Section 97

The taxpayer unsuccessfully argued that the initial cost of its interest in an LP was the fair market value of the property contributed by it to the LP and that the adjusted cost base of the property was further increased an instant later under s. 97(2)(b). Before rejecting this argument, Boyle J stated (at para. 63):

There is no suggestion that subsection 97(1) should apply in the circumstances described in subsection 97(2), and it is subsection 97(1) that would be the specific rule which would provide that a transferor partner’s cost of their partnership interest is fair market value. Subsection 97(1) appears to be a necessary part of the Act given that partnerships are not themselves persons under the Act, but are only required by section 96 to compute their income as if they were.

In 2003 and 2004, the taxpayer (“Iberville”) contributed shopping centres worth $130M and with a cost base of $14M and received non‑share consideration or boot of $8.5M. Shortly thereafter, the partnership sold the shopping centres to unrelated third parties and realized capital gains of over $100M which were allocated to Iberville. It subsequently disposed of the partnership interest to an affiliate, and claimed a capital loss of $122M, which was not suspended because of the winding-up of the partnership shortly thereafter.

This claimed capital loss was based on the proposition that the adjusted cost base of its partnership interest had been increased not only by the s. 97(2) elected amount but also by the fair market value of the contributed property. In particular (para. 4):

At the time of the transfer, the rules in section 54 determined the cost of the partnership interest or increased partnership interest to be the fair market value of the transferred shopping centres, and immediately after that time paragraph 97(2)(b) added an amount equal to the elected amount less any boot.

In rejecting this interpretation, Boyle J first found that, consistently with the terms of the partnership agreement and the provisions of the Civil Code, the partnership had been formed earlier on the day before the time of the property contribution. He then stated (at paras. 54-56) respecting Iberville’s interest in the partnership:

It had already acquired that before the shopping centre transfers. There is therefore no possibility of a successful argument that the “cost” of the increase in their partnership interest should be captured under section 54 in addition to the subsection 97(2) adjustment.

The taxpayer’s position is that the “cost” being sought was the difference between the value of the shopping centres and the amount of the promissory notes received, reflected by the additional units in the Partnership received. Not only was this partnership not unitized, …subdivisions C and J dealing with capital gains and losses and partners and partnerships, respectively, do not recognize either (i) changes in the relative interest of a partnership as the acquisition of separate property nor (ii) the issuance of additional units in a partnership.

This is the reason for which this appeal must fail. Paragraph 97(2)(b) would apply in this same manner in this case regardless of whether the Partnership was unitized or not.

Boyle J further found, in the event that his interpretation was incorrect and Iberville instead first acquired an interest in the Partnership upon the transfer of the shopping centres, Iberville’s position nonetheless failed. He had noted earlier (at para. 6) counsel’s concession that “if the language of subsection 97(2) permits of any other reasonable interpretation [than as quoted above], the taxpayer should lose,” and then stated (at paras. 65-66):

It is not obvious from the language used in subsection 97(2), read in context, that there is a moment in time at which the transferor partner could recognize a cost under the section 54 definition of ACB that is not immediately after the partnership acquired the property. Section 97 uses the phrase “immediately after . . . the partnership . . . acquired the property” in subsection 97(1) … . It uses the phrase “immediately after the disposition” in subsection 97(2).

Similarly, paragraph 97(2)(c) which deals with the flow‑through of the character of taxable Canadian property if such property is transferred from a partner to a partnership on a taxable basis or on a rollover basis, applies “at any time that is within 60 months after the disposition”…. Just as the Appellant’s moment in time of the disposition not being after the disposition would lead to an absurd and presumably unintended result, so too would it similarly lead to an absurd and unintended opportunity to shed a property’s taxable Canadian property status by flowing it into a partnership.

The taxpayer (“R & S”) transferred its business to a limited partnership, with a joint s. 97(2) election being made. The Minister reassessed R & S to include substantial amounts in its income as a result of the transfer. A request by R & S and the partnership to file an amended election was denied by the Minister and the Federal Court denied their application for judicial review of this decision. R & S then appealed to the Tax Court and took the position in its pleadings that the allocation of consideration between partnership-interest and non-partnership interest consideration set out on the (T2059) election form did not reflect the actual agreed allocation. The Crown brought an application to quash the appeal on the ground that the Court lacked jurisdiction to hear the appeal.

In denying the Crown’s motion, Graham J stated (at paras. 10-12):

…[T]here is an important difference between the agreed amount and the key facts. The agreed amount is an amount selected by the parties to the transaction. Other than in accordance with the provisions of subsection 85(1), the agreed amount cannot be altered by the Minister. By contrast, the key facts are factual determinations. …[S]imply recording $X on the T2059 election form does not mean that the fair market value is $X. It simply means that the parties believe it to be $X. If the Minister disagrees with that valuation, the Minister is free to reassess… .[I]f… the taxpayer disagreed with the fair market value upon which the Minister had reassessed, the taxpayer could object to, and ultimately appeal from, the resulting reassessment. …

Other key facts, such as the allocation of consideration among transferred properties, are no different than fair market value. …

The Minister is bound by the agreed amount because it is something that the parties have elected. The Minister is not bound by the key facts because the facts are the facts. They exist independently from the election. So, if the Minister is not bound by the key facts stated in the election, why would the parties to the transaction be bound by them?

A corporation (“BPC”), which was mostly owned by a Canadian pension fund (“OMERS”), obtained the agreement of a predecessor of the taxpayer (“OPGI Amalco”) that, prior to BPC’s acquisition of OPGI Amalco, it or an OPGI Amalco subsidiary (“MRC Amalco”) would transfer various of its rental real estate properties (including the “Three Real Estate Properties”) on a s. 97(2) rollover basis to newly formed LPs (the “First Level LPs”). Following the acquisition on October 16, 2001 of OPGI Amalco by a subsidiary of BPC, the cost of the interests in the First Level LPs was bumped under s. 88(1)(d) on an amalgamation which formed the taxpayer. In 2004, the First Level LPs transferred the Three Real Estate Properties to respective newly-formed LPs (the “Second Level LPs”) on a s. 97(2) rollover basis and the First Level LPs were wound–up, thereby permitting the high ACB in their units to be pushed down onto the cost of the interests in the Second Level LPs under s. 98(3)(c). The taxpayer then sold its interests in the Second Level LPs, somewhat after the three-year period referenced in s. 69(11), to entities that were exempt from Part I tax.

In finding that the use of the s. 97(2) rollovers in these transactions was not abusive, D’Arcy J stated (at paras 187, 188,193 and 194):

…[I]t is not the purpose of subsection 97(2) to tax the partners, when they dispose of their partnership interest, on the potential recapture or capital gain relating to the property of the partnerships, including the Three Real Estate Properties. The Act treats the sale of the partnership interest as a sale of nondepreciable property. The partnership’s assets are taxed at the partnership level on the basis of their attributes at the time of the sale.

In short, it is not one of the purposes of subsection 97(2) to tax the subsequent sale of an interest in a partnership on the basis of the nature of the property held by the partnership.

…

Parliament…made the positive decision to limit the application of subsection 69(11) to transfers to tax-exempt entities that occur within the three-year period [in s. 69(11).] In my view, it is reasonable to conclude that Parliament was of the view that transfers after this three-year period did not abuse subsection 97(2).

For the foregoing reasons, I have concluded that the Oxford Transactions did not achieve an outcome subsection 97(2) was intended to prevent, did not defeat its underlying rationale and did not circumvent subsection 97(2) in a manner that frustrated or defeated its object, spirit or purpose.

The taxpayer transferred assets of a business to a partnership in what was intended to be an s. 97(2) rollover transactions in consideration for cash, promissory notes and assumption of debt ("boot") totalling an amount less than the cost amount of the transferred assets, and a Class "F" partnership interest stipulated to have a value equal to the balance of the purchase price. The partnership used cash (derived in part from a third party who had subscribed for ¾ of the equity in the partnership) to subscribe for preferred shares of a sister company of the taxpayer ("Holdings"), with Holdings in turn using the proceeds to subscribe for preferred shares of holding companies ("Holdcos") for the various indirect individual shareholders of the taxpayer. A "back-flow preventor" clause in the Partnership Agreement provided that in the event that the partnership received any payments in respect of preferred securities held by the partnership, the partnership would make distributions to the holders of Class F units equalling such payments received.

In finding that the $18.7 million payment made by the Partnership to Holdings ostensibly as consideration for preference shares of Holdings was not additional consideration to the taxpayer for the business assets transferred by it to the Partnership, Bonner J. noted (at p. 3012) that the Crown had admitted in its pleadings that the Class F units received by the taxpayer together with the boot was equal to the fair market value of the transferred assets. Accordingly there was "no room for even a penny of additional consideration when the legal form of the transaction governed".

The taxpayer borrowed money from a bank, contributed the borrowed money and a shopping centre to a partnership in consideration for the assumption of indebtedness and the issuance of debt and a partnership interest. The partnership then made a distribution of capital to the taxpayer in the form of cash and the issuance of a mortgage, with the taxpayer using the cash to pay off the bank loan.

In finding that s. 85(1)(b) should be applied to increase the consideration deemed to be received by the taxpayer to an amount above that initially elected, Bell TCJ. stated (at p. 1339):

"The withdrawal of approximately 2/3 of the capital account at the time of asset transfer followed 38 days later by the withdrawal of the balance is inconsistent with the concept of a true capital account. The form of the entire transaction does not conceal its substance."

The taxpayer contributed technology valued at U.S. $3 million to a newly-formed partnership between it and an arm's length Canadian corporation ("P-E Canada"), P-E Canada contributed U.S. $1.5 million to the partnership and five days later, the taxpayer was paid U.S. $1.5 million by the partnership pursuant to a clause in the partnership agreement entitling it to "an initial distribution by way of return of capital of $1,500,000 immediately after the making of the initial contributions". (The agreement provided for an equal sharing of all other distributions.)

The distribution to the taxpayer was found to be part of the consideration for the contribution of property made by it to the partnership. Although the taxpayer's counsel relied on a clause in the partnership agreement requiring each partner to contribute capital of U.S. $500,000 in each of the partnership's first three fiscal years, this continuing obligation was characterized as relating to the additional funding by each party of R&D expenditures rather than as a liability of the taxpayer to recontribute the amount it had withdrawn, allegedly on a temporary basis.