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V.A. Sider (613)995-1178
September 1, 1982
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We are writing in reply to your letter of July 30, 1982 wherein you requested our comments on the application of paragraph 87(2)(e), subsection 100(2) and subparagraph 54(a)(iv) of the Income Tax Act with respect to the following example:
Corporation A owns 100% of the shares of Corporation B and Corporation C. Corporation C owns 100% of the shares of Corporation D. Corporations C and D are in partnership with three other arm's length corporations. Corporations C and D together own 50% of this partner- ship. C's adjusted cost base of the partnership interest is in a negative position. Corporations A, B and C wish to amalgamate to form ABC Limited. The partnership agreement provides for the continuation of the partnership in such a situation.
It is our view that the application of paragraph 87(2)(e) will result in the flow through of the negative adjusted cost base of Corporation C's partnership interest to ABC Limited. The calculation of adjusted cost base is made immediately before the amalgamation and at that time no disposition has occurred. Therefore the adjusted cost base can be a negative amount at that time.
It is also our view that immediately prior to the amalgamation subsection 100(2) and subparagraph 54(a)(iv) will not result in the negative adjusted cost base being brought into C's income as no disposition has occurred at that time.
We trust the above comments will be of assistance to you.
Yours truly,
for Director General Corporate Rulings Directorate Legislation Branch