Principal Issues: Whether a bump to the ACB of an interest in a partnership pursuant to paragraph 111(4) would result in an increase to the at-risk amount in respect of that partnership?
Position: The application of subsection 96(2.3) would reduce the ACB of the partnership interest to the amount of the ACB before the bump under paragraph 111(4)(e).
Reasons: It ensures that the at-risk amount of a partnership will not be increased as a result of the notional disposition and reacquisition of that partnership under paragraph 111(4)(e).
March 9, 2012
Toronto Centre TSO HEADQUARTERS Large File Case Manager Income Tax Rulings Directorate Attention: Bruce Eagle J. Gibbons (819) 458-3538 2011-042149
At-Risk Amount and Paragraph 111(4)(e)
This is in reply to your email dated September 15, 2011, concerning the interaction of paragraph 111(4)(e) of the Income Tax Act (the "Act") and subsection 96(2.2) of the Act. In particular, your question is whether a bump to the adjusted cost base (the "ACB") of an interest in a partnership pursuant to paragraph 111(4)(e) of the Act would result in an increase to the at-risk amount in respect of that partnership.
Generally, pursuant to paragraph 96(2.2)(a) of the Act, the starting point for the calculation of the at-risk amount in respect of a partnership is "the adjusted cost base to the taxpayer of the taxpayer's partnership interest at that time." However, this provision also provides that, where applicable, the ACB for this purpose is computed in accordance with subsection 96(2.3) of the Act. This latter provision provides that "where a taxpayer has acquired the taxpayer's partnership interest at any time from a transferor other than the partnership," the ACB is to be computed in accordance with that section. Accordingly, it is our view that this provision would apply in the case where a taxpayer elects under paragraph 111(4)(e) of the Act, since, under this latter provision, the partnership interest "is deemed to have been disposed of by the corporation... and shall be deemed to have been reacquired by it."
Pursuant to subsection 96(2.3) of the Act, the ACB of the interest in the partnership is the lesser of:
(a) the taxpayer's cost otherwise determined, and
(b) the greater of(i) the adjusted cost base of that interest to the transferor immediately before that time, and
(ii) nil,and where the adjusted cost base of the transferor cannot be determined, it shall be deemed to be equal to the total of the amounts determined in respect of the taxpayer under paragraphs (2.2)(c) and (d) immediately after that time.
The cost otherwise determined under paragraph 96(2.3)(a) in this case would be equal to the proceeds of disposition (the "POD") determined under paragraph 111(4)(e). Thus, assuming the corporation has elected the maximum possible bump under paragraph 111(4)(e), the POD would equal the fair market value of the partnership interest. Therefore, the lesser of paragraphs 96(2.3)(a) and (b) would be the amount of the ACB of the partnership interest before the change of control. In other words, the application of subsection 96(2.3) would reduce the ACB of the partnership interest to the amount of the ACB before the bump under paragraph 111(4)(e).
In our view, the above result seems reasonable since it ensures that the at-risk amount of a partnership will not be increased as a result of the notional disposition and reacquisition of that partnership under paragraph 111(4)(e). XXXXXXXXXX .
For your information a copy of this memorandum will be severed using the criteria in the Access to Information Act and placed in the CRA's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the Taxpayer. Should the Taxpayer request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Celine Charbonneau at (613) 957-2137. A copy will be sent to you for delivery to the client.
Yours truly,
G. Moore
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch