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: Are retired partners considered members of a partnership for purposes of 97(2)?
Position: No.
Reasons: A retired partner ceases to be a partner except in certain circumstances as described in subsection 96(1.1) and 98.1(1) of the Act.
XXXXXXXXXX Bob Naufal, CMA
(613) 957-2744 2004-007335
June 30, 2004
Dear XXXXXXXXXX:
Re: Paragraph 96(3)(a) and retired partners
We are writing in response to your letter dated April 26, 2004, wherein you asked us about the application of paragraph 96(3)(a) of the Income Tax Act (the "Act"), in a situation where a partnership has retired partners.
Briefly, your letter describes a situation whereby an upper tier partnership (the "First Partnership") is a member of a lower tier partnership (the "Second Partnership"). In a previous fiscal period of the First Partnership, several partners (the "Retired Partners") ceased to be members of the First Partnership. The First Partnership and the Retired Partners entered into an agreement to allocate a specific share of the income of the First Partnership to the Retired Partners for a specified period of time to which subsection 96(1.1) of the Act would apply.
The Second Partnership will acquire property from the First Partnership and elect under subsection 97(2) of the Act with respect to the transfer. A member of each partnership (the "Designated Partner") will have the authority to act for the respective partnership and execute the election on behalf of all members of the partnership pursuant to paragraph 96(3)(a) of the Act. In this regard, you have asked whether the Designated Partner of each partnership is required to have authority to act on behalf of the Retired Partners.
Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5, dated May 17, 2002. However, we are prepared to provide you with the following general comments.
Generally speaking, a partnership is the relation that exists between persons carrying on business in common with a view to profit. Under subsection 96(1) of the Act, the income earned and the losses incurred by a partnership are generally calculated at the partnership level and attributed to partners in accordance with their respective interests. Where a taxpayer (the Retired Partner in your situation) has retired from a continuing partnership, he or she would cease to be a member of the partnership, although the retired partner may be allocated a portion of the partnership income for a period following his or her retirement, under subsection 96(1.1) of the Act.
Subsection 97(2) of the Act generally provides that a partner, or a person about to become a partner, may transfer certain property to a Canadian partnership on a rollover basis, provided that the partner and all of the other members of the partnership so elect. In this regard, paragraph 96(3)(a) of the Act provides that where a taxpayer who is a member of a partnership has made an election under certain provisions of the Act, including subsection 97(2), in a manner which would otherwise be valid, the agreement, designation or election is not valid unless: i) it was made or executed on behalf of the taxpayer and each other member of the partnership; and ii) the taxpayer had authority to act for the partnership. If these two conditions are met, the election is deemed by paragraph 96(3)(b) of the Act to have been made or executed by each other member of the partnership. For subsections 97(2) and 96(3) of the Act to apply, the taxpayer(s) making the election described therein must be an existing member of the partnership. Therefore, in the situation described in your letter, a member of either partnership would not be required to have authority to act on behalf of the Retired Partners.
We trust our comments will be of some assistance.
Yours truly,
Wayne Antle, CGA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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