Section 38.1 - Tax-deferred transaction — flow-through shares

///?p=13248">5 February 2013 T.I. 2012-0446211E5 is essentially the same): The taxpayer had acquired units in two flow-through share partnerships. Approximately two years after the offerings, the LPs would transfer their flow-through shares to a mutual fund corporation (MFC), presumably under s. 85(2), and the LPs would wind-up and distribute the flow-through shares to the taxpayer and other investors, presumably under s. 85(3). Alternatively, the LPs might simply wind-up (presumably under s. 98(3)) and distribute the flow-through shares to the former limited partners including the taxpayer.

In response to a query as to the consequences of a donation of the MFC shares or the flow-through shares, as the case may be, following such windings-up, CRA provided a general discussion, and stated that

It is a question of fact whether the special rules in section 38.1 of the Act apply in a particular situation.

CRA was asked to consider transactions in which a limited partnership holding flow-through shares transferred those shares to a mutual fund corporation in consideration for shares of the mutual fund corporation (presumably, under s. 85(2)), those shares (the "MFC shares") were distributed to the limited partners on the winding-up of the partnerships (presumably under s. 85(3)), and the MFC shares were donated by the former partners.

CRA noted that if s. 38.1(b) applies, the taxpayer is deemed to to have a new exemption theshold for the MFC shares, and then stated that "it is a question of fact whether the special rules in section 38.1...will apply in a particular situation."