Principal Issues: Whether the ACB of shares of the corporation distributed on the winding-up of the partnership can be greater than zero considering that the corporation is holding flow-through shares deemed to have an ACB of nil.
Position: Yes.
Reasons: Under 85(3)(f), the ACB of the partner's interest in the partnership could be, depending of the facts, greater than zero.
XXXXXXXXXX 2018-075157
M. Séguin
September 17, 2018
Dear Madam,
Subject: Winding-up of a limited partnership
This is in response to your letter of March 30, 2018 in which you asked us for our opinion regarding Technical Interpretation No. 13-019724-001 dated July 14, 2014 (the "Interpretation") issued by Revenu Québec.
Unless otherwise indicated, any statutory reference constitutes a reference to a provision of the Income Tax Act (the “Act").
This technical interpretation provides general comments on the provisions of the Act. It does not confirm the income tax treatment of a particular situation but is intended to assist you in making that determination. Our Directorate only confirms the tax treatment of particular transactions in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R7, Advance Income Tax Rulings and Technical Interpretations.
1) Particular Situation
The facts of the Interpretation can be summarized as follows:
- A taxpayer ("Taxpayer") subscribed for limited partnership units in a limited partnership ("LP").
- LP used the funds raised to subscribe for flow-through shares in the capital stock of a natural resource corporation in Canada. The corporation incurred Canadian exploration expenses and renounced those expenses to LP.
- LP allocated to each limited partner the partner’s share of the Canadian exploration expenses so as to benefit from the deduction provided by the Act.
- Approximately two years after the Taxpayer's subscription for LP Units, the LP transferred, by virtue of a tax rollover under subsection 85(2), its property, i.e., the flow-through shares, to a variable capital investment company ("SIVAC").
- In consideration for this rollover, LP received common shares in the capital stock of SIVAC. LP was then wound-up by virtue of subsection 85(3) within 60 days and the shares of the capital stock of SIVAC held by LP were distributed to the limited partners, including the Taxpayer.
2) Question
In the Interpretation, the question asked was what was the ACB was of the common shares of the capital stock of SIVAC held by the Taxpayer after the described transactions. You asked the CRA to confirm whether it agrees with Revenu Québec's interpretation of a similar situation. You are ultimately asking the CRA to confirm that the ACB of the SIVAC shares distributed to the limited partners could be other than nil and that subsection 66.3(3) would not apply to deem a nil cost to the shares of the capital stock of SIVAC in the hands of the Taxpayer.
3) Our Comments
By virtue of subsection 66(16), for the purposes of subsection 66.3(3), the LP is deemed to be a person. Although the ACB of the flow-through shares held by LP is deemed to be nil under subsection 66.3(3), the ACB related to the Taxpayer's ownership interest in LP could be other than nil.
Consequently, in the context of this particular situation, the cost incurred by the Taxpayer for shares of the capital stock of SIVAC received by the Taxpayer in consideration for the disposition of its interest in LP on the winding-up is deemed, by virtue of paragraph 85(3)(f), to be equal to the ACB of the Taxpayer’s interest in the LP immediately before the winding-up of LP.
The computation of the Taxpayer's ACB for the Taxpayer’s interest in LP, which would be a capital property, should be in as set out in paragraphs 53(1)(e) and 53(2)(c) (taking into consideration, among other things, subsection 66.8(1) et seq.) and could, depending on the circumstances, be other than nil.
In conclusion, our comments are limited to the above and it should be noted that all the tax consequences relating to a particular situation, including the potential application of the general anti-avoidance rule, can only be determined in light of a comprehensive analysis of all the facts and circumstances pertaining to a particular situation.
Best regards,
Urszula Chalupa, LL.B, M. Fisc.
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch