21 March 2001 External T.I. 2000-0060235 - FARM PARTNERSHIP

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:

Taxpayer and his wife are partners in a farming operation with the wife having only a minimal interest in the partnership. Taxpayer wishes to dissolve the partnership and transfer the assets on a tax-deferred basis pursuant to subsection 98(3) of the Act and gift 50% of his farm property to his wife. They would then roll their farm property into a new partnership pursuant to subsection 97(2) of the Act with each spouse receiving a 50% interest in the partnership.

Do the attribution rules in sections 74.1 and 74.2 apply to the income earned by the new partnership?

Position TAKEN:

Unable to provide an answer in the context of a technical interpretation letter.

Reasons:

Insufficient information provided to make a determination. Too many potential issues to provide general comments.

XXXXXXXXXX 2000-006023
T. Young, CA
March 21, 2001

Dear XXXXXXXXXX:

Re: Inter-Vivos Transfer of Farm Property to Spouse

This is in reply to your letter of November 29, 2000, forwarded to us by the Regina Tax Services Office, requesting our opinion on a proposed series of transactions involving the transfer of farm property between spouses. We also acknowledge your letters of December 26, 2000, and January 24, 2001.

In your letter, you stated that a taxpayer (the "Husband"), who owns farm property, entered into a partnership with his wife (the "Wife"). The Husband transferred the farm property into the partnership pursuant to subsection 97(2) of the Income Tax Act (the "Act"). After the transfer, the Husband had a partnership interest based on the full fair market value of the farm property and the Wife had a nominal partnership interest.

You have proposed that the Husband and Wife dissolve the partnership with each taking back property pursuant to subsection 98(3) of the Act proportionate to their respective partnership interests. The Husband would then transfer 50% of his farm property to the Wife by way of a gift and each spouse would then transfer their farm property into a new partnership pursuant to subsection 97(2) of the Act with each spouse receiving a 50% interest in the partnership.

You have enquired about the general income tax consequences of this proposed series of transactions and, specifically, if they can be done on a tax deferred basis and if the attribution rules in sections 74.1 and 74.2 of the Act would apply.

Our Comments

Written confirmation of the tax implications inherent in particular transactions is given by this directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R4 (enclosed), dated January 29, 2001. Moreover, there are a number of issues that are unclear from your letter. As well, the situation and proposed transactions described in your letter raise many potential issues that go beyond the scope of a technical interpretation and would need to be analysed in the context of an advance income tax ruling. For instance, there are legal and tax issues relating to the transfer of property, in which both the Husband and Wife have an undivided interest, out of the partnership, and then between the spouses prior to transferring the assets into a new partnership. Further, the transactions you describe could have implications with respect to the reasonableness of the allocation of partnership income between the Husband and Wife, and there may be issues with respect to the transfer of inventory. The implications of section 245 of the Act would also have to be considered.

As a result, we are unable to confirm the income tax consequences of the proposed transactions you described. However, we would be pleased to confirm the tax consequences after obtaining a complete understanding of all the relevant facts of the particular situation, in the context of an advance income tax ruling.

We regret that we cannot be of further assistance.

Yours truly,

M. Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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