| March 6, 1991 | |
| Special Audits Division | Rulings Directorate |
| Tax Avoidance Section | G. Arsenault |
| E.H. Gauthier | 957-2126 |
| Director | |
| 902789 |
Subject: Partnerships
This is in reply to your Memorandum dated October 3, 1990 concerning capital cost allowance claims by partnerships in respect of assets used in a business conducted outside of Canada.
It is our opinion that where a Canadian resident becomes a partner in a partnership carrying on business outside of Canada that has never before had a partner who was a resident of Canada, for purposes of determining the Canadian resident partner's share of the income or loss of the partnership for purposes of the Act, the capital cost of the partnership's assets will generally be considered to be the historical cost to the partnership expressed in Canadian dollars utilizing the exchange rate as at the date the partnership acquired the assets.
You have advised that you are reviewing several cases where Canadian residents have become partners in foreign partnerships that own and operate
24(1)
1. artificial capital cost allowance claims and terminal losses may arise in these situations,
2. section 245 will have application if the partnership interest is acquired primarily for the capital cost allowance deduction.
Old 245(1)
Based on the telephone discussion between G. Arsenault and Bob Clark, we understand that your first question was meant to refer to subsection 245(1) as it read prior to the 1988 amendment that introduced the general anti-avoidance rule. Prior to the 1988 amendments, subsection 245(1) ("Old 245(1)") read as follows:
"245(1) Artificial transactions. - In computing income for the purposes of this Act, no deduction may be made in respect of a disbursement or expense made or incurred in respect of a transaction or operation that, if allowed, would unduly or artificially reduce the income."
We note that capital cost allowance and terminal losses are determined at the level of the partnership that owns the property in question and are not deductions of the partners. To the extent such deductions create losses at the partnership level, such losses are of course allocated to the partners and taken into account in the computation of their income.
There is some uncertainty as to whether Old 245(1) applied to capital cost allowance. In McKee v. M.N.R. 77 DTC 5345 (F.C.T.D.), the Federal Court Trial Division held that capital cost allowance was not a "disbursement or expense" within the meaning of that phrase as employed in Old 245(1) and that consequently Old 245(1) did not apply to capital cost allowance. However, in Harris v. M.N.R. 66 DTC 5189 (S.C.C.), the Supreme Court of Canada expressed the non-binding opinion that Old 245(1) could apply to capital cost allowance and this opinion was cited with approval by the Federal Court of Appeal in Her Majesty the Queen v. Alberta and Southern Gas Co. Ltd. 77 DTC 5244 (F.C.A.). We consider the better view to be that Old 245(1) could apply to capital cost allowance and terminal losses.
Whether Old 245(1) would apply to any particular situation is essentially a question of fact. While we cannot comment definitively as to whether Old 245(1) would apply to the situations under consideration by you without a more complete understanding of all of the relevant facts, we consider that it will generally not be possible to apply Old 245(1) to deny capital cost allowance claims and terminal losses of a partnership that are based on the actual, bona fide (albeit historical) cost of the depreciable property to the partnership.
In our opinion, Old 245(1) cannot be applied to prevent a taxpayer from taking his share of the losses of a partnership in which he is a member into account in calculating his income. Taking such losses into account in determining a taxpayer's income as provided by paragraph 3(d) does not constitute the making of a deduction in respect of a disbursement or expense.
GAAR
If it can be established that a person became a partner primarily to claim losses created by capital cost allowance of the partnership, it would appear that the act of becoming a partner in the partnership was an "avoidance transaction" within the meaning of subsection 245(3). However, it is essentially a question of fact whether this was the primary purpose. A determination of whether the primary purpose was to obtain the tax benefit must be made having regard to all the facts.
21(1)(b)
21(1)(b)
It is not readily apparent that any of the provisions of the Act relating to CCA are being misused or abused. IT-205 suggests that the CCA claims in these cases are in accordance with the provisions of the Act. There is no provision of the Act which requires the UCC of an asset of a partnership to be revalued to fair market value other than subsection 13(7) which does not apply in the circumstances under consideration. Indeed, subsection 85(5.1) actually operates in the opposite way to provide that a fair market valuation that would otherwise be required on the transfer of a depreciable property to a partnership under subsection 97(2) must be readjusted upwards to the transferor's UCC in certain circumstances.
General Comments
We confirm your advices that you are considering the application of the object and spirit rule enunciated by the Supreme Court of Canada in Stubart and the partnership at-risk rules.
We note that in some cases it may be possible to establish that the partnership is a sham disguising what is really a purchase of the assets by the Canadian resident such that the partnership can be disregarded as a sham under the common law without resort to section 245.
We also note that the outcome of the appeal to the Federal Court of Appeal of the decision in Signum Communications Inc. v. Her Majesty The Queen, 88 DTC 6427 (F.C.T.D.) may have some bearing on the cases under consideration by you.
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