23 February 2004 External T.I. 2004-0056471E5 - Farm inventory and partnership wind up

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.

Principal Issues:  Does subsection 85(3) apply when a cash basis farm
            partnership transfers inventory to a farm corporation in
            exchange for an open note receivable and the
            partnership subsequently winds up?

Position: Yes.

Reasons: Within the conditions of subsection 85(3).

Bob Naufal, CMA
XXXXXXXXXX (613) 957-2744
2004-005647
February 23, 2004

Dear XXXXXXXXXX:

Re: Farm inventory and partnership wind up

We are writing in response to your email of January 12, 2004, in which you asked for our comments on the situation where inventory is transferred from a cash basis farm partnership to a Canadian-controlled private corporation ("CCPC") for consideration of an open note and shares of the CCPC. The partnership is subsequently wound up, and the assets distributed to the partners. You are concerned that, in this situation, the open note transfer will frustrate the partnership wind up under subsection 85(3) of the Income Tax Act (the "Act").

Our Comments

Written confirmation of the tax consequences that apply to a particular fact situation is given by this directorate only in the context of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide the following general comments.

A taxpayer using the cash method to compute income from a farming business may elect to transfer inventory owned in connection with the business, to a corporation under subsection 85(1) of the Act. Subsection 85(2) of the Act provides that the rules under subsection 85(1) of the Act apply where the property in question is owned by a partnership and is transferred to a taxable Canadian corporation for consideration that includes shares of the corporation. Generally, where a taxpayer or partnership carrying on a farming business transfers, using section 85, inventory owned in connection with that business to a corporation, and the taxpayer or partnership reports income from the farming business on the cash basis, paragraph 85(1)(c.2) of the Act will apply to ensure that the taxpayer includes the deemed proceeds of disposition in income, under subparagraph 28(1)(a)(i) of the Act, and that the corporation will be entitled to deduct the deemed cost of the inventory under subparagraph 28(1)(e)(i) of the Act.

In the situation described in your email, it is our view that the open note received as part of the consideration on the disposition of the farm inventory will not, in and of itself, invalidate the application of subsection 85(3) to the partnership wind-up, provided that all other requirements of that provision are met. In addition, the value of the note must be included in the partnership's farming income pursuant to subparagraphs 85(1)(c.2)(ii) and 28(1)(a)(i) of the Act.

We trust our comments will be of some assistance.

Yours truly,

Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate