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:
The existence of a residual interest in a partnership when the retired partner is allocated a share of a partnership income or loss (accruing to the retired partner during that part of a fiscal period the retired partner was a member of the partnership) at the end of the particular fiscal period of the partnership?
Position TAKEN:
Under those circumstances a residual interest exists. This alters an opinion given, dated April 18, 1990 under referance 5-9317, and coincides with an opinion given dated Aug. 11, 1994 under referance 5-941590.
Reasons FOR POSITION TAKEN:
The liberal interpretation of the word a "right" as it is used in section 98.1 of the Act lends to the smooth and intended application of that section. It permits the recognition of an increase or decrease in the ACB of the residual interest in the partnership (par. 53(1)(e) or 53(2)(c)) 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.
5-941759
XXXXXXXXXX Franklyn S. Gillman
Attention: XXXXXXXXXX
September 13, 1994
Dear Sirs:
Re: Section 98.1 and paragraph 53(1)(e) of the Income Tax Act (the Act)
This is in reply to your letter dated July 6, 1994 wherein you requested clarification as to the application and interaction of section 98.1 and paragraph 53(1)(e) of the Act.
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).
In the situation where the partner who disposed of its interest maintains the right to receive a nominal amount of partnership property, we would question whether this amounted to a residual interest to which subsection 98.1 of the Act applied or, alternatively, we would consider the application of section 245 of the Act to redetermine the tax consequences.
These opinions are our best interpretation of the law as it applies generally. They may, however, not always be appropriate in the circumstances of a particular case. 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 these 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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