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FEDERAL INCOME TAX - Capital gain and losses - Adjusted cost base - Partnership

Friday, August 14, 2020 @ 2:08 AM  


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Appeal by Iberville Developments from a decision of the Tax Court that confirmed the notice of determination issued by the Minister of National Revenue that reduced the appellant’s net capital loss for the 2008 taxation year to nil. On three occasions, the appellant transferred properties to a limited partnership by way of a rollover. The appellant subsequently disposed of its interest in the partnership by way of a corporate rollover. The dispositions of the partnership interest triggered a capital loss of $122,091,744. The loss was computed on the basis that the partnership interest disposed of had an adjusted cost base of $272,076,726. The Minister determined the adjusted cost base of the partnership interest had been reduced to $149,844,299 thereby bringing to zero the capital loss. The Tax Court concluded s. 54 of the Income Tax Act did not apply as the partnership was in existence when the first property was transferred to it.

HELD: Appeal dismissed. The adjusted cost base of the partnership interest received by the appellant in return for the transfer of the properties was equal to the elected amount pursuant to s. 97(2) of the Act. Increasing the adjusted cost base of the partnership interest by both the elected amount and the fair market value of the transferred properties would give rise to an absurd result as it would permanently defer the taxation of the increase in the value in the properties that were rolled over to the partnership and sold at a profit. That would defeat Parliament’s intent that a capital gain deferred by reason of a rollover under s. 97(2) be taxed on a subsequent arm’s length disposition. The appellant’s partnership interest had already been acquired when the properties were transferred, which eliminated any possibility that in addition to the s. 97(2) adjustment, the partnership interest could be increased under s. 54 by the fair market value of the transferred properties. The Tax Court was correct in determining that s. 54 was not applicable when the appellant, an existing partner, made the election under s. 97(2). Its construction was in line with the statutory language, gave effect to the intent of Parliament and avoided the absurd result advocated by the appellant.

Iberville Developments Ltd. v. Canada, [2020] F.C.J. No. 752, Federal Court of Appeal, M. Noël C.J. and Y. de Montigny J.A. and M.J.L. Gleason JJ.A., July 3, 2020. Digest No. TLD-August102020009