Section 43

After Monsieur acquired a duplex in January 2011, he used the two units for renting to a third party and as his personal residence, respectively. In July 2019 he ceased to rent out the first unit, and appropriated it to his residence.

He disposed of the duplex in December 2022. By making a s. 45(3) election respecting his change of use under s. 45(1)(c) (as permitted by the 2019 Budget changes), he was deemed to have not disposed of the unit that had been used for rental purposes. After noting that it was necessary to report the preconverted living unit and the expanded unit separately in claiming the principal residence exemption, CRA stated:

… [A]n allocation of the adjusted cost base ("ACB") and the proceeds of disposition of a property based on the size of each unit is, in some cases, that of a reasonable allocation. However, the allocation does not need to be based on area. All factors that may affect the value of any unit in the building must also be considered.

Where a partner disposes of some of its units of a partnership during the year, is there an ACB adjustment for the entire amount of the income allocated to that partner for the fiscal period? After noting that "all of the units that a partner holds in a partnership constitute a single property, i.e. the partner's interest in the partnership" so that, for example, a disposition of "40% of its partnership units…constitutes a partial disposition of its partnership interest," CRA stated:

Where the partial disposition occurs during the fiscal period of the partnership and thus the ACB adjustment for that fiscal period is not reflected in the ACB of the partnership interest for purposes of computing the gain or loss on the partial disposition, it is our view that the ACB of the remaining partnership interest will be increased by that ACB adjustment.

"[T[he phrase 'at that time' as used in subsection 43(1) of the Act, would, in our view, refer to the time immediately before the particular triggering event that resulted in the application of the subsection which was the partial disposition of the property."

Before going on to find that there was a pro rata recognition of capital gain when 20% of a partner’s units were redeemed, CRA stated:

[A]ll the units that a partner holds in a partnership are one and the same property, that is, the partner's interest in the partnership. Therefore, when a partner has 20% of his or her units redeemed by the partnership, there is a partial disposition of the partner’s partnership interest.

Over the years, A made advances (the "Debt") to Aco which it wholly owned, and then sold all the shares of A to an arm’s length purchaser, as well as the Debt for nominal consideration. What are the consequences of the repayment by Aco of the Debt held by B?

CRA indicated that if the Debt was capital property, its partial or full repayment would give rise to capital gains having regard to its nominal ACB and ss. b)(i) and (ii) of "disposition" in s. 248(1), as well as s. 43(1).

A partnership has several members, some of whom hold partnership interests which participate in both income and capital of the partnership. The partnership agreement will be amended to provide for the issuance of two partnership interests: the first, to provide for participation only in income; and the second, to provide for participation only in capital. If only the income share is subsequently disposed of, would that constitute a partial disposition of property? CRA stated:

The CRA accepts that a partner's interest in a partnership may take the form of various shares in the partnership. However, such an interest remains a single property. Accordingly, on a partial disposition of the interest, the adjusted cost base ("ACB") of the interest in the partnership is determined under subsection 43(1). Under paragraph 53(2)(d), the ACB of the retained portion of the interest is equal to the ACB of the entire interest less the ACB of the portion subject to the partial disposition.

If farmland is divided into two lots, one of them with road access, how should the ACB be apportioned between the two parts? CRA responded:

The allocation of the ACB by sq. m. does not always give an acceptable result. All relevant factors surrounding a particular situation must be considered. The value assigned to portions of farmland by a professional appraiser at the time the property was acquired is a factor that could be considered in determining the portion of the ACB that is reasonable to assign to the disposed of part.

Regarding an individual who sold his preferred units, but retained his common units, in a partnership, CCRA indicated that it regarded him as having had a single property, his partnership interest in the partnership, so that on the sale he was required under s. 43 to allocate a portion of the ACB of his single property to the sold units. CCRA further stated:

It is not possible for us to specifically identify a method for calculating the part of the ACB that can reasonably be attributed to the disposed party, since various calculation methods could produce a result that is acceptable for the purposes of subsection 43(1).

Ms. A is one of the three limited partners in a limited partnership (the "LP"). Her 33 units entitle her to 1/3 of the value of the shares, 3/4 of the value of the land and 1/3 of the value of the buildings held by the LP. The ACB of her interest in the LP is $500,000.

In order that Mr. X can purchase Ms. A's interest in such shares, the partnership agreement is amended to create three new classes of units with respective entitlements to the three types of property, so that Ms. A's units are exchanged for 33 units giving rights in shares, 72 units in land and 33 units in buildings. Ms. A then sells her 33 units respecting shares to Mr. X for $700,000.

After noting that the preliminary exchange did not entail a disposition, and regarding the allocation of ACB on the disposition to Mr. X, CCRA indicated that the total of the units held by a limited partner in a limited partnership constitutes property that is the limited partner's interest in the limited partnership, so that the ACB is therefore attributed to the totality of those units. under the Act. It was not possible to specifically identify a method for calculating the part of the ACB that it is reasonable to attribute to the disposed-of part, since various calculation methods could produce a result that was acceptable.

An individual acquired a mortgage at a significant discount to its principal from another individual (Mr. B). CCRA assumed that the mortgage bore interest at a commercially reasonable rate, so that the discount was not interest. CCRA found that, if the individual acquired the mortgage as capital property, on each receipt of a blended payment of principal and interest, he would have a part disposition pursuant to (b)(i) of the disposition definition, giving rise to a capital gain. It stated:

The adjusted cost base of the portion of the debt that has been disposed of is, by virtue of section 43, an amount equal to the proceeds of disposition less a portion of the discount as determined on the basis of a pro rata share of all amounts receivable as instalments of the total principal owing by Mr. B.

CCRA did not have the facts to determine whether the granting by the taxpayer to a public authority of an option to acquire an easement on the taxpayer’s farmland occurred in the context of an expropriation. However, even if it did, the proceeds of disposition exceeded 20% of the ACB of the farm, so that the taxpayer was required to compute a capital gain rather than being permitted to treat the ACB of the part property disposed of as being equal to the proceeds.

In an arrangement in which a creditor is entitled to all the income and losses following conversion of its loan into an interest in a film partnership, it is arguable that the continuing limited partner has partly disposed of his partnership interest because his entitlement to share in profits and losses has been reduced to nil. Although the issue is considered to be arguable, RC will consider the proceeds of disposition of the interest to be equal to the amount of the liability converted.

What are the tax implications to a creditor which receives a payment on account of a debt obligation’s principal amount that is greater than the obligation’s adjusted cost base? CRA responded:

When the creditor receives a payment on account of the outstanding principal amount of a debt obligation, the creditor is considered to have disposed of a portion of that obligation with the amount of the payment constituting the proceeds of disposition of that portion.

…[T]he adjusted cost base applicable to the part disposition would be equal to that proportion of entire adjusted cost base of the debt obligation immediately prior to the part disposition that the payment received is of the outstanding principal amount of the obligation at that same time.

Where there is a partial repayment of a debt acquired by a taxpayer on capital account and at a discount, the taxpayer must use the part disposition method, i.e., part of the debt is considered to be disposed of each time a payment is received, resulting in a capital gain.