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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
A partner who retires is allocated a share of the partnership income that accrued while he was a partner but paid only at year end is that a residual interest pursuant to section 98.1?
Position TAKEN:
yes , it is a residual interest.
Reasons FOR POSITION TAKEN:
5-941590
XXXXXXXXXX Franklyn S. Gillman
Attention: XXXXXXXXXX
August 11, 1994
Dear Sirs:
Re: Section 98.1 of the Income Tax Act (the "Act")
Residual Interest in a Partnership
This is in reply to your letter dated June 15, 1994 wherein you requested clarification as to the application of section 98.1 of the Act.
A review of the facts that you have enunciated should be the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R dated September 28, 1990. As expressed at paragraph 6 in the Information Circular, this Directorate will not express opinions on definite transactions that are being proposed other than by way of an advance income tax ruling, nor will this Directorate provide rulings on completed transactions.
While we are unable to provide confirmation of the tax effect with regards to situations such as the ones you described, we offer the following general comments for your assistance.
All references to the Act are to the Income Tax Act, S.C. 1970-71-72,c.63 as amended and consolidated to June 10, 1993.
A person who retires and disposes of a partnership interest at any time during a particular fiscal period of a partnership will have a residual interest in that partnership pursuant to paragraph 98.1(1)(a) of the Act where either:
a) that person is allocated a share of the partnership income or loss (accruing during the time the person was a member) at the end of that particular fiscal period of the partnership, or
b) the right for that person to receive property in satisfaction of his interest in the partnership, had not been satisfied at the time of ceasing to be a member of the partnership.
As a result, the partnership interest is deemed not to be disposed of on retirement but rather becomes a residual interest, the adjusted cost base of which is that of the partner's partnership interest immediately before retirement. Therefore, the retired partner will be entitled to increase or decrease the adjusted cost base of the residual interest in the partnership (pursuant to paragraphs 53(1)(e) and 53(2)(c) of the Act) with respect to the share of income or loss in respect of the portion of the fiscal period of the partnership during which the retired partner was a member.
Paragraph 1 of Interpretation Bulletin IT-242R states:
"When a partner ceases to be a member of a partnership (a "retired partner") and all of the retired partner's rights to partnership property for that partnership interest are not satisfied, the retired partner has a residual interest in that partnership by virtue of paragraph 98.1(1)(a). In such circumstances, a partner's partnership interest is deemed not to be disposed of on retirement but rather becomes a residual interest which has an adjusted cost base equal to the adjusted cost base of the partner's partnership interest immediately before retirement. Since a residual interest is also deemed to continue to be an interest in a partnership, the additions to and deductions from its adjusted cost base, pursuant to paragraphs 53(1)(e) and 53(2)(c), apply. A residual interest is separate and distinct from an income interest in a partnership."
When a retired partner's rights as described in paragraph 98.1(1)(a) of the Act are satisfied in full after he retires but before the end of the fiscal period of the partnership in which he ceased to be a member thereof, he shall be deemed to:
a) be a partner until the end of that fiscal period; and
b) to have disposed of the residual interest at the end of such fiscal period (pursuant to paragraph 98.1(1)(b) of the Act).
The above comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, an opinion is not an advance ruling and accordingly, is not binding on Revenue Canada, Customs, Excise and Taxation.
We trust that our comments will be of assistance.
Yours truly,
for Director
Manufacturing Industries,
Partnerships and Trusts Division
Rulings Directorate
Policy and Legislation Branch
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