16 July 1997 External T.I. 9700585 - SECTION 34.2 RESERVE

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:

Whether the reserve claimed by a member of a partnership under section 34.2 and included in income in following year when the individual was no longer a member of the partnership would be allocated to his province of residence.

Position:

Cannot be definitive, only general comments available; transaction being proposed.

Income earned in a year in a province computed according to rules under Part XXVI of Regulations and would depend on whether taxpayer carried on a business in the year, resided in the province and had a permanent establishment in or outside the province.

Reasons:

Paragraph 22 of IC-70R3. Proposed transactions should be dealt with by way of advance rulings.

XXXXXXXXXX 970058

Attention: XXXXXXXXXX

July 16, 1997

Dear Sirs:

Re: Reserve under Section 34.2 of the Income Tax Act (the "Act")

This is in reply to your letter dated January 2, 1997 concerning a reserve under section 34.2 of the Act and the treatment of the reserve included in income for the purposes of Part XXVI of the Income Tax Regulations (the "Regulations") by a member of a partnership who proposes to dispose of his partnership interest.

As your letter concerns a specific proposed transaction, the matter should be the subject of a request for an advance income tax ruling. Consequently, we are not prepared to provide a definitive response to your enquiry and can only provide the following general comments:

1.It is our opinion that a reserve that was included in computing a taxpayer's income for a taxation year under subsection 34.2(5) of the Act would be allocated to a particular province or provinces as follows:

(a)Where the taxpayer resided, and had a permanent establishment ("PE"), in a province and also had a PE in another province or in other provinces, the rules under subsections 2601(2) and 2603(3) of the Regulations would apply for the purposes of determining the taxpayer's "income earned in a year in a province", as the term is defined in subsection 2600(1) of the Regulations,

(b)Where a taxpayer had no income from a business with a PE outside his province of residence in a taxation year, the taxpayer's income earned in the year in that province would be determined in accordance with subsection 2601(1), for purposes of subsection 2600(1) of the Regulations.

As indicated in paragraph 22 of Information Circular 70-6R3, this opinion is not an advance ruling and, accordingly, it is not binding on Revenue Canada, Taxation.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch