27 August 2012 External T.I. 2011-0423021E5 - QTI Reserve - 34.2(13)(c)(i) restriction

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Principal Issues: Whether the QTI reserve would be restricted in various scenarios as a result of the restriction in subparagraph 34.2(13)(c)(i), which applies if, in computing a corporate partner’s income for a taxation year in respect of a partnership, the year ends immediately before another taxation year “at the beginning of which the partnership no longer principally carries on the activities to which the reserve relates”

Position: General comments only.

Reasons: Question of fact

XXXXXXXXXX
						2011-042302
						J. Gibbons, CGA

August 27, 2012

Dear XXXXXXXXXX:

Re: Subparagraph 34.2(13)(c)(i) of the Income Tax Act (the “Act”)

This is in reply to your email dated February 28, 2012, concerning the application of the above-noted provision.

In particular, you have outlined the following hypothetical situation. A partnership (the “Partnership”) has two corporate members, one or both of whom has a significant interest in the Partnership. The Partnership carries on the business of developing and exploiting oil and gas resources, and all of the assets of the Partnership are engaged in this business. The members of the Partnership have qualifying transitional income (“QTI”) in respect of the Partnership that qualifies for the reserve under 34.2(11) of the Act. You ask whether the QTI reserve would cease to be available to the members of the Partnership in various scenarios.

Our comments

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. Also, where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. Nonetheless, we are prepared to offer the following general comments.

Subparagraph 34.2(13)(c)(i) of the Act provides that no QTI reserve under subsection 34.2(11) is available if, in computing a corporate partner’s income for a taxation year in respect of a partnership, the year ends immediately before another taxation year “at the beginning of which the partnership no longer principally carries on the activities to which the reserve relates.”

It is a question of fact, based on the particular partnership’s circumstances, whether a partnership no longer principally carries on the activities to which a QTI reserve relates. This determination involves the consideration of various factors and each situation has to be considered on a case by case basis. For example, if a partnership were to dispose of more than 50% of its properties, and this disposition resulted in a corresponding reduction of the partnership’s activities so that it no longer principally carried on the activities to which the QTI reserve related, the QTI reserve would be denied.

We trust these comments will be of assistance.

Yours truly,

G. Moore
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch