Canada - English

Restriction of Section 88 Bump for Partnership Interests - by Rick McLean 

Canadian Tax Adviser

 

August 21, 2012

 

Rick McLean
Toronto, International Corporate Tax

 

Proposed amendments to limit the application of the section 88 "bump" in respect of a partnership interest were introduced by the Department of Finance in its draft legislation released on August 14, 2012. These proposed changes, which were announced in the 2012 federal budget, limit the bump to the extent that the accrued gain of the partnership interest is reasonably attributable to the unrealized gain or recapture of "ineligible" property.

For purposes of this rule, ineligible property is:

 

  • Depreciable property
  • Canadian and foreign resource property
  • Inventory
  • Eligible capital property
  • Other property held on income account.

 

Background
Existing paragraph 88(1)(d) determines the amount by which the cost of non-depreciable capital property may be increased or "bumped" on the winding-up of a subsidiary into a parent corporation (or on the amalgamation of a subsidiary corporation with a parent corporation under subsection 87(11)). The amount of bump available for a particular property (in this case a partnership interest) is limited to the fair market value of the property (at the time the parent last acquired control of the subsidiary) in excess of the cost amount of the property.

 

Draft legislation - Bump reduction
Finance's draft legislation introduces new subparagraph 88(1)(d)(ii.1), which provides for a reduction in the amount of bump available for an interest in a partnership held by the subsidiary. The bump reduction is accomplished by reducing the fair market value (at the time that the parent last acquired control of the subsidiary) of the partnership interest by the unrealized gains and recapture that may reasonably be regarded as being attributable at that time to ineligible property held directly by the partnership, or indirectly through one or more partnerships.

 

Draft legislation - Anti-avoidance rules
The draft legislation also introduces two anti-avoidance rules that appear to be aimed at manipulations (through transfers of property) in the amounts used in determining the bump reduction in proposed subparagraph 88(1)(d)(ii.1). New paragraph 88(1)(e) applies to certain transfers of property before the acquisition of control of the subsidiary and new subsection 97(3) applies to certain transfers of property after the acquisition of control of the subsidiary.

 

New paragraph 88(1)(e) will reduce the fair market value of a subsidiary's partnership interest if property is transferred, as part of a series of transactions or events that includes the acquisition of control of the subsidiary, to a partnership under subsection 97(2), or if a partnership interest is transferred to a corporation under section 85 before the parent acquires control of the subsidiary . Generally, this new rule applies after August 13, 2012.

New subsection 97(3) provides that a tax-deferred transfer under subsection 97(2) does not apply to a disposition of ineligible property that is transferred, as part of a series of transactions or events that includes the acquisition of control of the subsidiary, to a partnership of a subsidiary, after the parent acquires control of the subsidiary. New subsection 97(3) applies to dispositions made after March 28, 2012.

 

For more information, contact your KPMG adviser.

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