27 August 1986 Income Tax Severed Letter 7-0699 - [Subparagraph 98(5)(b)(ii)]

DATE August 27, 1986

TO- KITCHENER DISTRICT TAXATION OFFICE 
FROM- Bilingual Services
        Section
        J.E. Grisé 
(613) 993-7295

ATTENTION
         Mr. R.W. Beech 
         Chief of Audit

RE: Subparagraph 98(5)(b)(ii)

This is in reply to your memorandum of May 30, 1986 concerning the application of subparagraph 98(5)(b)(ii) of the Income Tax Act to the inventory of a cash basis partnership. We also acknowledge XXXX note enclosing representations from XXXX.

You describe a situation wherein a father and son partnership ceased to exist during its 1983 fiscal period. The son continued the business of the partnership and the rules in subsection 98(5) of the Act apply. Both partners of the partnership and the son elected by virtue of subsection 28(1) of the Act to compute their income from the business in accordance with the cash method. There was no amount specified under paragraph 28(1)(b) of the Act by the partnership in its last fiscal period.

The amount described in subparagraph 98(5)(a)(i) of the Act for the son exceeds the amount determined in subparagraph 98(5)(a)(ii) of the Act. Accordingly, an amount is available under subparagraph 98(5)(b)(ii) of the Act (the excess amount) to establish the cost to the son of property received by him from the partnership. The son added the excess amount determined pursuant to subparagraph 98(5)(d)(iii) of the Act to the cost amount of his inventory which he determined to be Nil. The cost of his inventory so calculated was then claimed as an expense by the son.

You contend that the partnership does not have a cost amount for its inventory and, therefore, there can be no amount designated under subparagraph 98(5)(b)(ii) of the Act. We agree that the property in question is not property described in an inventory of the taxpayer and, accordingly, paragraph (c) of the subsection 248(1) definition of "cost amount" will have no application. However, paragraph (f) of the definition applies to the property which results in a Nil cost amount since the cost of the inventory had been deducted by the partnership.

We considered denying the son's claim on the basis that paragraph 28(1)(c) of the Act could not apply. However, since there is some technical support for applying 28(1)(c) and considering the proposed amendment to repeal paragraph 98(5)(d), it was decided to continue our past practice of allowing a deduction under 28(1)(c) for the amount determined to be the cost of inventory pursuant to paragraph 98(5)(b) of the Act.

Section Chief Bilingual Services Section Bilingual Services and Resource Industries Division Rulings Directorate Legislative and Intergovernmental Affairs Branch

JEG/al