What is the interaction of ss. 80(9) and (15) where a bottom partnership (the “BP”) in a tiered partnership structure has a forgiven amount in the same year that the BP is wound up? CRA responded:
…BP would have a fiscal period that was deemed to end immediately before the time that is immediately before the time that the BP ceases to exist (the “deemed fiscal period”). Thus, the BP’s income inclusion under subsection 80(13) would be included in the deemed fiscal period, and, as a partner of the BP, the top partnership (the “TP”) could deduct an amount in respect of the relevant limit which would then be deemed to be a commercial debt obligation that was issued by the TP and settled at the end of the BP’s deemed fiscal period. The TP could then apply this forgiven amount against its own tax attributes under subsections 80(5) to 80(10), as applicable.
With regard to subsection 80(9), the forgiven amount may only be applied against the ACB of the TP’s interest in the BP if the BP is not related to the TP. If the BP is not related to the TP, the forgiven amount could be applied to the ACB of the TP’s interest in the BP determined immediately after the BP’s deemed fiscal period, which would include the TP’s share of any income inclusion for that deemed fiscal period, including any income included under subsection 80(13).
The balance of any forgiven amount…would be included in the TP’s income under subsection 80(13) and allocated to its members. [S]ince the TP would be deemed by subparagraph 80(15)(c)(i) to have issued a commercial debt obligation that was settled at the end of the BP’s deemed fiscal period, subsection 80(15) would apply to the partners of the TP. Thus, such partners may be entitled under subparagraph 80(15)(a) to deduct an amount in respect of the relevant limit which could then be treated as a forgiven amount and applied against the partners’ own tax attributes.