9 October 1996 Ruling 9605193 - year end change residual income eligible reserve

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

									960519
XXXXXXXXXX							Cal Brown
(613) 957-8980

Attention: XXXXXXXXXX

October 9, 1996

Dear Sirs:

Re: Subsections 34.2(4) and (5) of the Income Tax Act (the "Act")

This is in reply to your letter of January 30, 1996 concerning the reserve in respect of December 31, 1995 income. We apologize for the delay in reply to this request.

You have requested our view on the following situations:

1.An active member of a professional partnership includes an allocated share of December 31, 1995 income in his/her income and deducts a reserve at December 31, 1995 pursuant to subsection 34.2(4) of the Act. In years 1996 through to 2004, the individual remains a practising member of the partnership and includes in professional income, the net amount relating to December 31, 1995 income pursuant to subsections 34.2(4) and (5) of the Act. Throughout this period the individual is actively engaged in the business and is resident in Canada.

Our Comments

Since subsection 34.2(5) of the Act includes the reserve in business income and since the business source related to the reserve is the partnership business in which the individual is actively engaged, the income from the partnership for the years 1996 to 2004 referred to above will include the amount determined under subsection 34.2(5). The income from the partnership will be income from a business carried on by a partner actively engaged in the business, for the purposes of clause (a)(ii) of the definition of "earned income" in subsection 146(1) of the Act and for Canada Pension Plan contributions.

2.The situation is similar to that described above except that the partner retires from the partnership in 1997 but continues to receive an income allocation. Under subsections 96(1.1) and 96(1.6) the individual would be deemed to be a member of the partnership and to carry on the business for purposes of the reserve under 34.2(5). This individual will have an income inclusion under 34.2(5) in the years 1997 through 2004 assuming that there continues to be valid allocations under subsection 96(1.1) of the Act.

Our Comments

In this case since the individual is not actively engaged in the business, the requirements of clause (a)(ii) of the definition of "earned income" in subsection 146(1) of the Act are not met. It is also our view that in these circumstances Canada Pension Plan contributions are not required in respect of the income allocations under 96(1.1) or income resulting from the application of subsection 34.2(5) of the Act.

3.In the situation described above there are no allocations of income in years 2000 and 2001 although the entitlement to income as contemplated under subsection 96(1.1) of the Act will last until 2012.

Our Comments

The determination of whether a reserve under subsection 34.2(4) is available can only be made on the specific facts of an actual case.

The comments expressed above are opinions and as such are not binding on the Department. We also note that in certain circumstances other provisions of the Act may apply to override these comments.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch