Principal Issues: In the circumstances described:
· Would the section 34 election of the proprietor apply to exclude the acquired partnership WIP in computing his income from the partnership?
· Would the section 34 election of the proprietor apply to exclude WIP, including the acquired partnership WIP, in computing his income from the proprietorship?
· In a subsequent rollover to a corporation, would the cost amount of the proprietorship WIP, including any remaining acquired partnership WIP, be "nil" if the proprietor has made an election under section 34?
· Would a paragraph 20(1)(l) or 20(1)(p) bad debt allowance or deduction be available in respect of the partnership's AR acquired by the proprietor, in computing his income from the proprietorship.
Position: 1. No
2. Yes
3. Yes
4. No
Reasons: See letter
D Tiu
XXXXXXXXXX (613) 957-8961
2006-018718
November 20, 2006
XXXXXXXXXX:
Re: Partnership Properties Acquired by a Withdrawing Partner from a Professional Partnership
We are writing in response to your May 18, 2006 inquiry on the above subject and further to our subsequent telephone discussions (XXXXXXXXXX/Tiu). You indicated the following:
? Mr. X will be withdrawing from a professional partnership and he plans to continue his practice as a sole proprietorship and to subsequently incorporate the proprietorship.
? The partnership will not be dissolved as a result of his withdrawal and as part of the payments in satisfaction of Mr. X's partnership interest, the partnership will transfer, among other partnership properties, the partnership work in progress ("WIP") and accounts receivable ("AR") on client cases related to his particular work.
? At the time of withdrawal, the partnership has in place a valid election under section 34 of the Income Tax Act (the "Act") to not include WIP in the calculation of partnership income.
? Immediately before the withdrawal, all of the partners agreed that the partnership income resulting from the transfer of the partnership WIP to Mr. X would be included in the partnership income allocated to Mr. X on withdrawal.
? Mr. X plans to make an election under section 34 to not include WIP in the calculation of his proprietorship income.
? With respect to the partnership AR to be transferred, an election under section 22 is not available to Mr. X and the partnership because less than substantially all of the business of the partnership has been sold.
You inquired as to:
? Whether the section 34 election that Mr. X makes as a proprietor entitles him to exclude the acquired partnership WIP in computing his income from the partnership.
? Whether the section 34 election that Mr. X makes as a proprietor applies to exclude WIP, including the acquired partnership WIP, in computing his income from the proprietorship.
? In a subsequent rollover to a corporation, whether the cost amount of the proprietorship WIP, including any remaining acquired partnership WIP, would be "nil" if Mr. X has made an election under section 34 to exclude WIP in computing his income from the proprietorship.
? Whether a paragraph 20(1)(l) or 20(1)(p) bad debt allowance or deduction would be available in respect of the partnership's AR acquired by Mr. X, in computing his income from the proprietorship.
Written confirmation of the tax consequences inherent in a particular transaction or series of 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 70-6R5. In any event, a request cannot be considered for a ruling when the transactions are completed or where the issues involved are primarily questions of fact. Notwithstanding the foregoing, we are prepared to provide the following general comments.
In our view, the section 34 election that Mr. X makes as a proprietor would not be relevant in computing his income from the partnership. However, the same election would apply to exclude WIP, including the acquired partnership WIP, in computing his income from the proprietorship. If such an election has been made, the cost amount of his proprietorship WIP, including any remaining acquired partnership WIP, would be "nil" in a subsequent rollover to a corporation.
In our opinion, a paragraph 20(1)(l) or 20(1)(p) bad debt allowance or deduction would not be available in respect of the partnership's AR acquired by Mr. X in computing his income from the proprietorship because the acquired AR are not amounts that have been taken into the proprietorship income in accordance with subparagraph 20(1)(l)(i) and 20(1)(p)(i) respectively. For additional details, please refer to Interpretation Bulletin IT-188R, Sale of Accounts Receivable dated May 22nd, 1984 and the related Special Release dated September 26, 1994.
These comments represent our opinions of the law as it applies generally, and as indicated in paragraph 21 of Information Circular 70-6R5, are not binding on the Department. Nevertheless, we hope that our comments will be of assistance to you.
Yours truly,
Robin Maley
Section Manager
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch