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: 1. An individual dies and he was a member of limited partnerships at the date of death. Will he have to report an amount of income or loss from the partnership?
2. If the individual borrowed funds to acquire the partnership interest, will the interest incurred in the year of death be deductible?
3. If the individual acquired units of a limited partnership which invested in flow-through shares and which has a December 31 year-end, will he be entitled to various resource deductions in the year of death?
Position: 1. Assuming the partnership continues to exist after the death of a partner, the terms of the partnership agreement will provide whether or not a deceased taxpayer will be allocated a share of the income or loss of the partnership from the end of the last fiscal period to the date of death. The deceased's share will be determined by reference to the income of the partnership calculated at the end of the fiscal period of the partnership according to the terms of the partnership agreement. If a share of the income is allocated to the deceased, it represents a right or thing. If a share of the loss is allocated to the deceased, it represents loss from business or property where the ACB has been reduced by the amount of the loss.
2. Except as provided in paragraph 4 of IT-212R3, an interest expense would not be deducted from the value of the right or thing in the year of death. An interest expense that is not deducted in computing the value of right or thing may be deductible in computing the income from business or property of the deceased if the conditions provided for in paragraph 20(1)(c) are met. If a loss results from the deduction of the interest, it could be claimed in the final return for the year of death.
3. Canadian exploration expenses or Canadian development expenses incurred by a partnership in a particular fiscal period may be allocated to persons who were partners of the partnership at the end of that fiscal period. There would be no allocation to the deceased partner in the year of death because he was not a partner at the end of the fiscal period that is December 31.
Reasons: 1. IT-278R2 and previous opinions.
2. IT-212R3 and wording of the Act.
3. Wording of the definitions of Canadian exploration expense and of Canadian development expense (paragraph 66.1(6)(h) and 66.2(5)(f))
XXXXXXXXXX 2006-017747
Sylvie Labarre, CA
July 27, 2007
Dear Sir:
Re: Death of a partner
This is in reply to your electronic message of March 22, 2006 in which you requested our opinion on some issues related to the death of a member of limited partnerships. You describe the following situation.
An individual passed away before December 31st of a particular taxation year. In the taxation years previous to the year of death, the individual had invested in various syndicated limited partnerships that are widely held. In the year of death, these partnerships allocated income and/or losses to the deceased's estate.
The deceased had incurred carrying charges throughout his last taxation year, the debt of which was originally used to finance the acquisition of these limited partnership interests.
In addition to the foregoing, prior to his death, the deceased had invested in a new limited partnership, which raised funds to invest in flow-through shares of various mining and oil & gas resource corporations.
All of the partnerships have December 31 fiscal year-ends.
Questions
1. You have requested our views on how to compute the amount arising from the partnership that should be reported as a right or thing when a deceased individual was a member of a partnership at the time of his death. You also have a question on how to report a share of a loss from a partnership in the deceased's tax returns.
2. Another question deals with the deductibility of the interest and the carrying charges incurred in the year of death in computing the income from a business or property or in computing the value of the right or thing.
3. Your last question is in respect of the consequence of the death of the taxpayer on the various resource deductions to which the taxpayer may be entitled because he was holding the units of a limited partnership that invested in flow-through shares.
Your request relates to a completed transaction. Since your situation involves a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
Stub Period
Assuming the partnership continues to exist after the death of a partner, the terms of the partnership agreement will provide whether or not a deceased partner will be allocated a share of the income or loss of the partnership from the end of the last fiscal period to the date of death (stub period). The amount of the share of income or loss for the stub period allocated to the deceased partner, if any, will be determined according to the terms of the partnership agreement. If the partnership agreement does not provide for an allocation of the partnership's income or loss to the deceased partner in the year of death, the deceased partner will not have any right or thing in respect of the partnership for the purpose of subsection 70(2) of the Act and will not be able to claim any loss in respect of the stub period.
If the partnership agreement provides for an allocation of income to the deceased partner in the year of death, the deceased's share of the partnership's income would be determined by reference to the income of the partnership calculated at the end of the fiscal period of the partnership according to the terms of the partnership agreement. The deceased partner's right to a share of the partnership income for the stub period would be a right or thing the value of which would be included, pursuant to subsection 70(2) of the Act in the regular return of income for the year of death but it may be included in a separate return if the deceased partner's legal representative so elects. In our view, proposed paragraph 96(1.01)(a) would not change that position.
In a situation where the partnership agreement provides for an allocation of income or loss to the deceased partner in the year of death and the partnership incurs a loss in the taxation year, the long-standing position of the CRA is to allow a deduction of the deceased partner's share of the partnership loss for the stub period in the regular return of income for the year of death provided the adjusted cost base of his partnership interest is reduced by the amount of the loss from a business or property (paragraph 4(b) of IT-278R2). The partnership loss does not affect the amount of the value of right or thing for the purpose of subsection 70(2) of the Act even if the deceased had the right to receive a share of the income of other partnerships. Proposed subsection 96(1.01) provides support for the view that this position remains appropriate.
The information from the limited partnerships should be used by the legal representative of the deceased to the extent available. We note that the filing deadline is not before April 30th of the year following the death. If an estimate was used in the deceased's return because the information was not available on the filing date, an amended return will have to be filed when the legal representative becomes aware of the actual amount if the actual amount differs from the estimate.
Deduction of interest
Except as provided in the position mentioned in paragraph 4 of IT-212R3, an interest expense would not be deducted from the gross amount of a right or thing in computing the value of the right or thing for purposes of subsection 70(2) of the Act. Note that if the interest expense is deducted in computing the value of the right or thing for the purposes of subsection 70(2) of the Act according to that position, it will not be deductible in computing the income from business or property pursuant to paragraph 20(1)(c) of the Act.
An interest expense that is not deducted in computing the value of the right or thing for purposes of subsection 70(2) of the Act may be deductible in computing the income from business or property of the deceased if the conditions of paragraph 20(1)(c) of the Act are met. For the purpose of this letter, we assume that the deceased individual borrowed funds to acquire a partnership interest or to contribute to a partnership for use by the partnership to earn income from property or business. Provided the conditions of paragraph 20(1)(c) of the Act were met during the lifetime of the individual, the interest expenses otherwise allowable would generally have been deducted, in computing his income from business or property during his lifetime, on a calendar year basis (as the taxation year of an individual is generally the calendar year). His share of the partnership's income for the taxation year of the partnership ending in the taxation year of the individual (the calendar year) would have been added to his income from business or property pursuant to paragraph 12(1)(l) of the Act. In the year of his death, the partner could deduct, in computing the income at the date of his death, the interest expenses otherwise allowable paid up to the date of death or payable in respect of the period ending at the date of death (depending on the method regularly followed by the taxpayer in computing the taxpayer's income). Assuming the partnership continues after the death of the partner, the result of that deduction would be a loss from a business or property, as the case may be, because no amount would be added pursuant to paragraph 12(1)(l) of the Act in computing the income from that business or property. That loss could be claimed in the final return for the year of death.
The funds borrowed, used by the taxpayer to acquire the partnership interest, would no longer be used by that taxpayer for the purpose of earning income from business or property (the deceased would be deemed to have disposed of the partnership interest immediately before his death pursuant to subsection 70(5) or (6) of the Act). Therefore, no interest expense would be deductible for the period beginning at the date of death in computing the income from the business or property of the deceased.
Deduction of other carrying charges
You did not provide us the detail of the carrying charges incurred by the deceased in respect of the funds borrowed to acquire partnership interests. For the purpose of this letter, we assume that the deceased incurred in the year of his death or a preceding year expenses referred to in subparagraph 20(1)(e)(ii) or (ii.1) of the Act. In such a case, the expenses referred to in paragraph 20(1)(e) of the Act would not be deductible in computing the value of the right or thing for purposes of subsection 70(2) of the Act.
As with the interest expense described above, the deduction provided for in subsection 20(1)(e) of the Act may be available in computing the income or loss from business or property of the deceased for the year beginning on January 1st and ending at the date of death which will be reported in the final return. The deduction will be limited to the lesser of the amounts determined for the purposes of subparagraphs 20(1)(e)(iii) and (iv) of the Act. In our view, the deceased is not entitled to deduct the remaining unamortized expenses since the debt has not been settled or extinguished as required in subparagraph 20(1)(e)(v) of the Act.
Allocation of Canadian exploration expense and of Canadian development expense
In accordance with paragraph 96(1)(d) of the Act, a deduction for resource allowance or resource expenditures is not available in the computation of the income or loss of a partnership. However, Canadian exploration expenses (CEE) or Canadian development expenses (CDE) incurred by a partnership in a particular fiscal period may be allocated to persons who were partners of the partnership at the end of that fiscal period. Amounts so allocated will be added to the CEE or CDE of the partner (subject to the application of section 66.8 in the case of a limited partner) pursuant to paragraph (h) of the definition of CEE in subsection 66.1(6) or pursuant to paragraph (f) of the definition of CDE in subsection 66.2(5), as the case may be. There would not be any allocation of CEE or CDE to the deceased in his last taxation year because he was not a partner at the end of the fiscal period of the partnership which is December 31.
We trust the above comments will be of some assistance.
Yours truly,
Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2007
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2007
Email this Content