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:
whether the mandatory and optional inventory adjustments for cash based farmers flow through when a partnership is dissolved and one partner continues to carry on the business
POSITION TAKEN:
the 28(1)(b) & (c) adjustments do not affect the cost amount of the inventory as defined in 248(1) but the Department will allow the proprietor to take a deduction under 28(1)(f) for the amount established to be inventory under 98(5)
REASONS FOR POSITION TAKEN:
Decision Summary 6081-3 dated August 27, 1986
XXXXXXXXXX
Dear Sir:
Re: Inventory Adjustments on Continuation of a Partnership by a Proprietorship
We are replying to your letter of October 12, 1993 concerning the interaction of subsections 28(1) and 98(5) of the Income Tax Act (the Act). We apologize for the delay in our response.
You describe a situation where a partnership between a father and son ceased to exist during its 1993 fiscal period. As the son continued the farming business of the partnership, the rules in subsection 98(5) of the Act determine the son's cost and the partnership's proceeds of disposition of the partnership property so acquired by the son. The father and son elected to compute the partnership income in accordance with the cash method under subsection 28(1) of the Act. The income of the partnership for its final fiscal period included both the mandatory and optional inventory adjustments described in paragraphs 28(1)(b) and (c) of the Act. The son continued to use the cash method for the proprietorship.
You ask whether the adjustments made under paragraph 28(1)(b) and (c) can be included in the cost of inventory for the purposes of subsection 98(5) of the Act. In the event that it cannot, you also ask for the limits within which the proprietor must elect if he transfers the inventory to a new partnership under subsection 97(2) of the Act on January 1, 1994.
As stated in paragraph 5 of Interpretation Bulletin IT-291R2 "Transfer of Property to a Corporation under Subsection 85(1)", the cost of inventory as defined in subsection 248(1) of the Act for a taxpayer reporting on the cash basis is nil. Accordingly, the cost of the inventory to the proprietor as determined under paragraph 98(5)(b) would be nil. However, the Department is prepared to permit the son a deduction under paragraph 28(1)(f) for the amount determined to be the cost of inventory pursuant to paragraph 98(5)(b) of the Act.
We do not have enough information to provide you with the limits which would apply to the elected amount for inventory should the proprietor wish to transfer the property to another partnership in the following calendar year. However, the comments in paragraph 5 of Interpretation Bulletin IT-291R2 would also be applicable to the contribution of inventory to a partnership by an individual who had elected to report income on the cash basis (making the appropriate adjustment to the reference in the bulletin to a deduction under paragraph 28(1)(c) of the Act).
We trust our comments will be of assistance to you.
Yours truly
P.D. Fuoco for DirectorBusiness and General DivisionRulings DirectoratePolicy and Legislation Branch
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