7 June 1983 Income Tax Severed Letter B-4406 F

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.

RE:     XXX

This is in reply to your memorandum of April 29, 1983 concerning the tax consequences resulting from the distribution of partnership assets to the individual partners of the above-mentioned partnership.

It is our opinion that profit sharing arrangements similar to the one described to us in your memorandum, would not, in and by themselves, result in the application of section 103. The allocation of income was consistent with some predetermined method and it was not a spontaneous or optional arrangement decided after or upon the termination of any given year or any given event.

The premise for the transaction appears to be that each partner would prefer to develop certain specific properties on an individual basis. The transfers of property appear to take place at FMV and, in our view, it is not unreasonable that the partner receiving the property should be allocated the income and suffer the tax consequences as it appears that the partner does not actually pay the partnership for the partnership assets received. It is unlikely that the other partners would wish to pay tax on what is, in effect, a "paper profit" and for which they received no money or other consideration.

In order for section 103 to be applicable, the allocation of income must be considered to result in the reduction or the postponement of the tax that might otherwise have become payable under the Act. The fact that the partner acquiring the land, is able to use the income to soak up losses from other sources, is not to be considered a reduction or postponement of tax. Had the allocation been different he still would not have paid any tax. Moreover, he has restricted his ability to reduce his taxes in future years.

We are also of the opinion that there has been no partial disposition of a partner's partnership interest nor has a partner disposed of his right to share income. With the exception of transactions involving the transfer of property to the partners for no consideration, each partner's rights and obligations remain unchanged. Based on the assumption that the partners are dealing at arm's length with each other, the revised allocation of income with respect to the inventory, when taken as a whole, should result in each partner receiving approximately one-half of the total paper profits to be realized from the disposition of all of the land.

As to your last question, we are of the view that the property is only disposed of at the time the various sales actually take place and that the contract of May 22, 1981 referred to simply represents an agreement to sell at a future date. Furthermore, the Sale of Goods Act (Statutes of Ontario) does not apply with respect to sale of land.

We trust that you will find the above comments of some assistance.