ACB Adjustments For Foreign Affiliate Shares Held Through Partnerships

Recent CRA comments at the May 2014 IFA international tax seminar¹ and a subsequently released CRA technical interpretation² highlight anomalies in the application of subsections 92(4) and (5) of the Income Tax Act (Canada) (the "Act").³

These provisions address the situation where shares of a foreign affiliate are held by a partnership of which a corporation resident in Canada is a partner. ⁴ If the foreign affiliate has previously paid a pre-acquisition surplus dividend to the partnership, and the partnership then disposes of the shares of the foreign affiliate or the Canadian corporation disposes of its partnership interest, a deemed gain will arise. The problem is that this deemed gain will arise even where the disposition occurs under a rollover provision that is otherwise intended to provide a tax-deferred result.