2023-0994141E5 Cost Recovery Method in IT-426R (Archived)

Principal Issues: Whether the cost recovery method as described in IT-426R (Archived) should be applicable to Canadian resident partners of partnerships that sell shares subject to an earnout agreement.

Position: No position disclosed in the letter.

Reasons: The Income Tax Rulings Directorate will re-examine that issue in consultation with internal stakeholders.

Author: Gagnon, Robert
Section: 12(1)(g), 39(1).

XXXXXXXXXX                                                                      2023-099414
                                                                                              R. Gagnon

February 1, 2024

Dear XXXXXXXXXX:

Re: Cost Recovery Method in Interpretation Bulletin IT-426R (Archived) & Partnerships

We are writing in response to your letter dated October 6, 2023, in which you essentially requested that the Canada Revenue Agency (“CRA”) reconsider its positions as stated in technical interpretation 2021-0884651E5 in which the CRA concluded that the conditions in paragraph 2 of Interpretation Bulletin IT-426R (Archived) (“IT-426R”) were not designed to apply to limited partnerships, and that the cost recovery method (as described in IT-426R) therefore cannot be applied, where a Canadian resident taxpayer is a member of a partnership that sells shares of a corporation.

You also asked questions and made representations concerning the application of the cost recovery method to Canadian resident taxpayers that are members of partnerships that sell shares of a corporation. We appreciate your representations to us on that issue.

Our Comments

Following your representations, the CRA is prepared to re-examine whether the cost recovery method should apply to Canadian resident taxpayers that are members of partnerships that sell shares subject to an earnout agreement. Any change of position would require amendments to the conditions for the application of the cost recovery method (as stated in paragraph 2 of IT‑426R) in the context of partnerships.

In its review, the Income Tax Rulings Directorate will have to consult internal stakeholders and the whole process may take some time. Therefore, any change of position would likely be disclosed at a future CRA Round Table, rather than in the context of a technical interpretation. At this time, we believe that it may not be necessary to respond to the questions in your letter.

We trust our comments will be of assistance.

Yours truly,

Urszula Chalupa, LL.B, M. Fisc.
for Division Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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