| 24(1) | 900401 |
| A.Y. Ho | |
| (613) 957-2094 |
19(1)
November16, 1990
Dear Sirs:
This is in reply to your letter of April 10, 1990, in which you request our opinion with respect to a lump sum payment upon death of a partner to the deceased partner's estate. We apologize for the delay in replying to your letter. To illustrate your questions, you have provided us with the following hypothetical fact as described in your letter and subsequent telephone conversations (Ho 19(1)
A) The terms of many professional partnership agreements provide that on the retirement or death of a partner, payments over a number of years are to be made to the retired partner or his estate in addition to a return of his capital account. Such payments are generally to compensate the retired partner or his estate for his share of the partnership goodwill in existence at the time of his withdrawal.
B) Such agreements generally also provide that the stream of goodwill payments are to be treated as an allocation of partnership income to the retired partner or his estate and accordingly, pursuant to subsection 96(1.1) of the Income Tax Act (the "Act") such payments would be included in the income of the payee and excluded from the income allocated to the remaining partners.
C) In many circumstances partnerships will purchase life insurance on the partners to fund any required payments in the event of the death of the partner before retirement. In such circumstances, rather than the goodwill being paid out over a number of years, a lump sum payment would be made by the partnership to the deceased's estate upon receipt of the life insurance proceeds.
Your questions
1) Where a lump sum payment of the life insurance proceeds is made, rather than a stream of periodic payments, and the partnership agreement is amended to treat this lump sum payment as an allocation of income to the deceased partner, does subsection 96(1.1) of the Act still apply to include the payment in the income of the estate?
2) Would such a payment be deductible in computing the income of the remaining partners even though it was funded by life insurance proceeds which were received tax-free?
3) Would the life insurance proceeds increase the "adjusted cost bases" of the partnership interests of the remaining partners pursuant to subparagraph 53(1)(e)(iii) of the Act?
Our comments
With respect to question 1, subsection 96(1.1) of the Act does apply to include the lump sum parent in the income of the estate.
With respect to question 2, neither the remaining partners nor the partnership can deduct the lump sum payment in computing income as it is not laid out to earn income. However, if the partnership agreements is amended to allocate an amount equal to the lump sum payment as income of the deceased partner for that year in lieu of the entitlement to share in future income, a corresponding decrease would be expected in the amount of income allocated to the remaining partners for that year.
With respect to question 3, we confirm that the life insurance proceeds would increase the adjusted cost base of the remaining partners pursuant to subparagraph 53(1)(e)(iii) of the Act.
The above comments are based on the limited information submitted, do not constitute an advance ruling, and as such, are not binding upon Revenue Canada, Taxation.
Yours truly,
for DirectorBusiness and General DivisionRuling DirectorateLegislative and Intergovernmental Affairs Branch