21 November 1997 External T.I. 9720435 - 34.2(5)

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 appeared to be completed transaction.

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. Where no income earned from a PE outside the province of residence, any reserve added back under 34.2(5) would be allocated to province of residence.

Reasons:

Paragraph 22 of IC-70R3. Completed transactions should be dealt with by way of TSO opinions.

972043
XXXXXXXXXX F.B. Fontaine, FCCA

Attention: XXXXXXXXXX

November 21, 1997

Dear Sirs:

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

Thank you for your letter of July 24, 1997 in which you requested clarification of our letter of July 16, 1997.

Paragraph 22 of Information Circular 70-6R3 (the “Circular”) outlines the procedures to be followed in the case of a completed or contemplated transaction. Specifically, the Circular provides that written opinions in respect of completed transactions are considered by the Tax Services Offices. The transactions that you described related to a specific fact situation. However, we responded with general comments that, in our opinion, provide a clear interpretation of the relevant provisions of the Act and the Income Tax Regulations (the “Regulations”).

To reiterate, where an individual has income in a year from a business carried on in more than one province, the individual’s income would be allocated to those provinces in accordance with subsections 2601(2) and 2603(3) of the Regulations. If such income included a reserve added back under subsection 34.2(5) of the Act, then that income would be allocated to those provinces in which the business was carried on. Only where an individual has no income in a year earned from a business with a permanent establishment outside his/her province of residence would his/her reserve added back under subsection 34.2(5), in computing income for a year, be allocated to his/her province of residence at the end of the year in accordance with subsection 2601(1) of the Regulations.

We hope this will be of assistance to you.

Yours truly,

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