8 April 1993 External T.I. 9238055 F - Application of 98(3)

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.

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Attention:  XXXXXXXXXX

Dear Sirs:

This is in reply to your letter dated December 8, 1992 wherein you requested an interpretation with respect to the transfer of work in progress of a partner who withdraws from a partnership and joins a new partnership.

As stated in your letter, the particular circumstances outlined therein on which you have asked our views appear to be a factual situation involving a specific taxpayer. As explained in Information Circular 70-6R2, it is not the Department's practice to comment on proposed transactions other than in the form of advance income tax rulings. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate taxation district office for their views. We are therefore not in a position to give you a definite response as to the application of the provisions of the Income Tax Act (the "Act"). However, we can offer you the following general comments which may be of assistance. Although, in certain circumstances, they may not be appropriate to your specific situation.

Unless either one of subsections 85(3), 98(3) or (5) of the Act applies, subsection 98(2) provides that a transfer of property (including work in progress in respect of which an election under paragraph 34(1)(a) is in force) from a partnership to a partner on withdrawal is deemed to have been made at fair market value.

Subsections 97(1) and (2) of the Act apply to a transfer of work in progress to a partnership by a taxpayer who, immediately after the transfer, was a member of the partnership. Under the provisions of subsection 97(2) of the Act, the work in progress is to be transferred at fair market value. However, in the case of a Canadian partnership the elective provisions of subsection 97(2) permit it to be transferred at an "agreed amount" which cannot exceed the fair market value of the work in progress and cannot be less than the consideration received by the transferor. When no consideration, other than an interest in the partnership, is received, the agreed amount may be any amount between nil and fair market value.

You stated in your letter that according to Interpretation Bulletin IT-457R, paragraph 16, the value of the work in progress taken by the withdrawing partner is allocated to him. It is actually stated that the additional income to the partnership resulting from the disposition of work in progress to the former partner must be allocated to one or more partners, including the withdrawing partner. As subsections 85(3), 98(3) or (5) of the Act do not seem to apply in the circumstances described in your letter, the cost amount to the withdrawing partner of the work in progress will be fair market value. An election under subsection 97(2) of the Act at less than fair market value, in the circumstances, might result in double taxation.

Yours truly,

for Director Manufacturing Industries, Partnerships and Trusts DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch