Principal Issues: Should the paragraph references to subsection 85(1) as contained in paragraph 97(2)(a) include a reference to paragraph 85(1)(f)?
Position: Yes.
Reasons: Paragraph 85(1)(f) refers to the consideration received other than shares of a transferee corporation or interest in a transferee partnership.
Bob Naufal, CMA
XXXXXXXXXX (613) 952-1506
2004-010429
April 6, 2005
Dear XXXXXXXXXX:
Re: Paragraph 85(1)(f) and subparagraph 97(2)(b)(ii) of the Income Tax Act (Canada) (the "Act")
We are writing in response to your letter of November 16, 2004 whereby you asked for an interpretation on the interaction of paragraph 85(1)(f) and subparagraph 97(2)(b)(ii) of the Act, involving a hypothetical situation where a partner transfers land to a partnership pursuant to these rollover provisions. In the situation described in your letter, the land was transferred to the partnership for agreed proceeds equal to $9,000 (the "elected amount") in exchange for a promissory note (the "Note") of an equivalent amount. It was subsequently determined that the fair market value ("FMV") of the land at the time of disposition was $8,000. The agreement did not contain a price adjustment clause.
It is your view that the interaction of paragraphs 85(1)(a) to (f), as contained in paragraph 97(2)(a), and paragraph 97(2)(b) of the Act appear to result in two reductions to the adjusted cost base (the "ACB"), once with respect to the Note and once again with respect to the transferor's partnership interest. Accordingly, you submit that the reference to the relevant paragraphs of subsection 85(1) of the Act should not include a reference to paragraph 85(1)(f) of the Act.
Our Comments
Transfer of property to partnership
In general, a partner or a person about to become a partner may transfer certain property to a Canadian partnership at a price other than FMV provided that the particular partner and all of the other members of the partnership so elect. In this regard, paragraph 97(2)(a) of the Act provides that paragraphs 85(1)(a) to (f) would apply, with appropriate modifications, to such a transfer. In the situation described above, since the transferor elected an amount in excess of the FMV of the property transferred to the partnership, paragraph 85(1)(c) of the Act deems the elected amount to be $8,000, notwithstanding that this amount is less than the consideration (other than a partnership interest) received on the transfer. Paragraph 85(1)(b) of the Act, which would normally apply to limit the elected amount to the value of the consideration (other than a partnership interest) received on the transfer, is subject to paragraph 85(1)(c) of the Act.
With respect to the ACB of the consideration (other than a partnership interest) received, the elected amount is allocated first to any such property. In the scenario presented above, since only one property (the Note) was received as consideration, paragraph 85(1)(f) of the Act provides that the cost to the transferor of the note received as consideration is deemed to be the lesser of: (i) the FMV of the note, and (ii) the FMV of the property disposed of to the partnership. Accordingly, the cost to the transferor of the Note would be $8,000.
Partnership interest
The computation of the ACB of the transferor's partnership interest at any time after the disposition of a particular property is adjusted for differences between the FMV of property transferred to a partnership (or the elected amount), and the value of consideration (other than a partnership interest) received. In this regard, subparagraph 97(2)(b)(i) of the Act provides that, at any time after the disposition of a particular property, where the proceeds of disposition as determined under paragraph 97(2)(a) of the Act exceed the FMV of the consideration received by the partner (other than an interest in the partnership), the excess is added to the ACB of the transferor's partnership interest. Conversely, subparagraph 97(2)(b)(ii) of the Act provides that, at any time after the disposition of a particular property, where the FMV of the consideration received exceeds the FMV of the property transferred, the excess is deducted in computing the ACB of the transferor's partnership interest.
In our view, subparagraph 97(2)(b)(ii) of the Act properly applies to situations, as described in your letter, where a person transfers property to a partnership, and receives consideration in excess of the FMV of said property. If a similar transaction was undertaken with a corporation instead of a partnership, the individual would likely be subject to tax on the excess value pursuant to subsection 15(1) of the Act.
Accordingly, in the scenario described in your letter, since the taxpayer transferred a property to the partnership and received, as consideration, an amount (the Note) in excess of the FMV of the property, such excess reduces the ACB of the partner's interest in the partnership immediately after the disposition of the property.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA. Our practice is to make this disclaimer in all instances in which we provide an opinion.
We trust our comments will be of some assistance.
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate