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:
1. Proper tax treatment for retiring partner who receives a retiring benefit + payments in respect of work in progress.
2. Effects of July, 1995 draft legislation re: 10 year reserves and fiscal year-ends.
Position TAKEN:
1. Dependent on terms of allocation agreement. Could be on income or capital account.
2. Comments given re: general application of the draft provisions.
Reasons FOR POSITION TAKEN:
1. Need all the facts before a decision can be made.
2. Reading of draft legislation and Technical Notes.
952160
XXXXXXXXXX Allan Nelson
(613) 957-9768
Attention: XXXXXXXXXX
October 2, 1995
Dear Sirs:
Re: Taxation of Partnership Income
Interaction with Draft Section 33 of the Act
Request for Technical Opinion
This is in reply to your May 10, 1995 letter to the North York District Office, concerning your client's requirement to report income from a partnership, in light of the fiscal year-end changes noted in the February 27, 1995 budget proposals.
Your questions relate to a specific factual situation. As noted in Information Circular 70-6R2, we do not provide opinions with respect to proposed factual transactions other than in reply to an advance income tax ruling request. However, we will offer the following general comments, which we hope will be of assistance to you.
Periods Prior to the Proposed Amendments
Generally speaking, if the principal activity of a partnership is the carrying on of a business in Canada, and all the partners agree to allocate a share of the future income or loss of the partnership to the retired partner, subsection 96(1.1) of the Act would apply, such that the retired partner is deemed to be a member of the partnership, and any income or loss so allocated is to be included in the retired partner's income for the taxation year in which the particular fiscal period of the partnership for which the allocation was made ends.
The proper income tax consequences of amounts allocated to the retiring partner, representing that partner's share of work in progress that has not previously been recognized for tax purposes, will depend on the agreements between a retiring partner and the continuing members of the partnership.
Please refer to paragraphs 1 to 3 and 13 of Interpretation Bulletin IT-242R, and paragraph 16 of Interpretation Bulletin IT-457R, for the Department's general comments.
Proposed amendments to the Income Tax Act (the "Draft Legislation") were issued by the Department of Finance in July, 1995, to implement, amongst other tax proposals, those related to fiscal year-end changes, as announced in the February 27 budget.
If the Draft Legislation becomes law as proposed, and a partnership allocates a portion of its "December 31, 1995 income" for a "qualifying fiscal period", as those terms are defined in draft subsection 33(1) of the Act, to a retired partner in a manner so that such income is subject to the application of paragraph 96(1.1)(a) of the Act in the partner's hands, then the partner will be entitled to deduct a reserve in respect of the partner's share of the partnership's December 31, 1995 income, pursuant to and in accordance with draft subsection 33(4) of the Act.
Any such reserve claimed in 1995, would have to be included in computing the retired partner's income for the 1996 taxation year, pursuant to draft subsection 33(5) of the Act. A new reserve, using the specified percentage provided in draft subsection 33(1) of the Act, would be available to the retired partner in 1996, if pursuant to paragraph 96(1.1)(a) of the Act, the retired partner is still deemed to be a member of the partnership in 1996.
The reserve would no longer be available to the retired partner in a year where paragraph 96(1.1)(a) of the Act no longer applies to deem the retired partner to be a member of the partnership.
Yours truly,
for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 1995
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 1995
Email this Content