Section 100

Before turning to the 2012 amendments, they gave an overview of the anomalous character of the existing rule:

… First it does not actually require the partnership to have a latent income gain – a partnership which owns only depreciable property is subject to subsection 100(1) even if no capital cost allowance has been claimed. In this respect, it operates to convert "future" recapture into an increased taxable capital gain. Second, the application of subsection 100(1) is one-sided – it provides no depreciable step-up to the partnership in the hands of the purchaser. Third, although colloquially thought of as an anti-avoidance rule, it requires no anti-avoidance intention. The provision will apply even where the Tax Exempt covenants to own the income asset in perpetuity. Fourth, the application of subsection 100(1) does not give rise to income, but rather to an increased taxable capital gain (against which, for example, capital losses may be used). Fifth, the application of subsection 100(1) is based on the quantum of the capital gain inherent in the partnership interest. There is no necessary corollary between this amount and the underlying income gains; …

The Amendments … do nothing to address the inconsistent application of the provision noted above.

Turning to the series of transactions language in the amended version, they stated (at p. 2128):

… A taxpayer that disposes of a partnership interest to an entity other than a Prohibited Acquirer – a taxable Canadian corporation, for example – may be concerned that subsection 100(1) will ultimately apply to it if the corporation sells the interest to a Prohibited Acquirer within a relatively short time frame. Arguable, the corporation's independent decision to on-sell the partnership interest should negate any serious concern, but the brevity of any time gap is often difficult to overcome. The seller may, therefore, desire contractual protection in the form of covenants limiting the ability of the purchaser to sell the partnership interest to a Prohibited Acquirer for a certain period of time. Such covenants will certainly be commercially undesirable to potential purchasers of partnership interests.…

Purpose of s. 100(1.1)(d) (p.2)

…[P]aragraph 100(1.1)(d) does not include a trust merely because it has a non-resident beneficiary. While the Department of Finance Explanatory Notes do not explain the reason for this, one can only assume that it is because accrued income gains on the assets of a partnership cannot be avoided by a non-resident through the use of a trust due to Part XII.2 tax. [fn no 13: Blanchet J. "Transactions Involving Interests in Partnerships", draft paper presented to the Canadian Tax Foundation's 63rd Tax Conference, 2012, at footnote 16.]

Breadth of beneficiary concept/automatic tainting if 10% stacked interest (pp. 2-3)

While the addition of paragraph 100(1.1)(d) is meant to prevent vendors from disposing indirectly of their partnership interests to tax-exempt entities and therefore avoiding subsection 100(1), paragraph 100(1.1)(d) is drafted such that it will include any trust that has a tax-exempt entity as a beneficiary. For example, a family trust in which one of the discretionary beneficiaries is a charity would be included under paragraph 100(1.1)(d), even if the trustees have never allocated any income to that beneficiary and have no intention of allocating income to that beneficiary. As noted above with respect to paragraph 100(1.1)(c), in the case of stacked trusts it may not matter whether any tax-exempt person has an ultimate interest in one of the trusts for the trust to be included under paragraph 100(1.1)(d). If the purchaser is a trust with a partnership as a beneficiary, for example, and another trust holds 10% or more of the fair market value of all the interests in the beneficiary partnership, then the purchaser trust will be included under paragraph 100(1.1)(d) and subsection 100(1) will apply to the vending partner, regardless of whether the second trust has any tax-exempt beneficiaries.4

Reason for rule (p. 3)

Subsection 100(1.3) applies where the purchaser of the partnership interest is a non-resident and partnership property is used, both immediately before and after the acquisition of the partnership interest, in carrying on business in Canada through a permanent establishment and that property represents 90% or more of the fair market value of all the assets of the partnership. It appears that this exemption was included because under Article XIII of Canada's income tax treaties, non-residents are taxed in the same manner as Canadian residents on income earned from the disposition of such assets…

Direct acquisition limitation (p.3)

[T]he exception in subsection 100(1.3) is limited to direct acquisitions by non-residents. This means that if the purchaser is a partnership with a non-resident partner, this exception will not be available regardless of whether the asset conditions in paragraphs 100(1.3)(a) and (b) are met. The reason for this discrepancy is unknown; it would have been easy to expand the exception to "a person referred to in paragraph (1.1)(b) or subparagraph (1.1)(c)(ii)".

First, the ACB of the partnership interest does not appear to be relevant in the determination of the deemed gain; accordingly, a dilution could result in a significant capital gain subject to subsection 100(1) in circumstances where an actual disposition of the partnership interest would not have resulted in a material gain. Whether or not the actual ACB of the partnership interest is preserved (creating a latent loss) may depend on the nature of the transaction that caused the dilution. Second, determining the quantum of the deemed dilution gain may require some interesting math, and the amount of such gain might not be an appropriate result. [fn. 10: Assume for example that a taxable Canadian corporation and a Tax Exempt are 50/50 partners in a partnership that is worth $1,000. The partnership borrows $100 to return capital to the corporation. The corporation might be deemed to have a $100 capital gain under subsection 100(1.5). However, consider the following alternative transaction. Each of the partners receives a $50 return of capital (no interests in the partnership are redeemed or reduced legally), following which the Tax Exempt would purchase a portion of the corporation's partnership interest for $50. This would only result in a $50 transaction that is subject to subsection 100(1), and would ostensibly result in the same ultimate ownership structure. What this suggests is that the initial dilution transaction partially diluted the corporation's remaining 44.4% interest in the partnership (i.e., it sold to itself), and it should not be taxed on the extra reduction in value.]