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) Do the total of the amounts described under subparagraph 98(5)(a)(i) and the excess amount described under paragraph 98(5)(c) of the Act include the cost of a partnership interest acquired from the sole proprietor's deceased spouse?
2) Is the unused exempt capital gains balance of a proprietor added to the proprietor's ACB (per paragraph 53(1)(r)) for the purpose of determining the proprietor's proceeds of disposition under subsection 98(5)?
Position:
1) Yes, provided the deceased (or, where applicable, the deceased's estate) was a member of the partnership immediately before the disposition.
2) Yes.
Reasons: 1) & 2) Wording of the Act
XXXXXXXXXX 2003-002965
Shaun Harkin, CMA
October 20, 2003
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Tax Treatment of Partnership Interest
This is in reply to your letter of July 8, 2003 wherein you asked for our comments in respect of the following hypothetical situation:
? Spouse A and B have carried on a business in a farming partnership for many years.
? Both Spouse A and Spouse B created exempt capital gains balances in respect of their partnership interests in their respective 1994 personal tax returns.
? Spouse A passes away before 2005 and Spouse B carries on the business such that subsection 98(5) of the Income Tax Act (the "Act") applies.
? On Spouse A's terminal tax return the trustees of Spouse A's estate utilize subsection 70(6.2) of the Act to elect out of subsection 70(6) of the Act such that subsection 70(5) of the Act applies to the transfer of the deceased partner's continuing partnership interest to Spouse B. As a result, a capital gain is triggered and the exempt gains balance is used to offset the capital gain.
Specifically, you ask:
1) For the purpose of subsection 98(5), does the partnership interest acquired by Spouse B from Spouse A have an adjusted cost base ("ACB") to Spouse B equal to its fair market value (i.e., the proceeds of disposition of Spouse A's partnership interest)? More specifically, is the ACB of the partnership interest acquired by Spouse B included for the purpose of calculating Spouse B's potential capital gain under paragraph 98(5)(a) and also for the purpose of calculating a bump to the cost base of non-depreciable capital property under paragraph 98(5)(c), if such a bump is available?
2) Can Spouse B add the unused exempt capital gains balance to her ACB (per paragraph 53(1)(r) of the Act) for the purpose of calculating the potential capital gain under paragraph 98(5)(a)?
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 comments.
We have assumed, for the purpose of answering your question, that Spouse A and B are residents of Canada at the time of Spouse A's death.
1) We agree that subsection 70(5) could apply to the disposition of the deceased partner's partnership interest in order to crystallize any accrued gains provided a proper election is filed under subsection 70(6.2). Assuming that a proper subsection 70(6.2) election is filed, Spouse A would be deemed to dispose of the partnership interest at its fair market value immediately before the death and Spouse B would be deemed to acquire it at a cost equal to such proceeds.
Subparagraph 98(5)(a)(i) and paragraph 98(5)(c) of the Act apply to a sole proprietor if the person who disposed of the interest to the sole proprietor was a member of the partnership immediately before the disposition. Accordingly, assuming that Spouse A's continuing partnership interest passes directly to Spouse B, Spouse B would include the acquisition cost in calculating the proceeds of disposition described in paragraph 98(5)(a) and, subsequently, when calculating the excess amount described in paragraph 98(5)(c) of the Act. The same result would follow if Spouse A's continuing partnership interest were distributed to Spouse B through Spouse A's estate and the estate was, in the interim, a continuing member of the partnership.
2) Where the conditions set out in the preamble of subsection 98(5) are met, the provisions therein will automatically apply and paragraph (a) will deem the proprietor's proceeds of disposition to be an amount computed with reference to the proprietor's adjusted cost base of his partnership interest immediately before the particular time (the particular time being the time the Canadian partnership ceased to exist) and the total cost amount to the partnership, immediately before the particular time, of each partnership property received by the proprietor.
Paragraph 53(1)(r) increases the adjusted cost base of a property that is an interest in a flow-through entity by an amount determined by the formula A x B/C. All of the variables include a reference to "at that time" (or "taxation year that includes that time"). The relevant time is discussed in the preamble of paragraph 53(1)(r), which refers to "property is an interest in... a flow-through entity... and immediately after that time the taxpayer disposed of all of the taxpayer's interests in,...the entity...". Accordingly, the basis bump occurs immediately before the disposition and would affect the computations in subsection 98(5) of the Act. That is, in applying subsection 98(5), the ACB of the partnership interest and the deemed proceeds of disposition of the partnership interest would both reflect the paragraph 53(1)(r) increase.
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
??
- 3 -
All rights reserved. Permission is granted to electronically copy and to print in hard copy for internal use only. No part of this information may be reproduced, modified, transmitted or redistributed in any form or by any means, electronic, mechanical, photocopying, recording or otherwise, or stored in a retrieval system for any purpose other than noted above (including sales), without prior written permission of Canada Revenue Agency, Ottawa, Ontario K1A 0L5
© Her Majesty the Queen in Right of Canada, 2003
Tous droits réservés. Il est permis de copier sous forme électronique ou d'imprimer pour un usage interne seulement. Toutefois, il est interdit de reproduire, de modifier, de transmettre ou de redistributer de l'information, sous quelque forme ou par quelque moyen que ce soit, de facon électronique, méchanique, photocopies ou autre, ou par stockage dans des systèmes d'extraction ou pour tout usage autre que ceux susmentionnés (incluant pour fin commerciale), sans l'autorisation écrite préalable de l'Agence du revenu du Canada, Ottawa, Ontario K1A 0L5.
© Sa Majesté la Reine du Chef du Canada, 2003
Email this Content