AROUND THE COURTS
Rollover into partnership and cost of partnership interest
If you transfer property into a partnership of which you are a member, or a partnership of which you are a member immediately after the transfer, the transfer can take place on a tax-free rollover basis under subsection 97(2) of the Income Tax Act. Basically, you can elect an amount, and the elected amount becomes your proceeds of disposition of the property. Therefore, if the elected amount equals your tax cost of the property, there will be a complete rollover.
In addition, the elected amount, net of any other consideration you receive (other than your interest in the partnership), is added to your adjusted cost base of your interest in the partnership. The other consideration is sometimes called “boot”. For example, if you elect $10,000 and receive back $4,000 boot, you will add $6,000 to the adjusted cost base of your interest in the partnership.
Where the rollover does not apply, a general rule provides that the adjusted cost base of a partnership interest is simply the cost of the interest.
In the recent Iberville Developments case, a company transferred property into a partnership under the rollover provision and took back some boot. In accordance with the above rule, the company added the elected amount net of the boot to the adjusted cost base of his partnership interest. However, the company also added the value of the property to the adjusted cost base of the interest, on the grounds that this was the cost of the interest, i.e. the amount it paid for the interest. The company made the unique argument that the rollover rule for the adjusted cost base of the interest applied immediately after the transfer of the property, while the more general adjusted cost base rule applied at the time of the transfer. As such, according to the company, its adjusted cost base of the interest should have included both amounts.
The CRA assessed the company, arguing that the adjusted cost base of the interest was limited to the elected amount net of the boot because the rollover provision took precedence over the general provision.
On appeal to the Tax Court of Canada, the Tax Court Judge sided with the CRA. The Judge further held that the company's position would lead to “an absurd and unintended result”, and that the CRA's interpretation was “more consistent with the purpose of the provisions in question themselves”.
The company has appealed this decision to the Federal Court of Appeal.