20 May 1998 External T.I. 9801045 - 34.2 RESERVE AND ACB OF PARTNERSHIP INTEREST

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 for the purposes of 53(1)(e), only the incremental amount taken into income each year because of the reserve under 34.2(4) should be added to the ACB, rather than the allocation of the income made by the partnership on which the reserve was originally calculated.

Position:

The amount to be added under 53(1)(e) to the ACB is the amount allocated to the partner by the partnership.

Reasons:

Paragraph 96(1)(d) provides that the income of the partnership to be computed without regard to 34.1 or 34.2(4). The 34.2(4) reserve is taken at the partner level and does not affect the allocations made by the partnership, to the extent of the partner’s share therof.

XXXXXXXXXX 980104
F.B. Fontaine, FCCA

Attention:XXXXXXXXXX

May 20, 1998

Dear Sir\Madam:

Re: Section 34.2 and subsections 53(1) and 53(2) of the Income Tax Act (the “Act”)

This is in reply to your letter dated January 9, 1998 in which you requested a technical interpretation concerning paragraphs 53(1)(e) and 53(2(c) and subsections 34.2(4) and (5) of the Act. You described a situation involving an individual who carried on a business in partnership, claimed a reserve under subsection 34.2(4) for both the 1995 and 1996 taxation years, received a distribution from the partnership in 1996, withdrew from the partnership in 1997 and carried on a substituted business thereafter, under subsection 34.2(3) of the Act.

Paragraph 22 of Information Circular 70-6R3 states that situations that involve completed transactions are considered by the Tax Services Offices. In the circumstances, while we are unable to provide confirmation of the income tax effects of the particular situation, we are prepared to offer the following general comments:

1. Paragraph 96(1)(d) of the Act provides, among other things, that the income of a member of a partnership shall be computed as if the partnership were a separate person and the amount of each income and loss of the partnership were computed for each taxation year of the partnership as if,

a) the Act were read without reference to section 34.1, and

b) no deduction were permitted under subsection 34.2(4).

2. Assuming that an individual member (the “taxpayer”) of a partnership had December 31, 1995 income, i.e. income from the partnership business for a qualifying fiscal period (“QFP”), and subsection 34.2(6) of the Act did not apply, the taxpayer would be entitled to claim a reserve under subsection 34.2(4) of the Act. A taxpayer’s income from a partnership business would generally be the taxpayer’s share of the partnership income and may be subject to any deductions by the taxpayer at the partner level made on a fiscal period basis in respect of the QFP of the business, for the purpose of determining the taxpayer’s December 31, 1995 income under subsection 34.2(1).

3. Generally, it has been the Department’s policy to make a partnership’s paragraph 20(1)(n) and subparagraph 40(1)(a)(iii) reserve available to its members after the wind-up of the partnership. However, in the case of a reserve under subsection 34.2(4), as it relates to the business of a partnership, it is our view, based on the application of paragraph 96(1)(d) and subsection 34.2(4), that only a member of the partnership (rather than the partnership in computing its income) would be able to use such a reserve in computing the member’s income from the particular business.

4. Based on the above comments, we would conclude that:

a) the amount of “the taxpayer’s share....of the income of the partnership....” required to be added to the adjusted cost base (“ACB”) of the taxpayer’s partnership interest, under subparagraph 53(1)(e)(i) at a particular time, would be the pro rata share of the partnership’s income for its fiscal period to which the taxpayer is entitled under the particular partnership agreement;

b) the ACB of the taxpayer’s partnership interest would be reduced by the individual’s share of any distribution made by the partnership in accordance with subparagraph 53(2)(c)(v) of the Act; and

c) generally, the ACB of a taxpayer’s partnership interest would not be required to be reduced by a reserve deducted under subsection 34.2(4), except as otherwise provided in subparagraph 53(2)(c)(i.4) in the case of specified members and limited partners of a partnership.

The comments above represent an expression of our opinion which, as indicated in paragraph 22 of the Circular, is not an advance income tax ruling and, accordingly, is not binding on Revenue Canada.

Yours truly,

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

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