Would the allocation of foreign tax by a partnership to a partner be regarded as a withdrawal by the particular partner that reduced the ACB of its partnership interest? CRA stated:
If the partnership pays the foreign tax on behalf of the partner or the foreign tax is withheld on behalf of the partner in accordance with foreign law from the foreign income paid to the partnership, such amount would be considered [for purposes of s. 53(2)(c)(v)] to be received by the partner on account or in lieu of payment of, or in satisfaction of, a distribution of the partner’s share of the partnership profits or partnership capital. Consequently, subparagraph 53(2)(c)(v) of the Act would reduce the ACB of the partner’s interest in the partnership for the amount of any non-business income tax paid by the partnership on behalf of the partner. …
CRA went on to note:
The reduction in ACB for foreign taxes paid on behalf of a partner may occur prior to the addition to the ACB for the allocation of foreign income to the partner which is made on the first day of the following fiscal period. Where the deductions under subsection 53(2) of the Act exceed the additions under subsection 53(1) of the Act, any negative ACB will be taxed as capital gain for a limited partner or specified member under paragraph 40(3.1)(a) of the Act, subject to the rules in subsections 40(3.11) to (3.2).