16 September 1997 External T.I. 9702695 - : SS. 34.2(5) Reserve Added Back

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.

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 or in accordance with some other formula.

Position:

Cannot be definitive, only general comments available; transaction being completed, taxpayer should consult the TSO.

Income earned in a year in a province is 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.

XXXXXXXXXX

Attention: XXXXXXXXXX

Dear Sirs:

Re: Provincial Allocations

Subsection 34.2(5) of the Income Tax Act (the "Act")

This is in reply to your letter of January 30, 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 carried on the partnership's business in 1995 and 1996 and thereafter ceased to carry on such business or a substitute business. The letter indicates that the taxpayer was resident in a province.

As stated in paragraph 22 of Information Circular 70-6R3 (the "Circular"), requests for written opinions on completed transactions are considered by the Tax Services Offices which will also provide over-the-counter advice and assistance on general matters. In this regard, we are unable to provide a definitive response to your enquiry and can only provide the following general comments:

1. Where a taxpayer deducted a reserve in a taxation year, the amount in respect of the reserve that is described under subsection 34.2(5) of the Act shall be included in computing the taxpayer's income for the following taxation year from a business. Such income will be 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. However, in determining the allocation of income earned in the year in a province, certain factors must be considered, including whether:

(a) the taxpayer resided in the province on the last day of the year

(b) the taxpayer carried on business in the province during the year, or/and

(c) the business had a permanent establishment ("PE") outside that province.

2. Based on the above comments, it is our opinion that a taxpayer's income for a taxation year that included an amount described under subsection 34.2(5) of the Act would be allocated to a particular province or provinces as follows:

(i) Where the taxpayer resided in a province at the end of a taxation year and had a business with a PE in that province as well as a PE or PE's 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 the year in the province.

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

As indicated in paragraph 22 of the Circular, this opinion is not an advance ruling and, accordingly, it 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