View Point Corp and JD Corp are two unrelated corporations that had adjacent parcels of land that they wished to develop together in one project. They decided to pool their land in a partnership.
When it transferred the land to the partnership, View Point filed a section 97 election identifying the fair market value as $750,000, the agreed amount as $225,000, with the difference being $525,000.
JD Corp transferred its parcel at fair market value of $200,000. JD Corp completed some preliminary work at their own expense and brought expertise to the project that warranted 60% share of the project.
The partnership was created in 1998. It constructed condominiums and sold them. The last condominium was sold in 2003. At which time the partnership dissolved. On the final settlement JD Corp showed a negative ACB of $200,000.
View Point Corp changed accountants around the time of the dissolution who discovered an error in the accounting records of the partnership. Although View Point and the Partnership had filed an election to roll the land into the partnership at a reduced cost, the partnership had recorded the property at fair market value. The accountant advised his client to amend its returns to recognise the unreported the capital gains. Which they did. This resulted in an increased ACB of the partnership interest for View Point in the amount of $525,000. No adjustments were made to JD’s ACB.
The Partnership Agreement included the following paragraph:
All tax consequences of the transfer of any asset to the Partnership by a Partner pursuant to this paragraph 11 shall be the sole responsibility of the partner transferring the asset to the partnership and shall not be a responsibility of the Partnership. It is further agreed that the value at which the said assets are transferred to the Partnership shall be as agreed between the Partners, or, failing agreement, at the value specified by the Partner transferring such asset to the Partnership
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