the value of shares of the corporation owned by the taxpayer as a result of a contribution of capital, the cost to the taxpayer of his shares...would, pursuant to paragraph 53(1)(c), be increased by that proportion of the amount of the contribution as may reasonably be regarded as pertaining to the shares of the corporation owned by him.

On a share subscription, any cost basis denied by s. 69(1)(a) may be treated as a contribution of capital provided there is some increase in the value of the taxpayer's shares.

IT-456R "Capital Property - Some Adjustments to Cost Base," para. 2

A contribution of capital occurs where a debt owing by a corporation to a shareholder is absolutely forgiven.

Articles

Tremblay, "Contributions to Capital - Cost Basis", Canadian Current Tax, October, 1987, p. 1

A court might decide that the fraction is not intended to result in an unfair denial of a portion of an eventual loss, and is merely intended to allocate the bump. RC will generally permit a full basis bump provided that the contributing shareholder receives some value, albeit an unquantifiable one.

Paragraph 53(1)(e)

Subparagraph 53(1)(e)(i)

Administrative Policy

2016 Ruling 2015-0617101R3 - 99(1) and timing of ACB adjustment

ACB of limited partner’s and GP’s interest increased by YTD income on s. 98(6) wind-up arising on GP’s s. 85 purchase of limited partner’s interest
Background

LPco (a wholly-owned Canadian subsidiary of Parentco) acquired all the shares of GPco (holding all the Class “A” units of a Canadian limited partnership, namely, the “Partnership”) and all the Class “B” and “C” Partnership Units in the Partnership in an arm’s length transaction. Income or loss of the Partnership is annually allocated to the two partners in proportion to their Units. Partnership holds depreciable property used in a Canadian business and also appreciated shares of a subsidiary (Aco).

Proposed transactions
  1. LPco will transfer its Units to GPco under s. 85(1).
  2. Upon such transfer, Partnership will legally cease to exist and all its property will be distributed to GPco, and GPco thereupon and thereafter will carry on alone the Partnership business.
  3. GPco may make s. 98(5)(c) designations, e.g., for its Aco shares.
Rulings

Provided Partnership is a Canadian partnership at the time it ceases to exist and GPco continues to carry on the business of the Partnership, s. 98(5) will apply to the dissolution.

Pursuant to s. 99(1), Partnership’s fiscal period will be deemed to have ended immediately before the time that is immediately before the time Partnership ceased to exist. The income or loss of Partnership for its fiscal period so ended will, to the extent of a Partner’s share thereof, be included in computing the Partner’s ACB of its Partnership interest under s. 53(1)(e)(i) or 53(2)(c)(i). In particular: LPco’s share thereof will be included in determining its ACB of the LPco Partnership Interest immediately before its disposition to GPco; and GPco’s share thereof will be included in determining the ACB to GPco of the GPco Partnership Interest immediately before the time Partnership ceased to exist.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) on a s. 98(5) wind-up, the ACB of the transferor partner’s interest is bumped by YTD income 91

10 May 2017 External T.I. 2017-0687051E5 F - Addition to ACB of a partnership interest

no s. 53(1)(e) addition for s. 34.2(2) stub period income inclusion

Is an amount included in a corporation’s income under s. 34.2(2) added by virtue of s. 53(1)(e) to the adjusted cost base of its partnership interest? CRA responded:

[T]he amount included under subsection 34.2(2)… will not be included in the corporation's share of the partnership's income from any source. Therefore, for the purposes of subparagraph 53(1)(e)(i), there would be no addition to the ACB to the corporation of the partnership interest in an amount otherwise included in the income of the corporation under subsection 34.2(2).

Furthermore, there is no other provision in paragraph 53(1)(e) for adding, to the ACB of the partnership interest, the amount that would be included in computing the corporation's income under subsection 34.2(2).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 34.2 - Subsection 34.2(2) no partnership-interest ACB addition for inclusion 55

10 October 2014 APFF Roundtable Q. 22, 2014-0538161C6 - APFF Conference, Q. 22 - ACB of interests in a partnership

Class A and B tracking units held by partner are single property

X Inc. and Y Inc. each hold "tracking units" in a Quebec general partnership ("SENC AB") which, in turn, holds the units of two subsidiary LPs ("SENC A," and "SENC B"). Their A and B units (which are held in different proportions) accord rights to the results of the investment in SENC A and SENC B, respectively. Would CRA consider that X Inc. and Y Inc. hold distinct interests in SENC AB and thereby have distinct ACBs for their A and B units? CRA responded (TaxInterpretations translation):

The CRA does not intend to change its long-standing position to the effect that an interest in a partnership constitutes a single and identical property irrespective whether the capital of the partnership has one or several classes of interest. Consequently, the ACB of the Class A units in the example submitted will not be distinct from the ACB of the Class B units.

1 October 2013 External T.I. 2013-0491571E5 - Partial disposition of partnership interest - ACB

all units are single property/entire gain allocated to remaining units

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. Accordingly, the partner would have an ACB adjustment for the entire amount of the income allocated to that partner for the fiscal period despite the partial disposition.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 43 - Subsection 43(1) disposition of some partnership units a part disposition 144

9 March 2012 External T.I. 2011-0416611E5 - disposition under paragraph 38(a.3)

Since s. 53(1)(e)(i)(A) does not explicitly say that the Act is to be read without reference to s. 38(a.3), there is no authority for adding exempt capital gains pursuant to that paragraph in determining the ACB of a partnership interest.

29 October 2002 External T.I. 2002-014633 -

When presented with a situation where a taxpayer retired from a partnership on September 30, 2001 and at December 31, 2001 had a residual interest in the partnership with a negative ACB, CCRA noted that where the problem was not one of double taxation but rather, of the timing of the adjustment to the ACB of the taxpayer's partnership interest (which, in this instance, would result in a capital gain in 2001 and a capital loss in 2002). Accordingly, the administrative relief discussed in Income Tax Technical News Nos. 5 and 9 would not be available.

1998 Ruling 980373

Where a limited partner leaves the partnership before the year end, so that s. 98.1(1)(b) deems the retired partner not to have disposed of its residual interest until the end of that fiscal period on the basis that it only receives payment for its partnership interest after it ceased to be a member, RC will treat the ACB of the disposed partnership as having been increased by the income for that year that is allocated to the partner.

Income Tax Technical News, No. 5, 28 July 1995

For fiscal periods ending after 28 July 1995, the adjustments to the ACB of a partnership interest in respect of the income or loss of the partnership will be made in accordance with s. 53(1)(e)(i) or 53(2)(c)(i).

27 May 1994 External T.I. 5-940728 -

Where an investment partnership provides that a partner who redeems his units partway through the year for their current fair market value shall have taxable income or capital gains allocated to him based on the appreciation in his units to the date of redemption, a partner who redeems a portion of his units partway through the year will be considered to have disposed of a portion of his partnership interest giving rise to a capital gain that will not reflect the addition under s. 53(1)(e)(i) to the adjusted cost base of his remaining partnership interest of the redemption-related allocation of income.

7 June 1991 T.I. (Tax Window, No. 7, p. 9, ¶1366)

Where a partnership is wound-up under s. 98(5), the last fiscal period of the partnership will be considered to have ended immediately before the determination of the ACB of the partnership interests even though both times are "immediately before" the partnership ceasing to exist.

11 March 1991 T.I. (Tax Window, No. 1, p. 5, ¶1155)

Where a corporation which has withdrawn from a partnership has the right to receive the amount in its capital account over time plus interest thereon, the interest will not represent a share of the partnership's income or capital, and will not be added to the ACB of the corporation's partnership interest.

18 April 1990 T.I. (September 1990 Access Letter, ¶1425)

Where B disposes of its partnership interest to the other partner, A, with the result that the partnership ceases to exist, B's share of the partnership profits for the fiscal period that is deemed (by virtue of s. 99(1)) to end immediately before that time will be included in the ACB of B's interest. However, this adjustment will not occur if B disposes of its partnership interest to C. Where B maintains the right to receive a nominal amount of partnership property, RC will question whether this amounts to a residual interest for purposes of s. 98.1 so that B will obtain the appropriate basis adjustment with respect to the second situation.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) 54

88 C.R. - Q.22

Where the accrued gain on the partnership assets is equal to the accrued gain on the partnership units, RC accepts that the gain which the partnership realizes on the dissolution of the partnership as a result of the application of s. 98(2) is added to the ACB to the partner of his partnership units so that a partner realizes no further gain on the disposition of his partnership interest.

Articles

Margaret D. Paproski, "Partnership Interests and Negative ACB", Business Vehicles, Vol. VI, No. 3, p. 257.

Peter Lee, "Dissolution of Partnership - Calculation of Adjusted Cost Base of Partnership Interest", Business Vehicles, Vol. V, No. 4, 1999, p. 273.

Rinfret, "A Review of the AEC Pipelines Limited Partnership", 1997 Corporate Management Tax Conference Report, c. 7

Discussion of Revenue Canada's policy on timing of adjustments to ACB of partnership interests.

Subparagraph 53(1)(e)(iii)

Administrative Policy

9 March 1992 T.I. (Tax Window, No. 17, p. 3, ¶1789)

Re consequences where the partnership is the beneficiary of a life insurance policy in one of the three individual partners; or where the deceased partner's estate will receive all the insurance proceeds.

In the latter case, the ACB of the deceased partner cannot be increased because he is deemed to dispose of his partnership interest immediately before his death and is not a partner at the time the proceeds are received.

3 December 1991 T.I. (Tax Window, No. 15, p. 4, ¶1673)

Where all the partners of a partnership are corporations the partnership carries life insurance on the individuals who were the voting shareholders of the partners, and the corporation owned by a deceased shareholder receives all the proceeds of the life insurance policy in satisfaction of its interest in the partnership, it is only the ACB of that corporation's interest in the partnership that is increased.

16 November 1990 T.I. (Tax Window, Prelim. No. 2, p. 8, ¶1052)

Where the partnership agreement provides for an income allocation to the retiring partner in the year of death equal to the life insurance proceeds received by the partnership, s. 96(1.1) will apply to include the amount of the allocation in the deceased partner's estate's income and the ACB of the partnership interest of the remaining partners will be increased under s. 53(1)(e)(iii).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1.1) 62

84 C.R. - Q.25

Where the partnership agreement provides that net life insurance proceeds will be allocable solely to the deceased partner and will be used to pay the estate of the deceased for the partnership interest, no adjustment is possible with respect to the deceased's former interest in the partnership, as the deceased is no longer a partner at the time the proceeds are received.

Subparagraph 53(1)(e)(iv)

See Also

Mitchell v. The Queen, 96 DTC o (TCC)

The guarantee by the partnership of various obligations of a limited partnership of which he was a member did not form part of the adjusted cost base of his interest in the partnership given that there was not a clearly enforceable right against the taxpayer as surety (the taxpayer had filed a lengthy statement of defence in response to a claim made against him under the guaranty) and given that any amounts evidently paid by him pursuant to the guarantee would be paid to a third party (Central Guarantee Trust Company) rather than to the partnership. The sum in question also did not represent an obligation of the partnership assumed by the taxpayer.

Administrative Policy

2016 Ruling 2016-0651621R3 - Partnership carried on by sole proprietor

ACB increased by assumption of debt owing to partner by partnership

A partnership was wound-up under s. 98(5) as a result of the limited partner transferring its interest under s. 85(1) to the general partner. Immediately before this happened, the general partner assumed a debt that was owing to it by the partnership, with the result that the debt was extinguished by operation of law.

CRA ruled that the ACB of the general partner’s interest for s. 98(5) purposes was increased by the amount of such assumed debt, and that a forgiven amount did not arise on the extinguishing of the debt.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) the assumption by a partner of a debt owing to it by a partnership bumped the partner’s ACB 182
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount no forgiven amount where partner assumed debt owing to it by partnership 46

27 June 2016 External T.I. 2016-0637341E5 F - Partnerships - Negative ACB

assumption of loan can be contribution, but not retained profits

Rather than making current distributions of its cash flow to a limited partner, those sums are lent by the LP to the limited partner – then at the beginning of the following year the LP effects a distribution of the applicable share of the previous year’s profits to the limited partner by issuing a demand note to it and pays that note by way of set-off against the loans owing by the limited partner. After finding that the loans might have given rise to an immediate gain under s. 40(3.1), CRA went on to state:

[T]he profits of a limited partnership in a situation such as that described would not be considered as contributions of capital for the purposes of subsection 40(3.13). …

The concept of a contribution of capital to a general partnership (SENC) or limited partnership is not limited to what is mentioned in…your letter. For example, the CRA considers that the assumption by a partner of a partnership debt can constitute a form of contribution of capital.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(2) - Paragraph 53(2)(c) - Subparagraph 53(2)(c)(v) loan advances to a limited partner may give rise to immediate s. 53(2)(c)(v) grind 243
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.1) loans by LP to partner potentially gave rise to negative ACB gain 156
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.13) retention of partnership profits not a contribution 138

2000 Ruling 2000-002842 -

On a winding-up of a partnership, "for the purposes of determining the ACB to each Partner of that Partner's interest in the Partnership for the purposes of subsection 98(3), the Partner's share of the net income of the Partnership for the fiscal period that commenced on XXXXXXXX and will end immediately before 'that time' will be added to the ACB of that Partner's interest in the Partnership as of the time immediately prior to 'that time' pursuant to subparagraph 53(1)(e)(i)".

2000 Ruling 2000-002842 -

In determining the ACB to a partner of its interest in a partnership for the purposes of s. 98(3), that ACB will be increased by liabilities of the partnership assumed by the partner immediately before that time.

29 June 2000 External T.I. 1999-001149 -

Where a debt owing to a partner is converted into capital, the amount of the "contribution" and, therefore, the increase in ACB of the partner's interest, will be a question of fact.

4 June 1992 T.I. 920847 (December 1992 Access Letter, p. 34, ¶C245-044)

Where, in connection the dissolution of a partnership under s. 98(3) and the recontribution of the property to a new partnership under s. 97(2), a partner borrows money to make a contribution to the old partnership immediately before its dissolution and receives a corresponding distribution of capital shortly after the formation of the new partnership, GAAR will be applied so as to prevent this avoidance of a capital gain on the dissolution of the partnership.

89 C.R. - Q.35

Where one of the partners of a two-person partnership retires or dies, the continuing partner who has assumed the liabilities of the partnership will be treated as having made a contribution of capital to the partnership immediately before the partnership ceased to exist.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) 26

89 C.M.TC - Q.8

where a limited partner has assumed partnership debt as part of the consideration given for the acquisition of his partnership interest, the debt assumed will increase the ACB of his interest.

IT-338R "Partnership Interest - Effects on Adjusted Cost Base Resulting from the Admission or Retirement of a Partner"

Where on a dissolution of a partnership to which s. 98(5) applies the continuing partner has assumed the liabilities of the partnership, that partner is considered to have made a contribution of capital to the partnership, with the result that the ACB of his interest would be increased pursuant to s. 53(1)(e)(iv).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) 10

IT-471R "Merger of Partnerships"

The ACB of each partner's interest in a partnership immediately before a distribution of undivided interest pursuant to s. 98(3) will include the partner's proportion of the partnership liabilities assumed by the partners on the dissolution of the partnership.

Subparagraph 53(1)(e)(viii)

Administrative Policy

Income Tax Technical News, No. 12 under "Adjusted Cost Base of Partnership Interest - Subparagraph 53(1)(e)(viii)

"Amounts referred in subparagraph 53(1)(e)(viii) will not increase the ACB of the partner's interest in the partnership until after the end of the relevant fiscal period of the partnership." However, where a partnership is dissolved under s. 98(3) there will be a timely adjustment under s. 53(1)(e)(viii) provided that a fiscal period of the partnership ends after the distribution of partnership assets to the partner and prior to the partnership interest being disposed of by the partner on dissolution of the partnership.

8 September 1997 T.I. 964202

In considering a situation where all the assets of a resource partnership are distributed on a pro-rata basis to the partners without an election being made under s. 98(3), RC indicated that "amounts referred to in subparagraph 53(1)(e)(viii) of the Act will not increase the ACB of the partner's interest in the partnership until after the end of the relevant fiscal period of the partnership". However, a favourable result would still obtain if the fiscal period of the partnership ends after the distribution of partnership assets to the partner and prior to the partnership interest being disposed by the partner on dissolution of the partnership.

94 C.P.T.J. - Q. 4

Re whether there is a timely adjustment to the partners' ACB where there is a pro-rata distribution of resource properties of a partnership immediately prior to its dissolution.

Paragraph 53(1)(f.1)

Administrative Policy

31 March 2016 External T.I. 2014-0524391E5 F - Debt parking

application of s. 53(1)(f.1) subsequent to application of debt parking rule

A corporation disposes of debt of a subsidiary at a substantial loss to another corporation which is related to it (and the subsidiary) by virtue only of s. 251(5)(b). The loss nonetheless is denied by s. 40(2)(e.1) and added to the adjusted cost base of the debt in the acquirer’s hands under s. 53(1)(f.1). However, the debt parking rule in s. 80.01(8) also applies to the acquisition, and deems that debt to be settled for an amount equal to its ACB to the acquirer.

CRA considered that the debt forgiveness rules could thereby apply to the debt because the deemed settlement under s. 80.01(8) occurs at the time of the acquisition, whereas the s. 53(1)(f.1) bump to the acquirer’s ACB occurs only immediately after that time

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(8) debt parking rule can apply even if no capital loss is recognized 148

12 September 1990 T.I. (Tax Window, Prelim. No. 1, p. 10, ¶1016)

Where a non-interest-bearing debt is transferred at a loss between two corporations controlled by the same person, the loss will be added to the cost amount of the debt to the transferee corporation unless the transferor owns shares of the transferee immediately after the disposition of the debt.

16 February 1990 T.I. (July 1990 Access Letter, ¶1320)

Where a wholly-owned subsidiary transfer shares, which are capital property to it, at a loss to its parent which thereafter holds the shares as inventory, the s. 53(1)(f.1) adjustment will not be available to the parent.

2014 Ruling 2013-0514191R3 - Debt restructuring, forgiveness and winding-up

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Principal Amount non-application of s. 39(2) to exchange of U.S.-dollar notes 123
Tax Topics - Income Tax Act - Section 39 - Subsection 39(2) s. 51.1 exchange of U.S.-dollar notes 123
Tax Topics - Income Tax Act - Section 51.1 s. 51.1 exchange of U.S.-dollar notes 123
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(4) s. 51.1 exchange of U.S.-dollar notes and ATR-66 debt slide 372

Paragraph 53(1)(h)

Administrative Policy

88 C.R. - Q.68

Where money borrowed to buy land cannot be related to particular parcels, the interest should generally be allocated to all land held during the year in proportion to the cost of each parcel.

Subsection 53(2) - Amounts to be deducted

Paragraph 53(2)(b)

Administrative Policy

2003 Ruling 2002-017470

A great-grandchild foreign subsidiary ("Dco") of a Canadian public corporation ("Aco") and a great-grandchild foreign subsidiary of Aco ("Fco") held through another chain of corporations each hold ownership interest ("quota") in another foreign affiliate of Aco ("Eco"). The two quota holders of Eco agree that the principal assets of Eco will be assigned to a newly-incorporated corporation in the same foreign jurisdiction ("Jco") for no consideration; but that contemporaneously with the creation of Jco and the assignment of property of Eco to Jco, the capital account and retained earnings of Eco will be reduced and added to the capital and retained earnings of Jco (which is owned by Dco and Fco in the same proportions as they owned, and continue to own, Eco).

S.53(2)(b) will apply to reduce the adjusted cost base of the Eco quota held by Dco after the reorganization by an amount equal to the fair market value of the Jco quota received by Dco on the reorganization.

Paragraph 53(2)(c)

Administrative Policy

10 January 2005 External T.I. 2004-007593

An amount of foreign non-business income tax allocated by a partnership to a partner and deducted by the partner under s. 20(12) will not result in a reduction to that partner's adjusted cost base of its partnership interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 20 - Subsection 20(12) no partnership ACB reduction for partner s. 20(12) deduction 184

Subparagraph 53(2)(c)(i)

Administrative Policy

Income Tax Technical News, No. 5, 28 July 1995

For fiscal periods ending after 28 July 1995, the adjustments to the ACB of a partnership interest in respect of the income or loss of the partnership will be made in accordance with s. 53(1)(e)(i) or 53(2)(c)(i).

Subparagraph 53(2)(c)(v)

Cases

Tesainer v. Canada, 2009 DTC 5749, 2009 FCA 33

Damages received by the taxpayers who were limited partners of a former partnership ("Fenix") from lawyers, as a result of their claim (along with that of the general partner of Fenix on behalf of Fenix) for losses sustained by them as a result of negligent advice by the lawyers (which resulted in the complete loss of the capital of Fenix) were found to have been received by them directly, rather than as a distribution of partnership capital, as alleged by the Crown. Accordingly, such receipt did not give rise to a capital gain to them under s. 98(1)(c) (on the basis that the supposed distribution would have resulted in a negative cost base for their investment in the partnership). Sharlow, J.A. stated (at para. 17) that "the settlement payment in this case cannot be said to have replaced a distribution of partnership capital because, as a matter of law, it did not and could not have discharged any claim of the individual plaintiffs against Fenix much less a claim for distribution of partnership capital" and noted (at para. 19) that if the action against the lawyers had instead been settled by the payment of an amount to Fenix, the amount received by Fenix would first have been required to be applied to settle outstanding claims of creditors of Fenix, which did not occur as the amounts were received directly by the taxpayers.

Stursberg v. The Queen, 93 DTC 5271 (FCA)

The other partners of the partnership consented to a reduction in the taxpayer's partnership interest from 40% to 15%, and to an increase in the partnership interest of a corporation ("WBG") of which he had voting control from 10% to 35%. WBG deposited the sum of $162,500 (representing 25% of the fair market value of the partnership assets) to the partnership, the taxpayer at the same time received a cheque for $162,500 from the partnership, and an amount of $269,812 representing 25/40ths of the taxpayer's 40% share of the partnership losses was transferred in the books of the partnership from the taxpayer to WBG.

Hugessen J.A. found that the payment of $162,500 to the taxpayer did not represent a distribution of capital to the taxpayer for purposes of s. 53(2)(c)(v) "because there [was] no change whatever in the corpus of the partnership capital or in the relative interests therein of any of the other partners" (p. 5275). Instead there was a partial disposition of the taxpayer's partnership interest to WBG, thereby giving rise to a capital gain.

Words and Phrases
distribution

See Also

Tesainer v. The Queen, 2008 DTC 2807, 2008 TCC 101

Damages received by the taxpayer who, along with other partners of a real estate partnership, received damages from the law firm which had handled the private placement of the partnership units, were found to be closer in character to a return of capital rather than something else.

Administrative Policy

27 June 2016 External T.I. 2016-0637341E5 F - Partnerships - Negative ACB

loan advances to a limited partner may give rise to immediate s. 53(2)(c)(v) grind

Rather than making current distributions of its cash flow to a limited partner, those sums are lent by the LP to the limited partner – then at the beginning of the following year the LP effects a distribution of the applicable share of the previous year’s profits to the limited partner by issuing a demand note to it and pays that note by way of set-off against the loans owing by the limited partner. Does this approach avoid negative ACB gains under s. 40(3.1)?

CRA referred to the “general principle of civil law to the effect that a person cannot make a contract with itself,” so as to suggest that a partnership loan to a partner may not be valid and went on to state:

Should it not be possible for a limited partnership to make loans to the limited partner…the amounts styled as loans…would be treated by the CRA as amounts received in lieu of or in full or partial payment of the distribution of the taxpayer’s share of the limited partnership profits under subparagraph 53(2)(c)(v).

CRA also stated:

[T]he scope of subparagraph 53(2)(c)(v) is very broad and could in theory…apply in respect of the loan amount (on the assumption that the loans were permitted under the civil law)… .

[T]he Courts…have given a very wide scope to the terms "on account of" and "in lieu of"…, which are also used in subparagraph 53(2)(c)(v).

Words and Phrases
in lieu of on account of
Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.1) loans by LP to partner potentially gave rise to negative ACB gain 156
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.13) retention of partnership profits not a contribution 138
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv) assumption of loan can be contribution, but not retained profits 169

11 April 1995 T.I. 950865 (C.T.O. "Partnership At-Risk Rules Re Loan")

Prior to the enactment of ss.40(3.1) and (3.2), it had been agreed that excess revenues generated by a limited partnership would be distributed to the limited partners in order to permit them to retire bank loans used to finance their acquisition of the limited partnership interests, rather than being used to pay off bank project financing of the limited partnership. However, in order to avoid a capital gain on a negative ACB arising from such distributions, it was acceptable to agree that such revenues instead would be used to acquire investments, with the investments being legally owned by the bank "in order to provide the bank with some element of security".

19 April 1990 T.I. (September 1990 Access Letter, ¶1414)

Where the Canadian partners of a U.S. partnership enter into currency feature contracts to close on the anticipated date of distribution of income in U.S. dollars from the partnership and convert the U.S. dollar distribution received to Canadian dollars upon receipt, the exchange rate that will govern for purposes of the adjustment to the ACB of the partnership interest will be that prevailing at the time they receive the distribution. The hedge transaction will be considered to be a separate transaction.

Paragraph 53(2)(h)

Articles

Goodman, "The Tax Treatment of Commercial Trusts", 1989 Canadian Tax Journal, July-August issue, p. 1053

Subparagraph 53(2)(h)(i.1)

Administrative Policy

2010 Ruling 2009-0330901R3 - Reorganization of XXXXXXXXXX

no ACB reduction for capital gain distributed to Trust parent on repurchase of most Trust units notwithstanding parent amalgamation before Trust year end
Background

Subco, which is held by Parent (also a Canadian corporation), owns all the units of Trust 1 which, in turn, holds all the units of Holding LP (previously acquired by it in connection with a reorganization in which it transferred assets including appreciated assets to Holding LP and subsidiary LPs, with gains being potentially limited or quantified through s. 97(2) elections).

Proposed transactions
  1. Trust I will transfer, at FMV, all its Holding LP Units to Subco in consideration for a non-interest bearing promissory note (Subco Note), so that its remaining assets will consist of a loan to Subco (the “Subco Loan”), the Subco Note, interests in sub trusts and cash.
  2. Trust I will distribute the Subco Loan and the Subco Note as the consideration for the purchase for cancellation of substantially all of the Trust 1 units (the “Subco Cancelled Units.”) Subco (or New Parent as successor of Subco) will continue to hold the remaining units of Trust I for an undetermined period of time. The amount of the income allocated to New Parent (as successor of Subco) in respect of this distribution will be equal to the total of Trust I’s income for its current taxation year (including from the drop-down transactions referenced above under “Background”). Subco will realize a capital loss on the cancellation of the Subco Cancelled Units.
  3. Subco will amalgamate with Parent to form New Parent.
  4. In filing its return for its current taxation year, Trust I will deduct under s. 104(6)(b) an amount equal to the income as became payable to Subco. New Parent (as successor of Subco) will include such amount under s. 104(13)(a) in computing its income.
  5. Trust I will designate pursuant to s. 104(21) in respect of New Parent (as successor of Subco) that the net taxable capital gains for the current taxation year of Trust I be deemed to be a taxable capital gain of New Parent from the disposition of capital property by New Parent for its XX taxation year.
Rulings

Include: The amount of the taxable capital gains referred to in 3 will be deemed to be a taxable capital gain of New Parent under s. 104(21).

Ss. 53(2)(h)(i.1)(A) and 53(2)(h)(i.1)(B)(I) will apply such that the ACB of the Trust I Units to Subco will not be reduced for the amount included in New Parent's income (as successor to Subco), as described in 4, and for an amount equal to the amount designated by Trust I in 5.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 107 - Subsection 107(2.1) recognition of capital loss on distribution of capital gain through redemption of most of trust units by corporate unitholder 98
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) - Forgiven Amount no forgiven amount on transfer by unit trust to its parent of debt owing by parent 34

4 November 2008 External T.I. 2008-0264181E5 - Income recognition and ACB - trust units

amount paid to beneficiary "was included" in its taxation year in which trust's taxation year ends/beneficiary return for previous year re-opened to avoid double taxation

Where a corporation with an October 31 year end receives income distributions from an income trust in February and March 2007 and sells its units in April 2007, the distributions so received by it will reduce the adjusted cost base of its units because the corresponding income allocated to it by the income fund will not be included in its income until its October 31, 2008 taxation year, i.e., at the time of the disposition of the units it was not the case that the amount of the distributions "was included in the taxpayer's income" (s. 53(2)(h.1)(A)). In this regard, CRA stated:

Assuming that the amounts payable are ultimately determined to be part of the trust's income for its taxation year, the amounts will, under paragraph 104(13)(a) of the Act, be income amounts of the beneficiary. However, paragraph 104(13)(a) of the Act requires the beneficiary to include those income amounts payable only for the beneficiary's taxation year in which the trust's taxation year ends. ...

[T]he amounts paid in February and March 2007...will not be included in income until October 2008 and therefore, because of the use, in clause 53(2)(h)(i.1)(A), of the past tense in the expression "was included in the taxpayer's income", these amounts are not described in clause (A).

In light of the provision in s. 39(1) that a capital gain will not include an amount otherwise included in income, the corporation at the time of filing its 2008 return (in which it included the distributions in income under s. 104(13)) would be able to refile ints 2007 return to reduce the capital gain reported in that return.

Words and Phrases
included

2007 Ruling 2007-0245281R3 - windup of income trust on sale of assets:3rd party

no ACB reduction for capital gains distribution by unit trust to bidco

This contemplated the winding-up of an income fund (the "Fund") following its acquisition by a "Bidco" in which the Fund sold its assets (mostly an LP interest) for a Bidco note, distributed that note to Bidco in satisfaction of a capital distribution and capital gains distribution declared by the Fund trustees and then redeemed its units for nominal proceeds. Ruling that the amount of the net capital gains allocation that was (separately) paid to the unitholder did not reduce the ACB of its units.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 40 - Subsection 40(3.3) capital loss on redemption of trust units following distribution of most of its assets including as capital gains distribution 106
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(21) trustees making filings on behalf of terminated fund 46
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) assumed debt traceable to capital distribution 93
Tax Topics - Income Tax Act - 101-110 - Section 104 - Subsection 104(6) realization and distribution of target MFT gain 99
Tax Topics - Income Tax Act - Section 80 - Subsection 80(1) 86
Tax Topics - Income Tax Act - Section 80 - Subsection 80(5) 86

2007 Ruling 2007-0237011R3 - XXXXXXXXXX - foreign buy-out of Canadian MFT

following Buyco purchase of income fund, it is wound-up through sale of property to Buyco for note, distribution of capital gain to Buyco through note issuance with s. 104(21) designation (with no ACB reduction under 53(2)(h)(i.1)) and note set-offs
Beginning structure

The Fund, a listed mutual fund trust held units and debt of Trust, which held all the units (being B units) of a Canadian limited partnership (LP1) and the shares of its general partner (GPco 1). LP1 holds all the units of a Canadian limited partnership (LP2) and the shares of its general partner (GPco 2).

Fund takeover transactions

Newco (owned and funded by Holdco) acquired all the Fund units for cash and subscribed for Class B LP1 units and GPco 1 shares to fund debt repayments. Newco acquired the shares of “Target Subsidiaries.” Newco amalgamated with GPco 1, GPco 2, and the Target Subsidiaries to form Newco-Amalco.

Proposed transactions
  1. The Trust will transfer all of its Class B LP1 Units to Newco-Amalco for a promissory note, payable on demand (the "Newco-Amalco Note").
  2. The Trust will distribute the Newco-Amalco Note to the Fund as payment of the taxable capital gain realized in 1, repayment of Trust notes and a capital distribution (including non-taxable portion of capital gain realized).
  3. The Trust will make a s. 104(21) designation in its current year’s return.
  4. The Trust will redeem all of the Trust Units for nominal proceeds, thereby recognizing a capital loss.
  5. The Fund will declare a distribution payable to Newco-Amalco with such distribution to be paid by delivery of a promissory note, payable on demand (the "Fund Note"). The Fund Note will constitute a payment of the taxable capital gain deemed to be realized under 2 and 3 and of a capital distribution.
  6. The Fund Note and the Newco-Amalco Note will be set off against each other.
  7. The Fund will make a s. 104(21) designation in its current year’s return.
  8. Newco-Amalco and Holdco will amalgamate.
Rulings

Include: on the distribution in 2, the Fund will be deemed by s. 107(2.1) to have acquired the Newco-Amalco Note at a fair market value cost and the Fund will not be deemed to have any proceeds of disposition of the Trust Units.

Ss. 53(2)(h)(i.1)(A) and 53(2)(h)(i.1)(B)(I) will apply such that the ACB of the Trust Units to the Fund, and of the Fund Units to Newco-Amalco, will not be reduced for the amount included in the Fund's or Newco-Amalco’s income under 2 or 5, and for the s. 104(21) amounts in 3 or 7.

11 January 1996 T.I. 952152 (C.T.O. "Effect of Net Capital Loss on Adjusted Costs Base on Trust Units")

Where an s. 104(13.2) designation is made in order that net capital losses of prior taxation years of a unit trust are used to shelter the taxable portion of capital gains paid out to unitholders, the net effect (as illustrated in a numerical example) is that the ACB of units in the trust will be reduced by the amount of the net capital losses.

Paragraph 53(2)(k)

Administrative Policy

11 October 1991 T.I. (Tax Window, No. 11, p. 18, ¶1517)

Incentives under the Employee Share Ownership Act (Ontario) reduced the adjusted cost base of the shares purchased by the employee.

Subsection 53(2.1) - Election

Administrative Policy

1993 A.P.F.F. Round Table, Q. 21

The election under s. 53(2.1) may not be made in respect of eligible capital property.

IT-273R2, "Government Assistance - General Comments," para. 12

the election should be made by means of a signed letter accompanying the applicable tax return.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 13 - Subsection 13(7.4) 16