Anonymised, illustrative composite. Same partnership interest, same will, the same 22.5% notional share to each child. One child became a partner. The other took a buyout instead — and a completely different Income Tax Act provision decided what that was worth.
At a glance
A Saskatchewan grain farmer held a 45% interest in a farming partnership he had run with his sister’s son for twenty-six years, the nephew holding the other 55%. At his death the interest was appraised at $2,650,000, against an adjusted cost base of $305,000. His will divided the 45% interest equally between his two adult children — Child A, who had farmed alongside him for eight years, and Child B, who had left for a career in Regina and had no wish to farm.
The family’s working assumption was that the rollover in family farm or fishing corporation rollover to a child would simply apply the same way it does to shares — a straight-line transfer at cost to whichever child the will named. That assumption is half right. Section 70(9.2)(a) does extend the rollover to a partnership interest on the identical property test used for shares: “a share of the capital stock of a family farm or fishing corporation of the taxpayer or an interest in a family farm or fishing partnership of the taxpayer.” Both children’s notional shares of the interest passed that test — the partnership had farmed the land continuously, and the deceased had been actively engaged in it. But a partnership interest carries a condition a share never has: somebody else has to agree to let the new owner in.
The nephew, as the surviving partner, held a veto the partnership agreement gave him over admitting a new partner. He agreed to bring Child A in, effective on the father’s death, under an amending agreement making Child A a partner holding the inherited 22.5% share directly. He would not admit Child B, who in any case did not want to farm. Under the partnership agreement’s own buy-sell mechanism, the partnership paid Child B out in cash for the value of that other 22.5% instead.
The 45% interest was worth $2,650,000 against an adjusted cost base of $305,000 — an accrued gain of $2,345,000 on the whole interest, $1,172,500 on each notional half. Child A’s half: $1,325,000 fair market value, $152,500 adjusted cost base. Child B’s half: identical figures, to the dollar.
That is where the identical figures stop mattering. Child A’s half produced no capital gain on the deceased’s terminal return at all. Child B’s half produced the full $1,172,500 gain, taxed as though there had been no partnership, no family farm and no rollover in the will whatsoever — because for that half, there wasn’t one.
Section 70(9.21) is not one rule for a partnership interest; look at the words inside the paragraph most people read past. Where the property is “a partnership interest described in paragraph (9.2)(a),” the rollover applies — with a bracket immediately after it: “(other than a partnership interest to which subsection 100(3) applies).” That bracket is the entire mechanism of this file.
Section 100(3) is not part of the family-farm rules at all — it is a general partnership provision, and it asks one question that has nothing to do with farming: “Where by virtue of the death of an individual a taxpayer has acquired a property that was an interest in a partnership immediately before the individual’s death…and the taxpayer is not a member of the partnership and does not become a member of the partnership by reason of that acquisition,” three things follow. The taxpayer “shall be deemed to have acquired a right to receive partnership property and not to have acquired an interest in a partnership.” Their cost in that right is fixed by reference to “the amount determined to be the proceeds of disposition of the interest in the partnership to the deceased individual by virtue of paragraph 70(5)(a) or 70(6)(d), as the case may be.”
Read the two provisions together and the mechanism is exact. Child A became a member of the partnership by reason of the acquisition — s.100(3) has nothing to attach to, s.70(9.21)(a)(iii) applies on its own terms, and the taxpayer “is, except for the purpose of paragraph 98(5)(g), deemed not to have disposed of the property as a consequence of the taxpayer’s death” — no disposition at all, at any value, ever. Child B did not become a member of the partnership by reason of the acquisition. Section 100(3) applies to that half, which means s.70(9.21)(a)(iii)’s own bracket excludes it from the rollover — not reduces it, excludes it — and the property falls back to the ordinary rule for capital property at death, s.70(5)(a): the taxpayer “shall be deemed to have, immediately before the taxpayer’s death, disposed of each capital property of the taxpayer and received proceeds of disposition therefor equal to the fair market value of the property immediately before the death.”
Compare family farm or fishing corporation rollover to a child, where the qualifying test that decided the outcome looked at the corporation’s own property, not at either child. Here the property test was satisfied by both halves equally — the split turns on a fact about the recipient the corporate-share rollover has no equivalent question for. A share transfers by itself; nobody has to admit a shareholder. A partnership interest does not.
Child A’s 22.5% rolled to him with no disposition, an unchanged adjusted cost base of $152,500 carried forward, and nothing to report. Child B’s 22.5% was reported on the father’s terminal return as a $1,172,500 capital gain, and Child B’s own cost of the buyout payment was fixed, under s.100(3)(b), at the $1,325,000 figure that had just been used to compute that gain — the “right to receive partnership property,” not a partnership interest, and s.100(3)(c) adds that “section 43 is not applicable to the right,” so the ordinary partnership adjusted-cost-base machinery has nothing to do with what Child B holds either.
Had the estate assumed s.70(9.21) simply followed the will, reporting no gain on either half, the $1,172,500 gain on Child B’s share would have surfaced on reassessment instead of in the return, with interest running from the original filing deadline and discovered after the buyout cash was already spent.
The tell was a question nobody in the room was equipped to answer from a will: is the recipient going to become a partner? That is not a tax question and it does not appear anywhere in the partnership agreement’s tax schedule — it is a fact about admission, decided by the surviving partner’s consent, and it is the fact s.100(3) is entirely built around. Two children, one will, one valuation, and the dividing line was never the Income Tax Act’s farming test at all.
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