30 October 2003 External T.I. 2003-0020545 - DEATH OF A PARTNER

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: 1) What is a deceased partner's share of partnership income in circumstances where the partnership continues after the death of the partner and the partnership had income at the time of the partner's death and nil income at its fiscal year-end? 2) Could the disposition of a partnership interest by a deceased partner to his spouse be done at cost?

Position:1) Assuming that the partnership continues to exist after the death of the deceased partner and, assuming that the partnership agreement provides for an allocation of income to a deceased partner in the year of death, the deceased partner's share of the partnership income should be nil. 2) Yes, provided all the conditions in subsection 70(6) are satisfied.

Reasons:

1) Allocation is in accordance with subsection 96(1). 2) Subparagraph 70(6)(d.1)(ii) of the Act.

XXXXXXXXXX 2003-002054
Shaun Harkin, CMA
October 30, 2003

XXXXXXXXXX:

Re: Technical Interpretation Request: Death of a Partner

This is in reply to your email of May 26, 2003 wherein you requested our views on the allocation of income to a deceased partner and the cost of the partnership interest to the spouse of the deceased.

In particular, you asked us to confirm that:

? A deceased partner's share of partnership income could be nil where the partnership had income at the time of the partner's death and nil income at its fiscal year-end.

? The disposition of a partnership interest by a deceased partner to his spouse could be done at cost.

In your letter, you asked us to assume that the partnership (hereafter referred to as the "Partnership") continued upon the death of a partner with the deceased's estate as a partner and that, immediately following the end of the partnership's fiscal period, the deceased's spouse acquires the deceased's partnership interest from the deceased's estate.

Our Comments

Written confirmation of the tax consequences inherent in a particular transaction or series of transactions are given by this Directorate only where the transaction(s) are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R5. Notwithstanding the foregoing, we are prepared to provide the following general comments.

Pursuant to subsection 96(1) of the Income Tax Act (Canada) (the "Act"), the members of a partnership share in the income or loss of the partnership calculated at the end of the fiscal period of the partnership. Therefore, assuming that a partnership continues to exist after the death of a partner and, assuming that the partnership agreement provides for an allocation of income to the deceased partner in the year of death, the deceased's share of the partnership's income would be determined by reference to the income of the partnership calculated at the end of the fiscal period of the partnership. In this respect, we would also draw your attention to proposed paragraph 96(1.01)(a) of the Act, which applies if a taxpayer ceases to be a member of a partnership as a result of the death of the taxpayer in 2003 or a subsequent taxation year. This provision deems a taxpayer, who is a former member of a partnership, to be a member at the end of the fiscal period of the partnership. This new provision clarifies that, although a taxpayer may have ceased to be a member of a partnership before the end of the fiscal period, an amount of the income or loss of the partnership is allocable to the taxpayer under subsection 96(1).

Where a partnership interest is transferred or distributed to a taxpayer's spouse as a consequence of the death of the taxpayer and the property becomes indefeasibly vested in the spouse within 36 months of the taxpayer's death, paragraph 70(6)(d.1) of the Act deems the taxpayer not to have disposed of the partnership interest (except for the purposes of paragraph 98(5)(g) of the Act) as a consequence of the taxpayer's death and deems the spouse to have acquired the partnership interest at the time of the taxpayer's death at its cost to the taxpayer. Any amount added or deducted under subsections 53(1) or 53(2) of the Act in respect of the deceased taxpayer's partnership interest will be reflected in the adjusted cost base of that interest and will flow through to the spouse.

Caveat

This letter should not be construed as implying that the CCRA has agreed, or is providing an opinion that, the Partnership would continue to exist after the death of the deceased. This determination can only be made after a complete examination of the terms of the deceased's will, if any, and an analysis of the law of the jurisdiction in which the deceased was resident at the time of death.

The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the Canada Customs and Revenue Agency. Our practice is to make this disclaimer in all instances in which we provide an opinion.

We trust the above comments are of assistance.

Yours truly,

Daryl Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

??

- 2 -