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Source:
CCH Tax/Federal Income Tax/News Tracker/Past News/Tax Window/Tax Window Files/2006-0177471E5
DEATH OF A PARTNER. 1. An individual dies and he was a member of limited partnerships at the date of
death. Will he have to report an amount of income or loss from the partnership? 2. If the individual borrowed
LANGIND E
DOCNUM 2006-0177471E5
REFDATE 070727
SUBJECT Death of a partner
SECTION 70(2)
SECTION 20(1)
SECTION 66.1
SECTION 66.2
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: 1. An individual dies and he was a member of limited
partnerships at the date of death. Will he have to report an amount of
income or loss from the partnership?
2. If the individual borrowed funds to acquire the partnership interest,
will the interest incurred in the year of death be deductible?
3. If the individual acquired units of a limited partnership which
invested in flow-through shares and which has a December 31 year-end, will
he be entitled to various resource deductions in the year of death?
POSITION: 1. Assuming the partnership continues to exist after the
death of a partner, the terms of the partnership agreement will provide
whether or not a deceased taxpayer will be allocated a share of the income
or loss of the partnership from the end of the last fiscal period to the
date of death. The deceased's share will be determined by reference to
the income of the partnership calculated at the end of the fiscal period
of the partnership according to the terms of the partnership agreement.
If a share of the income is allocated to the deceased, it represents a
right or thing. If a share of the loss is allocated to the deceased, it
represents loss from business or property where the ACB has been reduced
by the amount of the loss.
2. Except as provided in paragraph 4 of IT-212R3, an interest expense
would not be deducted from the value of the right or thing in the year of
death. An interest expense that is not deducted in computing the value of
right or thing may be deductible in computing the income from business or
property of the deceased if the conditions provided for in paragraph
20(1)(c) are met. If a loss results from the deduction of the interest,
it could be claimed in the final return for the year of death.
3. Canadian exploration expenses or Canadian development expenses
incurred by a partnership in a particular fiscal period may be allocated
to persons who were partners of the partnership at the end of that fiscal
period. There would be no allocation to the deceased partner in the year
of death because he was not a partner at the end of the fiscal period that
is December 31.
REASONS: 1. IT-278R2 and previous opinions.
2. IT-212R3 and wording of the Act.
3. Wording of the definitions of Canadian exploration expense and of
Canadian development expense (paragraph 66.1(6)(h) and 66.2(5)(f))
XXXXXXXXXX
2006-017747
Sylvie Labarre, CA
July 27, 2007
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Dear Sir:
Re: Death of a partner
This is in reply to your electronic message of March 22, 2006 in which you
requested our opinion on some issues related to the death of a member of
limited partnerships. You describe the following situation.
An individual passed away before December 31st of a particular taxation
year. In the taxation years previous to the year of death, the individual
had invested in various syndicated limited partnerships that are widely
held. In the year of death, these partnerships allocated income and/or
losses to the deceased's estate.
The deceased had incurred carrying charges throughout his last taxation
year, the debt of which was originally used to finance the acquisition of
these limited partnership interests.
In addition to the foregoing, prior to his death, the deceased had
invested in a new limited partnership, which raised funds to invest in
flow-through shares of various mining and oil & gas resource corporations.
All of the partnerships have December 31 fiscal year-ends.
Questions
1. You have requested our views on how to compute the amount arising from
the partnership that should be reported as a right or thing when a
deceased individual was a member of a partnership at the time of his
death. You also have a question on how to report a share of a loss from a
partnership in the deceased's tax returns.
2. Another question deals with the deductibility of the interest and the
carrying charges incurred in the year of death in computing the income
from a business or property or in computing the value of the right or
thing.
3. Your last question is in respect of the consequence of the death of
the taxpayer on the various resource deductions to which the taxpayer may
be entitled because he was holding the units of a limited partnership that
invested in flow-through shares.
Our comments
Your request relates to a completed transaction. Since your situation
involves a completed transaction, you should submit all relevant facts and
documentation to the appropriate Tax Services Office ("TSO") for their
views. A list of TSOs is available on the "Contact Us" page of the CRA
website. Although we cannot comment on your specific situation, we are
prepared to provide the following general comments, which may be of
assistance.
Stub Period
Assuming the partnership continues to exist after the death of a partner,
the terms of the partnership agreement will provide whether or not a
deceased partner will be allocated a share of the income or loss of the
partnership from the end of the last fiscal period to the date of death
(stub period). The amount of the share of income or loss for the stub
period allocated to the deceased partner, if any, will be determined
according to the terms of the partnership agreement. If the partnership
agreement does not provide for an allocation of the partnership's income
or loss to the deceased partner in the year of death, the deceased partner
will not have any right or thing in respect of the partnership for the
purpose of subsection 70(2) of the Act and will not be able to claim any
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loss in respect of the stub period.
If 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
according to the terms of the partnership agreement. The deceased
partner's right to a share of the partnership income for the stub period
would be a right or thing the value of which would be included, pursuant
to subsection 70(2) of the Act in the regular return of income for the
year of death but it may be included in a separate return if the deceased
partner's legal representative so elects. In our view, proposed paragraph
96(1.01)(a) would not change that position.
In a situation where the partnership agreement provides for an allocation
of income or loss to the deceased partner in the year of death and the
partnership incurs a loss in the taxation year, the long-standing position
of the CRA is to allow a deduction of the deceased partner's share of the
partnership loss for the stub period in the regular return of income for
the year of death provided the adjusted cost base of his partnership
interest is reduced by the amount of the loss from a business or property
(paragraph 4(b) of
IT-278R2). The partnership loss does not affect the amount of the value
of right or thing for the purpose of subsection 70(2) of the Act even if
the deceased had the right to receive a share of the income of other
partnerships. Proposed subsection 96(1.01) provides support for the view
that this position remains appropriate.
The information from the limited partnerships should be used by the legal
representative of the deceased to the extent available. We note that the
filing deadline is not before April 30th of the year following the death.
If an estimate was used in the deceased's return because the information
was not available on the filing date, an amended return will have to be
filed when the legal representative becomes aware of the actual amount if
the actual amount differs from the estimate.
Deduction of interest
Except as provided in the position mentioned in paragraph 4 of IT-212R3,
an interest expense would not be deducted from the gross amount of a right
or thing in computing the value of the right or thing for purposes of
subsection 70(2) of the Act. Note that if the interest expense is
deducted in computing the value of the right or thing for the purposes of
subsection 70(2) of the Act according to that position, it will not be
deductible in computing the income from business or property pursuant to
paragraph 20(1)(c) of the Act.
An interest expense that is not deducted in computing the value of the
right or thing for purposes of subsection 70(2) of the Act may be
deductible in computing the income from business or property of the
deceased if the conditions of paragraph 20(1)(c) of the Act are met. For
the purpose of this letter, we assume that the deceased individual
borrowed funds to acquire a partnership interest or to contribute to a
partnership for use by the partnership to earn income from property or
business. Provided the conditions of paragraph 20(1)(c) of the Act were
met during the lifetime of the individual, the interest expenses otherwise
allowable would generally have been deducted, in computing his income from
business or property during his lifetime, on a calendar year basis (as the
taxation year of an individual is generally the calendar year). His share
of the partnership's income for the taxation year of the partnership
ending in the taxation year of the individual (the calendar year) would
have been added to his income from business or property pursuant to
paragraph 12(1)(l) of the Act. In the year of his death, the partner
could deduct, in computing the income at the date of his death, the
interest expenses otherwise allowable paid up to the date of death or
payable in respect of the period ending at the date of death (depending on
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the method regularly followed by the taxpayer in computing the taxpayer's
income). Assuming the partnership continues after the death of the
partner, the result of that deduction would be a loss from a business or
property, as the case may be, because no amount would be added pursuant to
paragraph 12(1)(l) of the Act in computing the income from that business
or property. That loss could be claimed in the final return for the year
of death.
The funds borrowed, used by the taxpayer to acquire the partnership
interest, would no longer be used by that taxpayer for the purpose of
earning income from business or property (the deceased would be deemed to
have disposed of the partnership interest immediately before his death
pursuant to subsection 70(5) or (6) of the Act). Therefore, no interest
expense would be deductible for the period beginning at the date of death
in computing the income from the business or property of the deceased.
Deduction of other carrying charges
You did not provide us the detail of the carrying charges incurred by the
deceased in respect of the funds borrowed to acquire partnership
interests. For the purpose of this letter, we assume that the deceased
incurred in the year of his death or a preceding year expenses referred to
in subparagraph 20(1)(e)(ii) or (ii.1) of the Act. In such a case, the
expenses referred to in paragraph 20(1)(e) of the Act would not be
deductible in computing the value of the right or thing for purposes of
subsection 70(2) of the Act.
As with the interest expense described above, the deduction provided for
in subsection 20(1)(e) of the Act may be available in computing the income
or loss from business or property of the deceased for the year beginning
on January 1st and ending at the date of death which will be reported in
the final return. The deduction will be limited to the lesser of the
amounts determined for the purposes of subparagraphs 20(1)(e)(iii) and
(iv) of the Act. In our view, the deceased is not entitled to deduct the
remaining unamortized expenses since the debt has not been settled or
extinguished as required in subparagraph 20(1)(e)(v) of the Act.
Allocation of Canadian exploration expense and of Canadian development
expense
In accordance with paragraph 96(1)(d) of the Act, a deduction for resource
allowance or resource expenditures is not available in the computation of
the income or loss of a partnership. However, Canadian exploration
expenses (CEE) or Canadian development expenses (CDE) incurred by a
partnership in a particular fiscal period may be allocated to persons who
were partners of the partnership at the end of that fiscal period.
Amounts so allocated will be added to the CEE or CDE of the partner
(subject to the application of section 66.8 in the case of a limited
partner) pursuant to paragraph (h) of the definition of CEE in subsection
66.1(6) or pursuant to paragraph (f) of the definition of CDE in
subsection 66.2(5), as the case may be. There would not be any allocation
of CEE or CDE to the deceased in his last taxation year because he was not
a partner at the end of the fiscal period of the partnership which is
December 31.
We trust the above comments will be of some assistance.
Yours truly,
Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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