Principal Issues: [TaxInterpretations translation] Can a member of a particular partnership apply a portion of a forgiven amount determined under subparagraph 80(15)(c)(ii) against the ACB of capital property that was not used in the business carried on by the particular partnership?
Position: Yes.
Reasons: The forgiven amount calculated under subparagraph 80(15)(c)(ii) is subject to the rules in paragraph 80(9)(a), which apply to all capital property owned by the taxpayer immediately after the time the debt is settled.
June 21, 2005
QUEBEC TSO HEADQUARTERS
MR. Robin Tremblay Income Tax Rulings Directorate
Technical Advisor
Audit and Enforcement Division Guy Goulet, CA, M.Fisc.
(613) -957-97682005-012034
Request for interpretation - Section 80(15)
This is in response to your email of March 9, 2005 requesting our comments on the application of subsection 80(15) in the Particular Situation described below.
Unless otherwise indicated, all statutory references herein are to provisions of the Income Tax Act (the "Act").
Particular Situation:
The Particular Situation as you have presented it to us is as follows:
1. Mr. X held a limited partnership interest in a limited partnership (LP) at the end of a particular year. That interest was capital property to Mr. X with an adjusted cost base (ACB) of $25,000 at the end of the particular year. Mr. X was not related to the LP.
2. Mr. X also held the following capital properties at the end of the particular year:
a. A vacant lot with an ACB of $42,000;
b. Shares of the capital stock of a corporation (Opco) of which he was not a specified shareholder with an ACB of $20,500.
Those assets were not used in the operation of LP's business and had no connection with its business.
3. In its fiscal period that ended at the end of the particular year, LP realized a gain on the settlement of a commercial debt obligation (the LP Debt). The LP Debt was not a debt described in paragraph (k) of the definition of "forgiven amount" in subsection 80(1).
4. LP reduced the forgiven amount to the maximum extent permitted by subsections 80(5), (7), (8), (9) and (10). The remaining unapplied portion of the forgiven amount for the LP Debt was added back in computing LP's income for the particular year pursuant to subsection 80(13).
5. In computing his income for the particular year, Mr. X included, pursuant to section 96, an amount of $87,500 representing his share of the amount included in computing LP's income pursuant to subsection 80(13) in respect of the LP Debt.
6. Mr. X elected to deduct $87,500 pursuant to paragraph 80(15)(a) in respect of the LP Debt in computing his income for the particular year. That election had the following additional consequences:
a. Mr. X was deemed to have issued a commercial debt obligation (the X Debt) that was settled at the end of the LP's fiscal period;
b. The $87,500 deducted by Mr. X under paragraph 80(15)(a) in respect of the LP Debt was deemed to be the amount paid on the X Debt.
c. The X Debt was deemed to have been issued at the same time and in the same circumstances as the LP Debt.
d. The source in respect of which the X Debt was issued was deemed to be the source in respect of which the LP Debt was issued.
7. None of the reductions to the amount in respect of the X Debt under subsections 80(3), (4), (5), (7) and (8) could be taken by Mr. X for the particular year. Consequently, pursuant to subsection 80(9), Mr. X applied the forgiven amount in respect of the Debt X against the ACB of the capital property held by him immediately after the time of settlement of the Debt X in the prescribed form attached to his return of income for the particular year:
Capital property:
Amount applied to reduce the ACB:
Vacant land:
$42,000
Shares in the capital stock of Opco
$20,500
Interest in LP
$25,000
$87,500
Your Questions:
Your questions are as follows:
1. In the Particular Situation, is it acceptable for Mr. X to have applied a portion of the forgiven amount in respect of the X Debt against the ACB of capital property that was not used in the business carried on by LP and was not related to LP's business or affairs?
2. Would Mr. X have been able to apply a portion of the forgiven amount in respect of the X Debt against a non-capital loss for a taxation year ending before the particular year if he had such a loss and if that loss was in respect of a business that was not attributable to LP's activities or business?
3. Is subparagraph 80(15)(c)(v) intended to limit the application of the forgiven amount in respect of the X Debt only against tax items whose source of income is the same as the source in respect of which the LP Debt was issued?
Our Comments:
Subsection 80(15) allows a member of a partnership to deduct, in computing income for a particular taxation year, an amount not exceeding the relevant limit in respect of the partnership debt (the amount determined under paragraph 80(15)(b)), where in a fiscal period of a partnership ending in the member's particular taxation year, a commercial debt obligation issued by the partnership has been settled. Where a member claims that deduction, paragraph 80(15)(c) provides that for the purposes of sections 80 and 80.04, inter alia, the following presumptions will apply:
(i) The partner is deemed to have issued a commercial debt obligation that was settled at the end of that fiscal period;
(ii) The amount deducted by the partner under paragraph 80(15)(a) in respect of the partnership debt is considered to be the forgiven amount on the deemed debt;
We are of the view that the deemed forgiven amount under subsection 80(15) allows, inter alia, a member of a partnership to elect to reduce the member’s own tax items under subsections 80(3), (4), (5), (7), (8), (9), and (10) rather than include in computing the member’s income under section 96 the member’s share of the amount included in computing the partnership's income pursuant to subsection 80(13).
With respect to your first question, we are of the view that in the Particular Situation, Mr. X's application of the forgiven amount in respect of the X Debt against the ACB of the capital assets he held immediately after the time of settlement of the X Debt is consistent with the Act.
As for your second question, we are of the view that Mr. X could have applied the forgiven amount in respect of the X Debt against a non-capital loss for a taxation year ending before the particular year pursuant to subsection 80(3) if he had had such a loss, even if that loss had not been a loss from the business carried on by LP.
Finally, with respect to your last question, we are of the view that in the Particular Situation, subparagraph 80(15)(c)(v) does not prevent Mr. X from applying the forgiven amount in respect of the X Debt against the ACB of capital property under subsection 80(9). In fact, the purpose of subparagraph 80(15)(c)(v) is to deem the source in respect of which the X Debt was issued. Thus, if Mr. X had been required to add an amount in computing his income pursuant to subsection 80(13) in respect of the X Debt, that amount would have been added to his income for the year from the source in respect of which the LP Debt was issued.
We hope that these comments are of assistance.
Best regards,
Ghislain Martineau
for the Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Directorate General for Policy and Planning