Dear Sirs:
This is in reply to your letter of June 11, 1991 wherein you requested us to confirm your view about the tax consequences of a partner upon ceasing to be a resident of Canada. To illustrate, you have provided us with the following hypothetical facts.
Hypothetical Facts
24(1)
Your Interpretation
1) .
2) 24(1)
3)
Our Comments
The above hypothetical facts appear to reflect a factual situation and proposed transactions. As stated in paragraph 6 of Information Circular 70-6R2, we do not confirm income tax consequences except in the context of an advance ruling. However, we can provide the following comments. Our comments are discussed under two subject areas.
Partnership continues to exist
If all of his rights in a partnership are satisfied upon withdrawal from the partnership, then a withdrawing partner will have no residual interest in the partnership and will have disposed of his partnership interest at the time of withdrawal. As a result, subsection 48(1) of the Act will not apply to the partnership interest when he ceases to be a resident of Canada. He will need to include in his income the taxable capital gain from the disposition of the partnership interest in the year of disposition by virtue of paragraph 3(b) of the Act
If the withdrawing partner has a residual interest in the partnership after the withdrawal, then section 98.1 of the Act will apply for the period he remains a resident of Canada. However, when he ceases to be a resident of Canada, subsection 48(1) of the Act will apply. If the partnership interest is not a taxable Canadian property, he will be deemed to have disposed of the residual interest at fair market value immediately before he ceases to be a resident of Canada, unless he files an election under paragraph 48(1)(c) of the Act. Since the rules in paragraph 98.1(1)(a) of the Act are subject to section 48, paragraphs 98.1(l)(a) and (b) will not apply if section 48 applies.
If the principal activities of the partnership are carrying on business in Canada, then subsection 96(1.1) of the Act will apply to the income allocated to the withdrawing partner in the year of his withdrawal from the partnership. He will need to include this allocated income in his income in the year in which the partnership's fiscal year ended whether or not he is a resident of Canada at that time.
Partnership ceases to exist
Upon the withdrawal of a partner, the partnership may be dissolved as a consequence of the application of provincial law or the partnership agreement. If this is the case, then subsection 98(1) of the Act may apply to the partnership. Accordingly, if all the partnership's properties have not been distributed to the partners, then the partnership is deemed not to have ceased to exist, each partner is deemed not to have ceased to be a partner and the right to share in the properties is deemed to be a partnership interest. If the withdrawing partner is deemed to have a partnership interest at the time he ceases to be a resident of Canada, section 48 will apply to his deemed partnership interest.
Also, the partnership is deemed to have a year end at the time of withdrawal pursuant to subsection 99(1) of the Act. If the withdrawing partner ceases to be a resident of Canada, the election to defer the inclusion of the income from partnership under subsection 99(2) of the Act will not be available to him pursuant to subsection 99(3). As a result, he has to include the income allocated to him from the partnership in his income in the year of withdrawal.
These comments represent our opinion of the law as it applies generally. As indicated in paragraph 21 of the Information Circular IC70-6R2, this opinion is not a ruling and accordingly, it is not binding on Revenue Canada, Taxation.
Yours truly,
for DirectorBusiness and General DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch