22 October 1996 External T.I. 9606175 - FISCAL PERIOD OF PARTNERSHIP

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

1.Whether partnership that includes an individual or a professional corporation as a partner must adopt calendar year as fiscal period.

2.Whether partnership may have to include up to 24 months income and losses in computing Dec 31, 1995 income.

3.Whether postamble of 249.1(1)(b), which contains an exception to the rule in 249.1(1)(b), applies re a property of a partnership.

4.Whether Reg 1100(3) applies to the short (stub) fiscal period ending in 1995.

5.Whether form T5013 was redesigned for 1995.

6.Whether Reg 1100(11) applies at the partner or partnership level.

Position:

1.Yes, unless alternative method in 249.1(4) applies.

2.Yes.

3.No.

4.Yes.

5.No.

6.CCA generally must be claimed by the owner of the property.

Reasons:

1.249.1(1)(b)(ii)

2.A partnership may have two fiscal periods ending in 1995, which could result in requirement to report up to 24 months income and losses in 1995. However, a reserve may be claimed under 34.2(4) if the requirements of 34.2 are satisfied (losses are taken into account in determining the reserve amount).

3.The exception applies to the business of a person or partnership, but not to the property of a person or partnership. Whether a fiscal period concerns a business or property is a question of fact.(See IT 434R re whether rental of real property generates business or property income.)

4.The 249.1(1)(b) deeming rule may result in a fiscal period and a taxation year that is less than 12 months. And in computing 34.2 reserve, maximum CCA claim is used.

5.However, the Guide to Partnership Information Returns was revised for 1995 to reflect the new fiscal period rules.

6.Where a partnership is deemed by 96(1)(b) to own the property, the CCA would generally be claimed by the partnership, and Reg 1100(11) would not generally restrict CCA claims of partnership by expenses incurred by its members.

									960617
XXXXXXXXXX							Denise Dalphy
(613) 957-9231
Attention:  XXXXXXXXXX

October 22, 1996

Dear Sirs:

Re: Partnerships and New Definition of Fiscal Period

This is in reply to your facsimile transmissions of February 15, 1996 and March 28, 1996, wherein you requested our opinion on a number of issues relating to a particular partnership and the new definition of fiscal period in section 249.1 of the Income Tax Act (the "Act").

Since your enquiry would appear to concern a completed transaction, you may wish to contact the relevant Tax Services Office where all relevant facts, documentation and other relevant information can be made available. However, we are prepared to offer some comments of a general nature, which we hope will be useful to you.

You have described a situation where a Canadian limited partnership (which has a November 30 year end), the partners of which are Canadian resident individuals and corporations (professional and non-professional), has an interest in a limited partnership resident in the United States (which has a December 31 year end) that owns real property situated in the United States that is commercial real estate and is held for the purposes of earning rental income.

Paragraph 249.1(1)(b) of the Act provides that the fiscal period of a business or property of a partnership that includes, inter alia, an individual (with limited exclusions) or a professional corporation as a member at the relevant time cannot end after the end of the calendar year. This requirement will apply to a partnership notwithstanding that one or some of the members of the partnership are neither individuals nor professional corporations. Therefore, any partnership that has an individual as a member or a professional corporation as a member must (unless the alternative method rule in subsection 249.1(4) of the Act applies) adopt a fiscal period that is the calendar year.

A result of the new definition of "fiscal period" is that a partnership may have two fiscal periods ending in 1995 and may have to include up to 24 months income - and losses - in computing its 1995 income for tax purposes. However, a reserve may be claimed by a taxpayer with respect to the "December 31, 1995 income" pursuant to subsection 34.2(4) of the Act, provided the taxpayer carries on a business in that taxation year and subsection 34.2(6) or subsection 34.2(7) of the Act do not prohibit such a deduction. A taxpayer's losses are taken into account in determining the reserve amount, in particular in the definitions of "December 31, 1995 income" and "qualifying fiscal period" in subsections 34.2(1) and (2) of the Act.

The exceptions to the rule in paragraph 249.1(1)(b) of the Act, which requires a calendar year fiscal period, are contained in the postamble of that paragraph and the exception applies to the business of a person or partnership where the business is not carried on in Canada or it is a prescribed business. In these cases, the deeming rule in paragraph 249.1(1)(b) of the Act does not apply. No exception is provided from the calendar year fiscal period requirement with respect to a property of a person or partnership. Of course, whether or not a fiscal period concerns a business or a property is a question of fact. In connection with whether the rental of real property generates income from a business or a property we would refer you to Interpretation Bulletin IT-434R. Whether a business is carried on in Canada (or both inside and outside Canada) is also a question of fact and the Courts have considered, inter alia, the following criteria in order to source income:

1. the nature of the activities

2. the degree of supervisory or other activity in Canada

3. the reason for the taxpayer's existence

4. whether the taxpayer intended to do business in Canada

5.the establishment of a bank account, listed telephone number or address, etc.

Since a fiscal period that is deemed by paragraph 249.1(1)(b) of the Act to end on December 31, 1995 may result in a fiscal period and taxation year that is less than 12 months, subsection 1100(3) of the Income Tax Regulations (the "Regulations") would apply to prorate a claim for capital cost allowance ("CCA") in that fiscal period/taxation year. With respect to CCA claims, we would also mention that, in computing a reserve under 34.2 of the Act, paragraph 34.2(2)(c) of the Act requires that maximum CCA claims be used in determining "December 31, 1995 income" and the reserve amount.

As a final note on the subject of the new definition of "fiscal period", we advise that form T5013 was not redesigned for 1995; however,the Guide to Partnership Information Returns was revised for 1995 to reflect the (at that time, proposed) changes to the definition of fiscal period. In particular, you may wish to refer to Chapter 8, which is entitled Form 5013 Supplementary, Statement of Partnership Income, of that Guide.

You also enquired about the operation of subsection 1100(11) of the Regulations where rental property is held through two levels of partnership, where the deemed ownership of the property and the related CCA claim is with a US partnership and expenses relating to the amortization of syndication and other costs are those of a Canadian partnership that has an interest in the US partnership. In our view, CCA claims are to be made by the owner of the property, including a partnership that is deemed to own the property pursuant to paragraph 96(1)(c) of the Act - that is, CCA would generally be claimed by the US partnership, not one of its members, namely the Canadian partnership. Subsection 1100(11) of the Regulations would also generally apply at the partnership, not the partner level, and consequently subsection 1100(11) of the Regulations would not generally restrict the CCA claims of the US partnership by the expenses incurred by its members. However, the general anti-avoidance rule in subsection 245(3) of the Act may apply in situations where the primary purpose of becoming a partner in a foreign partnership is to obtain the tax benefit of partnership losses from CCA claims.

Yours truly,

for Director
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch