24 August 1987 Income Tax Severed Letter 7-1466 - [Subsections 28(1) and 98(5)]

DATE: August 24, 1987

TO- CURRENT AMENDMENTS AND REGULATIONS DIVISION

FROM- Bilingual Services
         Section
        M. Vallée
       (613)957-8982

ATTENTION B. Bryson

RE: Subsections 28(1) and 98(5)

XXXX

The problem raised by XXXX concerns the computation of the income of a deceased taxpayer who was a partner of a farm partnership which, for the year prior to his death, had included in the computation of its income, an amount under paragraph 28(1)(b) of the Income Tax Act.

As stated in XXXX letter, dated August 1, 1984, in a farm partnership, when the farmer dies, his estate must complete a tax return for the portion of the year up to the date of his death. The amount of livestock inventory included in income under section 28 in the previous year must be included in expenses in the final return. Section 28 cannot be utilized to recognize the value of the livestock inventory in the income because this can only be done at year-end.

We do not agree with XXXX statement to the effect that no amount can be included in the computation of the income of the partnership and allocated to a partner for the taxation year in which he dies. We are of the opinion that the example described in XXXX letter is erroneous.

In that particular instance, the partnership does not seem to have ceased to exist upon the death of the taxpayer, and a financial statement for the partnership fiscal year was attached to XXXX letter. Since the taxpayer had presumably died in August a tax return for the year of his death had to be filed before February of the following year.

Subparagraph 96(1)h) provides that the taxation year of the partnership is its fiscal period. In the example submitted by XXXX the taxation year of the partnership ends on December 31, notwithstanding the death of one partner in the course of the year. Consequently, the income of this partnership is computed at that date and a portion thereof is allocated to each of the partners in accordance with the partnership agreement. Since the rules stated in section 28 apply to the computation of the income of the partnership, as if it were a separate person and not at the individual partner level, the partnership could include in the computation of its income the fair market value of its livestock inventory at that date. A portion of the partnership income could then be allocated to the deceased partner and his widow and prorated between them based on the number of days during the year when they were members of the partnership.

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