Article

Flow-through shares may have unintended results at death

Many tax and financial planners work with clients who purchase partnership units in a limited partnership which invests in flow-through shares in a principal business corporation. It pays to know the rules in advance when it comes to reporting results on terminal returns for these assets, as sometimes, executors are surprised – unpleasantly.

Capital property owned by an individual in a non-registered account is deemed to be disposed of immediately before death at its fair market value (FMV). This deemed disposition may result in a capital gain or loss. In the case of limited partnership units, the ACB is calculated from original cost, including commissions or legal fees on acquisition, plus or minus certain adjustments made while the units were owned. One of these adjustments increases the adjusted cost base by income allocated to the limited partner and decreases the adjusted cost base by losses allocated to the limited partner. Another adjustment decreases the adjusted cost base by the partner's share of the Canadian Exploration Expenses incurred by the partnership in its fiscal year.

A problem can arise where a partner dies during the partnership’s fiscal year. The first tax period of an estate begins on the day after a person dies and ends at any time within the next 12 months. If the partner dies on any day other than the end of the partnership’s fiscal period, it will be the estate which is allocated the CEE deduction in the year of death, as well as any carry-forward opportunities for use of the deduction against future income, causing unintended results on the terminal return.

Where this happens, the adjusted cost base of the partnership interest reflected on the terminal return does not take into account the CEEs allocated to the estate.

Note that the deemed disposition at FMV is avoided where the partnership interests pass to a Canadian resident spouse or common-law partner, in which case the deemed disposition is accounted for at adjusted cost base. It is possible to elect out of this roll-over.

Where Canadian resident beneficiaries receive partnership units in settlement of a capital interest in the estate, units received will have been acquired at a cost equal to the ACB at the time of their distribution from the estate.

This information is used with the permission of Knowledge Bureau, Inc. For more information go to www.knowledgebureau.com.