29 April 2003 External T.I. 2003-0006465 - RETIRING PARTNER-INCOME INTEREST

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) permits the retired partner to direct some or all of the allocation to his or her spouse.

Position: Yes, but subsection 56(2) and possibly subsection 56(4) would apply so that the allocation would also be included in the retired partner's income during the retired partner's lifetime.

Reasons: Paragraph 96(1.1)(b) requires the amount allocated to be included in the income of the taxpayer to whom it is allocated. Payments made to the retired partner's spouse under an agreement entered into by the retired partner and the other members of the partnership would likely be described in either of subsection 56(2) or (4) and thus would also be included in the income of the retired partner.

XXXXXXXXXX 2003-000646
B. G. Dodd
(613) 957-8953
April 29, 2003

Dear XXXXXXXXXX:

Re: Payments to Retiring Partners

We are writing in reply to your letter dated January 22, 2003 concerning payments to retired partners and subsections 56(2), 56(4), 73(1), 96(1.1) and 96(1.2) of the Income Tax Act (the "Act").

The situation you are contemplating involves retirement pensions paid to retiring partners of professional firms such as lawyers, accountants, architects and others. Your enquiry concerns possible revisions to such arrangements which would provide a retiring partner with certain options including sharing the amounts to be paid with the partner's spouse and the reversion of the full amount to the survivor in the event of the death of either the spouse or the partner. It is your view that under subsection 96(1.1) of the Act, a retirement pension could be paid to either the retired partner or his or her spouse or, could be shared by each of them. For purposes of this letter, we have assumed that both the retired partner and the retired partner's spouse are resident in Canada.

Written confirmation of the CCRA's position on the income tax consequences arising from proposed transactions is only provided under our advance income tax ruling service. Should you wish to proceed in this manner, we would be pleased to consider an application for an advance ruling submitted as described in Information Circular 70-6R5. In the meantime, we offer the following comments which are general in nature and are not to be construed as binding with respect to any particular situation.

As described in paragraph 14 of Interpretation Bulletin IT-278R2, it is our general view that subsection 96(1.1) of the Act applies where the partners of a partnership, whose principal activity is carrying on business in Canada, enter into an agreement to allocate a share of the income or loss of the partnership to a person who has ceased to be a partner (i.e., a retired partner), or to that person's spouse, common-law partner, estate or heirs or any other person to whom the right to such income is transferred.

Where subsection 96(1.1) of the Act applies, by virtue of paragraph (b) thereof, the amount which is allocated under the agreement shall, "notwithstanding any other provision of the Act", be included in computing the income of the taxpayer to whom it is allocated. As such, any allocation made, for example, to a retired partner's spouse under an agreement described in subsection 96(1.1) of the Act would be included in computing the income of the retired partner's spouse. At the same time, it is our view that arrangements under which the allocation otherwise determined may, at the retired partner's discretion and during the retired partner's lifetime, be shared between the spouse and the retired partner, or paid entirely to the spouse, would, depending on the circumstances, be subject to subsection 56(2) or (4) of the Act. As such, the payment or transfer made to the other person referred to in subsection 56(2) of the Act (i.e., the retired partner's spouse), or the amount, the right to which is transferred or assigned to the non-arm's length person as described in subsection 56(4) (i.e., the retired partner's spouse), would be included in computing the income of the retired partner. Accordingly, while any allocation made pursuant to subsection 96(1.1) of the Act to the spouse would be included in computing the spouse's income, the same amount may also be included in computing the income of the retired partner. In our view, subsection 248(28) of the Act would not prevent this result.

We also note that, by virtue of subsection 96(1.1) of the Act, the person to whom the allocation is made is deemed to be a partner for certain express purposes of the Act, including section 103. As such, in the case of any partnership sharing agreement which has as its motivation the reduction or postponement of tax, or which involves non-arm's length partners and an unreasonable sharing basis, the provisions of subsections 103(1) and (1.1) of the Act would have to be considered. Regarding subsection 73(1) of the Act, this provision only applies with respect to capital property and subsection 96(1.4) expressly provides that, for purposes of the Act, an income interest described in subsection 96(1.1) is deemed not to be a capital property.

The publications noted above are available from your local tax services office and from our website at www.ccra-adrc.gc.ca. We hope this will be of assistance.

Yours truly,

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