A partnership stub period accrual under s. 34.2 may not represent safe income “on hand”

Where a corporate partner with a calendar taxation year includes an accrual in income under s. 34.2(2) with respect to the six-month stub period following the June 30 fiscal period end of a partnership of which it is a member, CRA considers that in computing the safe income on hand of the corporation on December 31, a negative adjustment should be made if, in fact, the partnership sustained a loss during the stub period – as the "phantom income" inclusion under s. 34.2 does not represent income "on hand."

On the other hand, in another interpretation also released today, CRA indicated that "in general" it would consider that the s. 34.2(2) income inclusion would result in an increase in the value of the shares in question, so that it would be acceptable for the corporation to choose not to claim a transitional reserve under s. 34.2(11) so as to increase the amount of the safe income on hand attributable to its shares.

Neal Armstrong.  Summaries of  21 March 2014 T.I. 2012-0471021E5 and 14 February 2014 T.I. 2012-0454481E5 F under s. 55(2) and s. 34.2(11).