22 December 2008 External T.I. 2008-0302421E5 - 88(1)(d) Bump Negative ACB of Partnership Interest

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Would a partnership interest with a "negative" adjusted cost base ("ACB") increase the "bump" amount as calculated under paragraph 88(1)(d) of the Income Tax Act ("ITA")?

Position: No. With respect to the "bump" amount determined under paragraph 88(1)(d), the cost amount of the partnership interest pursuant to subparagraph (i) cannot be negative. Paragraph (d) of the definition of ACB in section 54 states that in no case shall the ACB to a taxpayer of any property at any time be less than nil. The calculation in subparagraph 88(1)(d)(i) specifies that the "bump" amount is the amount, if any, by which the total determined under subparagraph (b)(ii) exceeds the amount, if any, by which the total of all amounts determined under clause 88(1)(d)(i)(A), exceeds the amounts determined under clauses 88(1)(d)(i)(B) and (C). Consequently, the result of the calculation in subparagraph 88(1)(d)(i) cannot be less than zero.

Reasons: Wording of the Act.

2008-030242
XXXXXXXXXX S.Snell
(613) 957-2095
December 22, 2008

Dear Sir:

Re: Tax Implications of Negative Adjusted Cost Base ("ACB") for Purposes of the Subsection 88(1) "Bump" Rules of the Income Tax Act ("ITA")

We are writing in response to your letter dated November 11, 2008 in which you request our comments regarding the application of paragraphs 88(1)(c) and (d) of the ITA in the circumstance where an "eligible asset" for purposes of the "bump", namely a partnership interest, has a "negative ACB".

Unless otherwise stated, every reference herein to a part, section, subsection, paragraph or subparagraph is a reference to the relevant provision of the ITA.

1) Facts and Assumptions

Our understanding of the facts is as follows:

• OPCO (the "parent" for the purposes of subsection 88(1)) and SUBCO (the "subsidiary" for the purposes of subsection 88(1)), a subsidiary wholly-owned corporation of OPCO, would amalgamate to form "Amalco". Both companies would be taxable Canadian corporations.
• The only asset owned by SUBCO would be a partnership interest in PROFCO, which would be held as capital property.
• The PROFCO partnership interest would have a "negative ACB" of $75,000 at the time of vertical amalgamation and a fair market value ("FMV") of $700,000.
• OPCO's ACB in the SUBCO shares immediately before the vertical amalgamation would be $500,000 and SUBCO would have a debt of $200,000 at that time.

To complete our analysis, we have made the following additional assumptions:

• SUBCO would hold a general interest in the partnership such that subsections 40(3.1) and (3.11) would not be applicable.
• The partnership interest would not be an "ineligible property" as described in subparagraphs (iii) to (vi) of paragraph 88(1)(c).
• Pursuant to paragraph 88(1)(c), the partnership interest would have been held as a capital property by SUBCO at the time that OPCO last acquired control of SUBCO, within the meaning of paragraph 88(1)(d.2), and such partnership interest would have been owned by SUBCO thereafter without interruption until such time as it was distributed to OPCO on the vertical amalgamation.
• Finally, we assume that, in accordance with subparagraph 88(1)(d)(ii), the "bump" amount would not exceed the amount, if any, by which the FMV of the partnership interest at the time OPCO last acquired control of SUBCO (within the meaning of paragraph 88(1)(d.2)), exceeds the cost amount to SUBCO of the partnership interest immediately before the vertical amalgamation.

2) Your Views

You state that the amount that could be added to the cost of the PROFCO partnership interest as calculated under paragraph 88(1)(d) would be the cost to OPCO of the shares of the capital stock of SUBCO, immediately before the vertical amalgamation (in accordance with subparagraph 88(1)(b)(ii)), less the amount calculated under subparagraph 88(1)(d)(i).

You contend that the amount as calculated under subparagraph 88(1)(d)(i) would equal the tax value of the partnership interest [($75,000)], less the debt owed by SUBCO [$200,000], which amount would be negative [($275,000)]. Further, you state that this amount, which is to be subtracted from the amount as calculated under subparagraph 88(1)(b)(ii), should in fact be added in your case as it is a negative amount [i.e. $500,000 - (275,000) = $775,000]. In other words, it is your interpretation that the "negative ACB" of the partnership interest would increase the available "bump" room.

You have requested that we provide our comments regarding the aforementioned analysis and interpretation of the calculation in paragraph 88(1)(d).

3) Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. The particular situation outlined in your letter appears to be a factual one, involving specific taxpayers and completed transactions. Accordingly, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. However, we offer the following general comments.

Paragraph 87(11)(b) provides that at any time there is an amalgamation of a parent corporation and one or more other corporations, each of which is a subsidiary wholly-owned corporation of the parent, the cost to the new corporation of each capital property of the subsidiary acquired on the amalgamation is deemed to be the amount that would have been the cost to the parent of the property if the property had been distributed at that time to the parent on a winding-up of the subsidiary and subsections 88(1) and (1.7) had applied to the winding-up.

Paragraph 88(1)(a.2) provides that each interest of the subsidiary in a partnership that was distributed to the parent on the winding-up (or the vertical amalgamation pursuant to paragraph 87(11)(b)) shall, except for the purpose of paragraph 98(5)(g), be deemed not to have been disposed of by the subsidiary.

In very general terms, subparagraph 88(1)(c)(i) provides that the cost to the parent of an interest in a partnership of the subsidiary distributed to the parent of the winding-up (or the vertical amalgamation pursuant to paragraph 87(11)(b)) is deemed to be the amount that but for this paragraph would be the cost to the parent of the property. In that respect, paragraph 88(1)(e.2) refers to paragraph 87(2)(e.1), which provides that where a partnership interest that is a capital property has been acquired from a predecessor corporation to which the new corporation was related, for the purposes of the ITA, the cost of that partnership interest to the new corporation shall be deemed to be the amount that was the cost of that interest to the predecessor corporation and, in respect of that partnership interest, the new corporation shall be deemed to be the same corporation as and a continuation of the predecessor corporation. This ensures that all adjustments required to be made by SUBCO in calculating the ACB of its partnership interest (in the scenario described above, a negative amount of $75,000) would have to be taken into account in computing any gain or loss from a subsequent disposition of the partnership interest by Amalco.

Paragraph 88(1)(c) provides that, to the amount determined under subparagraph 88(1)(c)(i), must be added the amount determined under paragraph 88(1)(d).

With respect to the "bump" amount determined under paragraph 88(1)(d), it is our opinion that the cost amount of the partnership interest pursuant to subparagraph (i) cannot be negative. Paragraph (b) of the definition of "cost amount" in subsection 248(1) states that the cost amount for a capital property is the property's ACB. Paragraph (d) of the definition of ACB in section 54 states that in no case shall the ACB to a taxpayer of any property at any time be less than nil.

We also note that the calculation in subparagraph 88(1)(d)(i) specifies that the "bump" amount is the amount, if any, by which the total determined under subparagraph (b)(ii) exceeds the amount, if any, by which the total of all amounts determined under clause 88(1)(d)(i)(A), exceeds the amounts determined under clauses 88(1)(d)(i)(B) and (C). Consequently, it is our opinion that the result of the calculation in subparagraph 88(1)(d)(i) cannot be less than zero.

The above comments represent our general view with respect to the subject matter and are not binding on the CRA, as explained in paragraph 22 of Information Circular 70-6R5. We trust that the foregoing will be of assistance to you.

Yours truly,

Stéphane Prud'Homme, LL.B, M.Fisc.

Manager
Mergers and Acquisitions Section
Reorganizations and Resources Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch