19 May 1998 Internal T.I. 9805547 - FORGIVEN AMOUNT

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.

Principal Issues:

interaction of section 80 forgiven amount and and new 34.1 "additional income rules".

Position:

income and reserve must be matched in same period.

Reasons:

reading of the Act

	May 19, 1998
Mr. S. Watson	Partnerships Section
	Director 	S.J. Tevlin
	London TSO

	Attention:  Chris Spettigue
		Business Enquiries
	980554

Sections 80` and 34.2 of the Income Tax Act

We are writing in response to your telephone query (Spettigue\Nelson) of February 23, 1998 and fax transmission of March 5, 1998 regarding the interconnection between sections 80 and 34.2 of the Income Tax Act.

Our understanding of the situation is follows:

A partnership had a January 31, 1995 year-end. Pursuant to subsection 249.1(1) the partnership had a fiscal period from February 1, 1995 to December 31, 1995 (“Stub Period”). The income for the Stub Period is deemed to be “December 31, 1995 income” for the purpose of the 10 year transitional reserve in new section 34.2. Section 34.2 allows for a reserve in 1995 of 95% of the Stub Period income. In the Stub Period the partnership has a forgiven amount which results in an income inclusion to each partner pursuant to subsections 80(13) & 96(1).

The partners have elected to use subsection 80(15) to deduct the income inclusion from their income and create a new forgiven amount as at December 31, 1995 which can be applied pursuant to section 80 against their own tax attributes.

The taxpayer’s representatives have requested that the partner’s share of the 80(13) amount be included in the Stub Period income while the 80(15) amount be deducted from the calculation of the January 31, 1995 income. The result being that they have effectively included only 5% of the partner’s share of the 80(13) income amount in 1995 while deducting 100% of the 80(15) amount.

You have asked for our opinion as to whether this mismatching of income and deductions is acceptable.

We have reviewed the information provided by you and in this regard we offer the following comments.

It is our opinion that the partner’s share of the partnership’s subsection 80(13) income amount that is included in his income pursuant to paragraph 96(1)(f) is to be included in the calculation of the partner’s Stub Period income. It is also our opinion that in computing the partner’s income for the 1995 taxation year the paragraph 80(15)(a) amount should be deducted in the calculation of the Stub Period income. As such, there will be no net income inclusion arising from the partnership’s debt forgiveness, and the section 34.2 transitional reserve calculation will not be overstated.

We trust our comments will be of assistance to you.

Yours truly,

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

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