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R. Albert (613) 957-2098
FEB 25 1988
Dear Sirs:
Re: Dissolution of a Partnership Severance of Undivided Interest in Work in Progress
This letter is in response to your December 9, 1987 request for an interpretation as to whether a "disposition" arises on severance of the undivided interests in various assets acquired by former partners of a partnership which dissolved pursuant to subsection 98(3) of the Income Tax Act (the "Act"). In particular, you are requesting clarification of the income tax treatment accorded on the severance of undivided interests in work in progress.
Subsection 98(3) of the Act requires a proportionate distribution of each property of a partnership upon dissolution such that each partner receives an undivided interest in each property rather than an undivided interest in the partnership property as a whole. Since each former partner is to receive an undivided interest in each of the properties, including work in progress, it is not possible for a partner to accept a divided interest in a partnership property without each of the partners concurrently disposing of their separate but undivided interest in those properties divided and distributed to others. Such a disposition could result in the realization of a gain. Specifically, paragraph 13 of IT-471 , Merger of Partnerships, indicates that the cost amount to the partnership of such work in progress immediately before its distribution to the partners will be "nil", as will be the cost to each partner of his undivided interest in the work in progress. The cost to each partner is subject to the allocation of any "excess", defined in paragraph 4 of IT-471 , allocated by the partner to the work in progress. Dispositions by the partners will occur at fair market value.
We are of the opinion that Tax Ruling TR-76 which deals with the partitioning of parcels of land, finds no parallel to this situation. It should be noted that although TR-76 may reflect the Department's views with respect to the partitioning of land, the old tax ruling series prefixed by TR should no longer be relied upon as representing the Department's present views.
We trust the above will be of assistance.
Yours truly,
for Director Small Business and General Division Specialty Rulings Directorate Legislative and Intergovernmental Affairs Branch