Aquilini Estate – Tax Court of Canada finds that partnership income and losses should be allocated proportionately to capital invested and recognizing work performed

The facts of this case, involving the successful application by CRA of s. 103(1.1), are perhaps too extreme to merit an extensive description. Pizzitelli J found that income and losses, which were allocated to a holding partnership by lower tier partnerships, had been allocated by it, in turn, to its family members in a manner that was highly disproportionate to the relative capital invested and that was negatively correlated with the work performed (the losses were allocated to the three brothers who did the work, and other entities which did no work were allocated income.)

Pizzitelli J rejected submissions that “all circumstances, including personal family circumstances and personal estate planning goals must be considered” and that the income and loss allocation methodology could be supported from the standpoint of estate planning objectives – and instead thought that “the reasonable business person would only consider factors relevant to their own business considerations having regard to their own business interest,” which confirmed his view that the focus should be on the respective capital invested and work performed.

Neal Armstrong. Summary of Aquilini Estate v. The Queen, 2019 TCC 132 under s. 103(1.1).