26 February 2003 External T.I. 2002-0178335 - PARTNERSHIP AS A TAXPAYER

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 CCRA.

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

Principal Issues: Whether subsection 96(1.1) of the Income Tax Act applies to a member of a partnership which is itself a partnership.

Position: Yes.

Reasons: Subsection 102(2) of the Act provides that, in subdivision j, a reference to a person or a taxpayer who is a member of a particular partnership includes a reference to another partnership that is a member of the particular partnership.

XXXXXXXXXX 2002-017833
J. Gibbons, CGA
February 26, 2003

Dear XXXXXXXXXX:

We are writing in response to your letter dated December 5, 2002, concerning the application of subsection 96(1.1) of the Income Tax Act (the "Act") to a member of a partnership which is itself a partnership.

In your letter, you describe a hypothetical situation where a partnership ("Partnership A"), whose principal activity is carrying on a business in Canada, includes a second partnership ("Partnership B") as one of its members. The partnership agreement provides that, following the withdrawal of Partnership B from Partnership A, income from Partnership A will be allocated to Partnership B. You have asked whether, in the circumstances, Partnership B would be considered a taxpayer for purpose of subsection 96(1.1) of the Act.

Our Comments

Written confirmation of the tax implications applicable to the transaction described above is given by this Directorate only if the transaction is proposed and is the subject of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5. However, we are prepared to offer the following general comments.

Subsection 96(1.1) of the Act generally provides that, where a taxpayer ceases to be a member of a partnership and members of the partnership enter into an agreement to allocate a share of the partnership's income or loss to the taxpayer or the taxpayer's spouse or estate, the taxpayer or the taxpayer's spouse, estate or heirs, as the case may be, is considered to be a member of the partnership and the share of the partnership's income or loss allocated to such a person is to be included in the person's income for the taxation year in which the partnership's fiscal period ends. This provision applies only if the principal activity of the partnership is the carrying on of business in Canada.

In our view, subsection 96(1.1) may apply to a retiring member of a partnership that is itself a partnership. In this regard, we note that subsection 102(2) of the Act provides that, for the purposes of subdivision j of the Act, a reference to a person or a taxpayer who is a member of a particular partnership shall include a reference to another partnership that is a member of the particular partnership.

We trust that these comments will be of assistance.

Yours truly,

Daryl Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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