Principal Issues: Under the presented scenario, whether a deemed gain under subsection 40(3.1) realized by a partnership can be included in the CDA of its corporate limited partner.
Position: No.
Reasons: Our position is that generally the partnership's income retains its characteristics as to source and nature when allocated to the partners.
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2016-067836 |
June 21, 2017
Dear Sir,
Subject: Capital dividend account
This is in response to your letter of November 25, 2016, in which you requested our views with respect to the definition of "capital dividend account" in subsection 89(1) of the Income Tax Act (the "Act") in respect of a particular hypothetical situation.
Unless otherwise stated, all references to a statutory section or included provision in this letter are to a section of the Act or one of its provisions.
This technical interpretation provides general comments about the provisions of the Act. It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
Hypothetical Situation
1. Holdings Limited Partnership ("Holdings LP") is a 99.98% limited partner in Realty Limited Partnership ("Realty LP ").
2. A Corporation ("ACo"), a private corporation within the meaning of subsection 89(1), was a 49.99% limited partner in Holdings LP.
3. B Corporation ("BCo"), a private corporation within the meaning of subsection 89(1), was a 49.99% limited partner in Holdings LP.
4. C Corporation ("CCo"), a private corporation within the meaning of subsection 89(1), had a 0.02% interest in Holdings LP and Realty LP.
5. The year-end for each of the limited partnerships and corporations was December 31.
6. On December 31 of a particular year, Holdings LP had a “negative” adjusted cost base of its interest in Realty LP of $300,000.
Your analysis
You indicated that, pursuant to paragraph 40(3.1)(a), Holdings LP was deemed to realize a capital gain equal to the "negative" adjusted cost base of its interest in the LP of $300,000. In addition, this gain was deemed to arise from the disposition of Holdings LP's interest in Realty LP at the end of the particular year.
Holdings LP allocated the capital gain for the particular year to its limited partners and its general partner in the following proportions: ACo (limited partner) and BCo (limited partner) were each allocated $149,970; while Cco (general partner) was allocated an amount of $60.
You indicated that, under the definition of "capital dividend account" in subsection 89(1), one-half of a capital gain realized by ACo generally should be added to its capital dividend account, being $74,985 (i.e., the excess of the capital gain realized by the corporation as per clause (a)(i)(A) over the related taxable capital gain as per clause (a)(i)(B)). However, the definition provides that for a capital gain realized after October 31, 2011, the inclusion in clause (a)(i)(A) excludes a capital gain under paragraph 40(3.1)(a).
You indicated, however, that in the current hypothetical situation, it is the partner of Realty LP, namely, Holdings LP, that will realize the capital gain under paragraph 40(3.1)(a). Holdings LP will then allocate this capital gain to its limited partners and its general partner.
You are of the view that this capital gain of $149,970 could be included in the capital dividend account of ACo, as it would not come from the disposition of ACo's interest in Holdings LP but, rather, from an allocation of income. You indicated that ACo is not deemed to have disposed of its interest in Holdings LP.
Your question
You asked whether the capital gain of $149,970 allocated by Holdings LP to ACo can be included under clause (a)(i)(A) of the capital dividend account definition under subsection 89(1) when calculating this account for ACo.
Our comments
In general, the Canada Revenue Agency's position is to consider that a partner which is a private corporation may include, pursuant to clauses (a)(i)(A) and (a)(i)(B) of the definition of a capital dividend account under subsection 89(1), its respective share of capital gains and related taxable capital gains realized by a partnership.
Furthermore, under 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).
Consequently, in your hypothetical situation, no amount could be included in ACo's capital dividend account.
Best regards,
Urszula Chalupa, LL.B, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch