2015-0617101R3 99(1) and timing of ACB adjustment

Principal Issues: Will subsection 99(1) apply so that, pursuant to subparagraph 53(1)(e)(i) or 53(2)(c)(i), the partner’s share of the partnership’s income or loss for its final fiscal period will be included in the determination of the ACB of the partnership interest immediately prior to its disposition?

Position: Yes.

Reasons: Wording of the provisions.

Author: XXXXXXXXXX
Section: 85(1), 98(5), 99(1), 96(1), 96(1.01), 53(1)(e)(i), 53(2)(c)(i)

XXXXXXXXXX                                                                                                      2015-061710

XXXXXXXXXX, 2016

Dear XXXXXXXXXX:

Re:   XXXXXXXXXX (collectively the "Taxpayers")
         Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-named parties.  We also acknowledge the information provided during our telephone conversations and correspondence concerning your request.

We understand that, to the best of your knowledge and that of the Taxpayers, none of the proposed transactions and/or issues involved in the ruling request are the same as or substantially similar to transactions and/or issues that are:

(i) in a previously filed tax return of the Taxpayers or a related person;

(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Taxpayers or a related person;

(iii) under objection by the Taxpayers or a related person;

(iv) the subject of a current or completed court process involving the Taxpayers or a related person; or

(v) the subject of a ruling previously considered by the Income Tax Rulings Directorate.

This document is based solely on the facts and transactions described below. Any information or documentation submitted in the course of processing your request does not form part of the facts and transactions and any references thereto are provided solely for the convenience of the reader.

DEFINITIONS

Unless otherwise expressly stated, every reference herein to the “Act” or to a part, subdivision, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C., 1985, c.1 (5th Supp.), as amended from time to time and consolidated to the date of this letter, and the Income Tax Regulations thereunder are referred to as the "Regulations".

All monetary amounts are expressed in Canadian dollars unless otherwise indicated.

In this letter, the following terms or expressions have the meaning specified and, where the circumstances so require, words reporting the singular include the plural and vice versa:

“ACB” means “adjusted cost base” and has the meaning assigned by section 54;

“Aco” refers to XXXXXXXXXX, an investment held by Partnership;

XXXXXXXXXX

“arm's length” has the meaning assigned by subsection 251(1);

“at-risk amount” has the meaning assigned by subsection 96(2.2);

“Canadian partnership” has the meaning assigned by subsection 102(1);

“capital property” has the meaning assigned by section 54;

“CRA” means the Canada Revenue Agency;

“FMV” means fair market value;

“GPco” refers to XXXXXXXXXX which is the general partner of the Partnership;

“GPco Partnership Interest” means the XXXXXXXXXX Class “A” Partnership Unit owned by GPco as described in paragraph 9;

“LPco” refers to XXXXXXXXXX which is the limited partner of the Partnership;

“LPco Partnership Interest” means the XXXXXXXXXX Class “B” and XXXXXXXXXX Class “C” Partnership Units owned by LPco as described in paragraph 8;

“paid-up capital” or “PUC” has the meaning assigned by subsection 89(1);

“Parentco” refers to XXXXXXXXXX, a company resident in XXXXXXXXXX;

“Partner” refers to a partner of the Partnership, being GPco and LPco;

“Partnership” refers to XXXXXXXXXX which is a limited partnership, as described in paragraph 5;

“Partnership Agreement” means the amended and restated limited partnership agreement of the Partnership entered into XXXXXXXXXX;

“Partnership Units” refers to units in the Partnership;

“Proposed Transactions” means the transactions described in paragraphs 16 to 18;

“related persons” has the meaning assigned by section 251;

“taxable Canadian corporation” has the meaning assigned by subsection 89(1); and

“UCC” refers to “undepreciated capital cost” and has the meaning assigned by subsection 13(21).

Our understanding of the facts, transactions and the purpose of the Proposed Transactions is as follows:

FACTS

1. LPco is a corporation incorporated under XXXXXXXXXX on XXXXXXXXXX and continued under XXXXXXXXXX on XXXXXXXXXX.  LPco is a wholly-owned subsidiary of Parentco.  LPco is resident in Canada and is a taxable Canadian corporation.

2. LPco’s address is XXXXXXXXXX and its business number is XXXXXXXXXX.  Its income tax return is filed with the XXXXXXXXXX Tax Centre and it is part of the XXXXXXXXXX Tax Services Office territory.  LPco’s taxation year ends on XXXXXXXXXX.

3. GPco is a corporation established under the Canada Business Corporation Act on XXXXXXXXXX. It is a wholly-owned subsidiary of LPco and acts as the general partner of Partnership.  GPco is resident in Canada and is a taxable Canadian corporation.

4. GPco’s address is XXXXXXXXXX and its business number is XXXXXXXXXX.  Its income tax return is filed with the XXXXXXXXXX Tax Centre and it is part of the XXXXXXXXXX Tax Services Office territory.  GPco’s taxation year ends on XXXXXXXXXX.

5. Partnership was formed on XXXXXXXXXX under the XXXXXXXXXX Limited Partnerships Act. Its head office address is XXXXXXXXXX.  Its taxation year ends on XXXXXXXXXX and its business number is XXXXXXXXXX. Its partnership information return is filed with the XXXXXXXXXX Tax Centre and it is part of the XXXXXXXXXX Tax Services Office territory.

6. In XXXXXXXXXX, LPco acquired all the shares of GPco and all the Class “B” and “C” Partnership Units in an arm’s length transaction.

7. Partnership is a Canadian partnership and has one limited partner, LPco, and one general partner, GPco.

8. LPco holds XXXXXXXXXX% (XXXXXXXXXX Class “B” units and XXXXXXXXXX Class “C” units) of the Partnership Units. The Partnership Units held by LPco are capital property to LPco.

9. GPco holds XXXXXXXXXX% (XXXXXXXXXX Class “A” unit) of the Partnership Units. The Partnership Units held by GPco are capital property to GPco.

10. Under the Partnership Agreement, the income or loss of the Partnership is allocated to each partner in accordance with their respective proportionate share of Partnership Units.

11. Partnership operates in the XXXXXXXXXX business mainly in XXXXXXXXXX but also has permanent establishments in XXXXXXXXXX.

12. XXXXXXXXXX

13. XXXXXXXXXX

14. Partnership owns depreciable property used in operating its business which has been included in the appropriate prescribed capital cost allowance (CCA) class.

15. Partnership has a XXXXXXXXXX% investment in Aco, a taxable Canadian corporation, which operates in XXXXXXXXXX.  The shares of Aco owned by Partnership are capital property to Partnership.  The ACB of its shares in Aco is $XXXXXXXXXX and the FMV is in excess of its ACB.

PROPOSED TRANSACTIONS

16. LPco will transfer the LPco Partnership Interest to GPco in exchange for XXXXXXXXXX common shares of GPco.  The parties will jointly elect under subsection 85(1), in prescribed form and manner and within the time referred to in subsection 85(6), in respect of the disposition of the LPco Partnership Interest. The parties will jointly elect an agreed amount equal to the lesser of the FMV of the LPco Partnership Interest at the time of the disposition and the ACB to LPco of the LPco Partnership Interest at that time.  The agreed amount will be added to the stated capital of the GPco common shares.

17. Upon the transfer of the LPco Partnership Interest to GPco, Partnership will legally cease to exist pursuant to XXXXXXXXXX law governing partnerships.  GPco will immediately carry on alone the business that was the business of the Partnership and will continue to use, in the course of that business, all of the property that was formerly property of Partnership immediately before Partnership ceased to exist and that was received by GPco upon the cessation of Partnership.  Such business will at no time within 3 months of Partnership ceasing to exist be carried on by LPco.  XXXXXXXXXX.

For greater certainty, there will not be any time interval between the time of the cessation of Partnership and the time that all property of Partnership is distributed to GPco as the person entitled by law to receive such property.

GPco may make designations under paragraph 98(5)(c) in respect of certain property (for example, the shares of Aco) transferred to it in connection with the cessation of Partnership.

18. The final fiscal period of the Partnership will be deemed to have ended immediately before the time that is immediately before the time the Partnership ceased to exist. The income or loss of the Partnership for that final fiscal period will be allocated to LPco and GPco based on their proportionate share of Partnership Units (XXXXXXXXXX% and XXXXXXXXXX% respectively). Each Partner will include its respective share of the income or loss of the Partnership for the Partnership’s final fiscal period in its respective taxation year in which the Partnership’s final fiscal period ends.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to simplify the corporate structure in a tax-efficient manner by dissolving Partnership and merging all of the activities of Partnership into GPco so that GPco can carry on the XXXXXXXXXX business.

RULINGS

Provided that

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, transactions and purpose of the Proposed Transactions,

(b) the Proposed Transactions are completed in the manner described above, and

(c) there are no other transactions which may be relevant to the rulings requested,

we rule as follows:

A. Provided that LPco and GPco file the requisite joint election in the prescribed form and manner and within the time limits specified in subsection 85(6), the provisions of subsection 85(1), other than paragraph 85(1)(e.2), will apply to the disposition of the LPco Partnership Interest by LPco to GPco, as described in paragraph 16.

B. Provided Partnership is a Canadian partnership at the time it ceases to exist and GPco continues to carry on the business of the Partnership as described in paragraph 17, the provisions of subsection 98(5) will apply in respect of the dissolution of Partnership.

C. Pursuant to subsection 99(1), Partnership’s fiscal period will be deemed to have ended immediately before the time that is immediately before the time Partnership ceased to exist.  Pursuant to subsection 96(1), the income or loss of Partnership for its fiscal period so ended will be the Partner’s income or loss for the Partner’s taxation year in which the fiscal period of Partnership so ends to the extent of the Partner’s share thereof and will be included in computing the Partner’s ACB of its interest in Partnership in accordance with subparagraph 53(1)(e)(i) or 53(2)(c)(i).  For greater certainty, LPco’s share thereof will be included in determining the ACB to LPco of the LPco Partnership Interest immediately before its disposition to GPco and GPco’s share thereof will be included in determining the ACB to GPco of the GPco Partnership Interest immediately before the time Partnership ceased to exist.

D. The Proposed Transactions, in and of themselves, will not result in the application of subsection 245(2) to redetermine the tax consequences confirmed in the rulings given above.

The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R7 Advance Income Tax Rulings and Technical Interpretations, dated April 22, 2016, and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed on or before XXXXXXXXXX.

OTHER COMMENTS

Unless otherwise expressly confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination or accepted any method for determination in respect of:

a. the PUC of any share or the ACB, UCC or FMV of any property referred to herein;

b. the reasonableness or FMV of any fees or expenditures referred to herein;

c. whether or not a person or partnership is carrying on a business or a particular business;

d. the nature of the legal relationships entered into or contemplated by the entities referred to herein;

e. the at-risk amount of any member of Partnership under subsection 96(2.2); or

f. any other tax consequence relating to the facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.

Yours truly,

XXXXXXXXXX
For Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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