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.
XXXXXXXXXX
Attention: XXXXXXXXXX
Dear Sirs:
RE: Work in Progress
This is in reply to your letter of December 30, 1992 in which you requested our views concerning the tax treatment of certain income of a partnership where a partner dies. We apologize for the delay in responding.
The scenario you have outlined in your letter appears to relate to specific taxpayers and involves an event that has occurred. In such circumstances, you should contact your local District Taxation Office for the Department's position on the matter you have raised. We are, however, providing you with the following general comments.
Our Comments:
The Department's general position concerning the tax consequences to a deceased partner is set out in Interpretation Bulletin IT-278R "Death of a Partner or a Retired Partner".
Whether a partnership ceases to exist upon the death of one of its partners depends on the relevant provincial law and the partnership agreement. The comments below have been made on the assumption that the partnership does not cease to exist on the death of a partner. In addition, the comments are based on the assumption that an election under paragraph 34(1)(d) of the Income Tax Act (the Act) is in effect at the time of death of the partner.
Where a partnership is considered not to cease to exist upon the death of a partner, the income of the partnership would continue to be determined on the basis of the partnership's normal fiscal period. With respect to these circumstances we refer you to the following comments in paragraph 2 of IT-278R which are set out below:
"If there is no actual or deemed fiscal year-end of the partnership when the partner dies, the deceased partner's right to share in the profits of the partnership from the end of the last fiscal period to the date of death is a right or thing the value of which is to be included in his income pursuant to subsection 70(2)" (emphasis added).
The underscored phrase, "share in the profits of the partnership" refers to income for income tax purposes. Consistent with this comment, such income would include the amount of work in progress at the end of previous fiscal period where the income of the partnership is first computed for accounting purposes (i.e., work in progress is taken into account in computing such income) and then adjusted for income tax purposes. Accordingly, the amount of such work in progress would effectively be treated as a right or thing.
For your further information, we note that paragraph 10 of IT-278R sets out the circumstances where the deceased partner's share of partnership income in respect of the last fiscal period in which he or she was a member of the partnership may include an amount based on the value of the partnership's work in progress at his or her death. In particular, the example therein sets out the manner in which work in progress is treated where a valid election under paragraph 34(1)(d) is in effect.
These comments represent our opinions of the law as it applies generally.
As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1991, these opinions do not constitute an advance income tax ruling and are not binding on the Department.
While we regret that our reply could not have been favourable, we trust that our comments will be of assistance to you.
Yours truly,
P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch
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