Background
Partnership1 (an LP) owes Debt1 to Taxpayer, which is a wholly-owned subsidiary of the limited partner (Holdings) of Partnership1.
Proposed transactions
Taxpayer will assume Debt1 which will be treated by Partnership1 as a contribution of capital equal to the principal amount of Debt1. As a result, Debt1 will be extinguished by way of legal confusion.
Holdings will dispose of its partnership interest in Partnership1 to Taxpayer and, as consideration therefor, Taxpayer will issue additional common shares and an interest bearing promissory note (“Note1”) to Holdings, with a joint s. 85(1) election being made. As a result, Partnership1 will cease to exist as a matter of law and Taxpayer will become the sole owner of all of the property of Partnership1.
Rulings
For the purposes of determining the ACB of the Taxpayer’s interest in Partnership1 for s. 98(5) purposes, the amount of Debt1 assumed by the Taxpayer before the partnership dissolution will be added to the ACB of the Taxpayer’s interest in Partnership1 under s. 53(1)(e)(iv).
The settlement of Debt1 will not give rise to a “forgiven amount” per s. 80(1) or 80.01(1).