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: partnership has nil taxable income., One partner is allocated
partnership income being salary and share of partnership loss resulting from salary expense tp partnership. Remaining partners get their share of loss. Can partner receiving positive allocation claim SBD on its partnership income?
Position: No.
Reasons: It is our position that the management fee formula is a method of allocating partnership income and is not an expense of the partnership. Where there is insufficient income to be allocated under the formula and the formula continues to be applicable the allocations pertain to capital and not to income.
XXXXXXXXXX 1999-001132
S. Tevlin
Attention: XXXXXXXXXX
June 2, 2000
Dear Sirs:
Re: Subsection 125(7) - Definition of Specified Partnership Income
We are writing in response to your letter dated May 13, 1999 wherein you requested our comments with respect to the following hypothetical situation.
The XYZ Partnership is comprised of three corporate partners: Xco, Yco, and Zco. Xco has no source of income other than from the partnership for the current year.
The partnership agreement specifies that the allocation of the partnership's income or loss will be allocated as follows:
Xco is to receive annual management fee in the amount of $300,000.
The income loss after paying the Xco management fee is to be split equally between the three partners.
XYZ Partnership's taxable income for the current fiscal period is nil. Xco is allocated net taxable partnership income of $200,000 representing its $300,000 salary and its one-third share of the partnership's loss after Xco's salary is deducted. Each of Yco and Zco is allocated $100,000 of partnership losses.
You have asked whether Xco would be entitled to claim the small business deduction on the full amount of its taxable income of $200,000 which originates from the partnership.
In this regard we offer the following general comments.
It is our view that the management fee formula described above is a method of allocating partnership income and the management fee is not an expense of the partnership. Where there is insufficient income to be allocated under the formula, and the formula continues to be applicable to partnership distributions, the remaining allocations pertain to capital and not to income. In the example described above, if the income of the partnership for tax purposes is nil and $300,000 were paid to Xco pursuant to the allocation formula, the $300,000 would represent a repayment of capital and not an income amount and no loss could be allocated to any partner.
Pursuant to subsection 96(1) of the Income Tax Act, partnership income from each partnership activity must be calculated at the partnership level with the resulting income or loss allocated to the partners pursuant to paragraphs 96(1)(f) and (g) of the Act. Unless the partnership has actually suffered a loss for a taxation year from an activity, no loss would be capable of allocation to a partner pursuant to paragraph 96(1)(g) of the Act. It would then follow that no partner should be allocated an amount of income greater than the income realized by the partnership.
The forgoing comments are given in accordance with the practice referred to in paragraph 21 of IC-70-6R3, and are not binding on the Canada Customs and Revenue Agency.
We trust our comments will be of assistance to you.
Yours truly,
Paul Lynch
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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