ACo and BCo is each a private corporation holding a 49.99% limited partnership interest in Holdings LP and having a calendar year end. On December 31 of a particular year, Holdings LP had a “negative” adjusted cost base of its interest in Realty LP of $300,000. The correspondent, after noting that (a)(i)(A) of the capital dividend account definition excludes a capital gain under paragraph 40(3.1)(a), suggested that ACo’s share of the “negative” ACB gain realized by Holdings LP could be included in ACo’s CDA, as this gain would not come from the disposition of ACo's interest in Holdings LP (and there was no deemed disposition of such interest) but, rather, from an allocation of income.
In finding that there would be no addition to ACo’s CDA, CRA stated:
[U]nder paragraph 96(1)(f), the amount of the income of the partnership for a taxation year from any source is the partner's income from that source to the extent of its share thereof. This income will generally retain its nature and characteristics. We are therefore of the view that a deemed capital gain under subsection 40(3.1) that is allocated by a partnership to one of its corporate partners would be subject to the exclusion stated in clause (a)(i)(A) of the definition of capital dividend account under subsection 89(1).