18 April 2001 Internal T.I. 2001-0075877 - RESERVE; 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: whether retired non-resident partner can claim 34.2 reserve

Position: yes

Reasons: 96(1.1) and 96(1.6) apply for section 34.2 including 34.2(6)

		April 18, 2001

	Toronto North TSO	HEADQUARTERS
	Audit Division	Denise Dalphy, LL.B.

	Attention: Anthony Lustri
		2001-007587

XXXXXXXXXX
Partnerships and Business Reserves

This is in reply to your facsimile transmission of March 14, 2001 and our subsequent conversations on this issue.

Our understanding of the facts is as follows:

1. The taxpayer ceased to be a partner of XXXXXXXXXX.

2. The taxpayer ceased to be a resident of Canada on XXXXXXXXXX.

3. In XXXXXXXXX , the taxpayer received, and will continue to receive, an allocation of partnership income representing his share of the unbilled work-in-progress of XXXXXXXXXX pursuant to the terms of the XXXXXXXXXX Partnership Agreement.

You have asked us whether the taxpayer is entitled to claim a section 34.2 reserve in XXXXXXXXXX and subsequent years when he is receiving income from the XXXXXXXXXX Partnership, notwithstanding that he has ceased to be resident in Canada.

Our Comments

For the purposes of, inter alia, section 34.2 of the Income Tax Act (the "Act"), subsection 96(1.1) deems a taxpayer who has retired as a partner in a partnership who is entitled under a partnership agreement to an allocation of income or losses from that partnership to continue to be a member of a partnership.

Subsection 96(1.6) of the Act provides (likely for greater certainty) that, for the purposes of, inter alia, section 34.2 of the Act, a taxpayer who, pursuant to subsection 96(1.1) of the Act, is deemed to be a member of a partnership will be deemed to carry on the business of the partnership in Canada, if that partnership carries on business in Canada.

A reserve under subsection 34.2(4) is not available if the provisions of subsection 34.6 of the Act apply. Among other things, subsection 34.2(6) will prohibit the deduction of a reserve if subparagraph (b)(ii) therein applies:

"(ii) the taxpayer is non-resident and does not carry on business through a permanent establishment (as defined by regulation) in Canada;"

Since a taxpayer who continues to receive income from a partnership that carries on business in Canada is deemed to be a member of that partnership and is also deemed to carry on that business in Canada for, inter alia, the reserve in section 34.2 and the flow-through provisions in subsection 96(1) of the Act (and the taxpayer will remain taxable in Canada on that income pursuant to subsection 96(1), paragraph 2(3)(b) and subparagraph 115(1)(a)(ii) of the Act), the fact that he or she is no longer resident in Canada will not preclude that taxpayer from claiming a reserve under section 34.2 of the Act.

We hope this opinion will be of assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Canada Customs and Revenue Agency's mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (613) 994-2898. A copy will be sent to you for delivery to the client.

Steve Tevlin
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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