Principal Issues:
What is the impact of a restricted farm loss on the ACB of a limited partnership interest?
Position:
The ACB of a taxpayer's partnership interest is reduced by an amount equal to the taxpayer's share of the farm loss, without regard to section 31 of the Act. Where the ACB of the partnership interest is negative, a capital gain will be deemed to arise.
Reasons:
Application of the Act. The provisions of section 53(2)(c)(i)(B) and subsection 40(3.1) of the Act are clear and unambiguous.
XXXXXXXXXX 2008-029698 I. Landry, M. Fisc. January 13, 2009
Dear Mr. XXXXXXXXXX,
Subject: Impact of a Restricted Farm Loss on the Adjusted Cost Base of an Interest in a Limited Partnership
This is in response to your letter of May 23, 2008 in which you requested our opinion regarding the impact of a restricted farm loss on the adjusted cost base ("ACB") of a limited partnership interest.
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
In your request for an interpretation, you described a situation where a taxpayer invested $30,000 in a farming limited partnership. This farming limited partnership realized a farm loss in its first two taxation years. The portion of the losses allocated to the taxpayer was $25,000 in the first year and $75,000 in the second year.
Since the taxpayer's chief source of income is not farming, the farm losses constituted restricted farm losses. The taxpayer deducted the maximum of $8,750 allowed by the Act and the balance of the unused losses was carried forward.
Comments
The situation you have described in your letter appears to be related to an actual situation concerning specific taxpayers. As explained in Information Circular 70-6R5, it is not the Directorate’s practice to comment on proposed transactions involving specific taxpayers otherwise than in the form of an advance income tax ruling. If your situation involves a specific taxpayer and a completed transaction, you should forward all relevant facts and documents to the appropriate Tax Services Office for its views. We are, however, prepared to provide the following general comments, which we hope you will find helpful.
The ACB of an interest in a partnership is normally computed at the time of its disposition, based on the ACB adjustments set out in paragraphs 53(1)(e), 53(2)(c) and (o).
However, there is an exception to this rule in subsection 40(3.1), even if there is no disposition of the interest. Generally, under this subsection, where the ACB of an interest held by a limited partner is negative at the end of the partnership's fiscal period, the partner is deemed to have realized a capital gain. By virtue of subparagraph 53(1)(e)(vi), this capital gain will be added in computing the ACB in order to reduce it to zero.
The taxpayer will therefore be required to adjust the ACB of the taxpayer’s interest at the end of each fiscal period of the partnership based on the losses realized. In addition, the taxpayer will be required to include in the taxpayer’s income for the taxation year that includes the time the partnership's fiscal period ends, a capital gain equal to the taxpayer’s negative ACB.
The amount of gain to be included is calculated under subsection 40(3.11). This gain amount includes, inter alia, amounts to be deducted in calculating the ACB of the member's partnership interest by virtue of subsection 53(2).
Under clause 53(2)(c)(i)(B), the ACB of an interest in a partnership must be reduced by, inter alia, farm losses without regard to section 31.
In the above situation, it is our view that the ACB of the taxpayer's partnership interest should be reduced by the full amount of the taxpayer's share of the farm loss, regardless of the fact that the taxpayer deducted only a portion of that loss. The ACB of the taxpayer's interest would therefore be reduced by $75,000 even though the taxpayer has an unused restricted farm loss of $57,500.
The Act does not allow the unused restricted farm loss to be deducted against the deemed capital gain pursuant to subsection 40(3.1).
Consequently, assuming that there are no other items adjusting the ACB of the taxpayer's interest, the taxpayer would have a deemed capital gain of $70,000 in the taxation year that includes the time at which the second fiscal period of the partnership ends, equal to the taxpayer’s negative ACB at the end of the partnership's fiscal period.
The taxpayer would therefore have a restricted farm loss of $57,500 that can be applied later only against income from other farming businesses. If this restricted farm loss is not used within the time limits provided for in paragraph 111(1)(c), the unused balance will be lost.
Best regards,
Louise J. Roy, CGA
Manager
for the Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch.