27 April 1994 External T.I. 9408455 - GRANDFATHERING NEGATIVE ACB

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

940845
XXXXXXXXXX C. R. Brown

Attention: XXXXXXXXXX

April 27, 1994

Dear Sirs:

Re: Proposed Legislation on Negative Adjusted Cost Base

This is in reply to your facsimile transmission dated April 5, 1994. You have requested our opinion on the status of the following limited partnerships (the "Offering Partnerships") under the proposed legislation on negative adjusted cost base:

(i) XXXXXXXXXX
(ii) XXXXXXXXXX
(iii) XXXXXXXXXX

You have provided us with copies of the offering memoranda which were filed with the XXXXXXXXXX.

Resolution 6 of the Notice of Ways and Means Motion to amend the Income Tax Act, contained in the federal budget released on February 22, 1994, provides that a gain will be realized where, at the end of a fiscal period, a limited partner holds a partnership interest that has a negative adjusted cost base. This general rule does not apply where:

(a)at the end of the relevant fiscal period, the partnership continued to carry on the business that was carried on by it on February 22, 1994,

(b)the limited partner held the partnership interest on February 22, 1994, and

(c)there has been no substantial contribution of capital to the partnership or substantial partnership borrowings after February 21, 1994 (other than in certain limited circumstances).

On March 30, 1994, the Minister of Finance issued a news release (the "Release") which clarifies the operation of the transitional relief set out in (a), (b) and (c) above. The Release indicates, inter alia, that a limited partner is exempt from the application of the proposed amendments respecting the negative adjusted cost base, by virtue of the transitional relief under the following circumstances:

(a)an offering memorandum was filed before February 22, 1994,

(b)funds are raised before 1995 pursuant to the offering memorandum,

(c)the funds so raised are expended before 1995 in accordance with the offering memorandum (or March 1995 in the case of certain certified productions),

(d)the limited partnership units are issued on or prior to December 31, 1994 in accordance with the offering memorandum, and

(e)the funds raised by and in accordance with the offering memorandum are expended in the manner contemplated in the offering memorandum.

We have examined the offering memoranda provided with your submission and it is our opinion that the Offering Partnerships and the partnerships funded by the Offering Partnerships will be exempt from the proposed amendment with respect to the negative adjusted cost base provided the following conditions are met:

(a)The offering amount will be no greater than the amount set out in the offering memoranda filed on XXXXXXXXXX

(b)Each limited partnership will continue to carry on its business and there is no substantial contribution of capital to the Offering Partnerships or the partnerships funded by the Offering Partnerships other than in accordance with the offering memoranda.

(c)Legislation is enacted substantially in the form of the transitional relief as clarified by the Release.

The above opinion is further subject to the proviso that our understanding of the provisions of the offering memoranda as stated in this letter is correct. In this regard, we provide the following as our opinions with respect to certain arrangements provided by the offering memoranda;

(a)for the purpose of the transitional relief provisions, the funds will be considered to be raised in 1994, notwithstanding the fact that the investor in a limited partnership unit may pay a portion of the cost of the unit by providing postdated cheques some of which may be due in 1995 ( XXXXXXXXXX ), and

(b)for the purpose of the transitional relief provisions, the funds raised by the offering memoranda will be considered to have been expended in 1994 or by March 1995, as the case may be, provided that all the costs to acquire the film have been made by 1994 or March 1995, as the case may be, and the only funds raised by the offering memoranda to be expended after 1994 are in respect of soft costs which are usually no more than XXXX% of the funds raised.

The above opinions are not rulings and accordingly they are not binding on Revenue Canada, Customs, Excise and Taxation.

We trust these comments will be of assistance.

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch