Section 53

X Inc. and Y Inc. each hold "tracking units" in a limited 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's.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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.

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).

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)".

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.

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.

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.

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.

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".

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.

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 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.

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.