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) When a partnership agreement states the partnership ends on the death of a partner could a new partnership of the deceased partner's spouse and the remaining partner be considered a continuation of the original partnership so that only one T2042 could be prepared for the year?
2) Two spouses are equal partners in a Canadian farm partnership. One of the spouses dies. The surviving spouse is the sole beneficiary and estate trustee of the deceased partner's estate. Could the surviving spouse execute and file a T2060, Election for Disposition of Property Upon Cessation of Partnership, on behalf of the deceased partner's estate, so that subsection 98(3) of the Income Tax Act (the "Act") could apply?
Position: 1) No 2) No
Reasons:
1) No provision of the Act could consider the new partnership to be a continuation of the original partnership for the purpose of preparing one T2042 for the year - the partnership of the deceased partner's spouse and remaining partner is a new and separate partnership because at law, per the partnership agreement, the original partnership ceased upon the death of a partner and did not have any provision to allow the original partnership to continue or admit new partner members upon the death of a partner.
2) The estate of the deceased could not be considered a "member of the partnership" immediately before it ceased.
XXXXXXXXXX 2001-010980
Shaun Harkin, CMA
April 29, 2002
Dear XXXXXXXXXX:
Re: Technical Interpretation Request: Family Farm Partnership
This is in reply to your letter of November 2, 2001 wherein you ask the following questions:
1) Could a new partnership comprised of a deceased partner's spouse and the remaining partner be considered a continuation of the original partnership so that one T2042, Statement of Farming Activities, could be prepared for the year when the following conditions exist?
- a father and son have been carrying on a Canadian farm partnership (hereinafter referred to as "Partnership 1") with a December 31 year end
- the father dies on September 30
- the partnership agreement states Partnership 1 ends on the death of a partner
- the deceased father's spouse, who is the sole beneficiary of her spouse's property, and son form a partnership (hereinafter referred to as "Partnership 2") for the purposes of carrying on the farm business
2) Two spouses are equal partners in a Canadian farm partnership. One of the spouses dies. The surviving spouse is the sole beneficiary and estate trustee of the deceased partner's estate (hereinafter referred to as the "Estate"). Could the surviving spouse execute and file a T2060, Election for Disposition of Property Upon Cessation of Partnership, on behalf of the Estate, so that subsection 98(3) of the Income Tax Act (the "Act") could apply?
Written confirmation of the consequences inherent in particular transactions are given by this directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular 70-6R4. If, however, the particular transactions are partially completed or completed, the enquiry should be addressed to the relevant Tax Services Office. Notwithstanding the foregoing, we are providing the following comments.
1) Since the Partnership 1 partnership agreement states that upon the death of a partner Partnership 1 ceases to exist, subsection 99(1) of the Act would deem Partnership 1 to have a September 30 fiscal period end. In our view, there is no provision of the Act that could allow Partnership 2, in your particular situation, to be considered a continuation of Partnership 1; therefore, a separate T2042 would have to be prepared for Partnership 1 and Partnership 2.
Capital cost allowance ("CCA") may be claimed by Partnership 1 up to September 30 of the year on a prorated basis as is allowed by Part XI of the Income Tax Regulations (the "Regulations"). Subsection 1100(3) of the Regulations restricts CCA where the taxation year is less than 12 months.
As noted in paragraph 10 of Interpretation Bulletin IT-427R, Livestock of Farmers, and paragraph 2 of Interpretation Bulletin IT-526, Farming - Cash Method Inventory Adjustments, the optional inventory adjustment does not apply in a year in which the farmer died. The reference to a farmer in those bulletins is a reference to an individual, corporation, partnership or trust in the farming business. Therefore, it is our view that the optional inventory adjustment does not apply in the year a partner dies causing the partnership to cease.
2) We agree with your comments that subsection 70(5) of the Act could apply, using subsection 70(6.2) of the Act, to the disposition of the deceased partner's partnership interest in order to crystallize any accrued gains. It is our opinion that the surviving partner could carry on the business that was the business of the partnership as a sole proprietorship using the provisions of subsection 98(5) of the Act.
With respect to your comments regarding the use of the T2060 election available under subsection 98(3) of the Act we offer the following comments.
Subsection 98(3) of the Act states in part:
"... a Canadian partnership has ceased to exist and all the partnership property has been distributed to persons who were members of the partnership immediately before that time so that immediately after that time each such person has, in each such property, an undivided interest that, when expressed as a percentage (in this subsection referred to as that person's "percentage") of all undivided interests in the property, is equal to the person's undivided interest, when so expressed, in each other such property..."
When a taxpayer dies subsection 70(5) or 70(6) of the Act deems the estate, trust or beneficiary to have acquired capital property of the deceased at the time of the death of the taxpayer. It is our opinion that the acquisition of an interest in a partnership by an estate, trust or beneficiary at the time of death of a partner does not automatically entitle the estate, trust or beneficiary to acquire the status of a "member of the partnership". This view is consistent with the decision in Bow River Pipe Lines Ltd. vs. The Queen, 97 DTC 5385 (FCA), where the court found that the appellant who had been assigned a limited partnership interest had, "never achieved the status of a "member of a partnership"". Since the words "member of a partnership" are not defined in the Act, the judge in that case stated that common law, the various agreements between the parties and the Partnership Act assist in defining the meaning of "member of a partnership".
The Partnership Act (Ontario) states, no person may be introduced as a partner without the consent of all existing partners. In the situation described, since at law the partnership has ceased at the time the Estate has acquired an interest in the partnership, it would not be possible at that time to allow for the admission of new members to the partnership. When the partnership ceases upon the death of a partner, partnership property would be distributed to the Estate but not to the deceased partner. Since the Estate could not be a person who was a member of the partnership before it ceased, it is our view that subsection 98(3) of the Act could not apply to the situation you described.
The foregoing comments represent our general views with respect to the subject matter. As indicated in paragraph 22 of Information Circular 70-6R4, the above comments do not constitute an income tax ruling and accordingly are not binding on the CCRA. 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,
Steve Tevlin
for Director
Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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