3 July 2001 Internal T.I. 2001-0078917 - PARTNERSHIPS AND OVERDRAFTS PART 1.3

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. On what basis are partnership earnings to be included in the capital tax base of corporate partners where the partnership and partner have different fiscal period ends.

2. When can amounts be netted in determining the amount of bank overdrafts to be included in computing a taxpayer's capital?

Position:

1. The corporate partner's share of partnership earnings for the fiscal period of the partnership that ended in the corporate partner's taxation year, whether distributed or not, should be included in the corporate partner's capital for Part I.3. Additionally, in certain circumstances amounts distributed by the partnership during the "stub period" may also be included in the capital of the corporate partner.

2. Generally, where the netting is in accordance with GAAP because of a legal right to offset the amounts. It is important to distinguish between netting or offsetting balances and the aggregation of accounts for balance sheet presentation purposes.

Reasons:

1. Generally, the capital of a corporate partner is determined with reference to the fiscal year end of the partnership.

2. XXXXXXXXXX , subsection 181(3) (920320, 952924, 960001)

		July 3, 2001

	George Kearl	HEADQUARTERS
	A/Manager	Alison Campbell
	Large Business Audit Section
	Calgary, TSO
		2001-007891

Part I.3 Tax Issues - Partnership Interests and Netting of Accounts

This is in reply to your memorandum of April 5, 2001, which requested our comments on the inclusion of partnership earnings in the taxable capital of a corporate partner and the netting of bank accounts and short-term investments for the purposes of taxation under Part I.3.

Partnership Interests

As noted in your submission to us, it has been the Agency's position for many years that a corporate partner's share of earnings from a partnership's fiscal period ended in the corporate partner's taxation year would have to be included in the corporate partner's taxable capital, whether or not such earnings have been distributed to the corporate partner. This is similar to the basis on which partnership earnings are included in a corporate partner's income for Part I purposes. It is still our view that the earnings of a partnership for its fiscal period ended in the corporate partner's taxation year are to be included in the corporate partner's capital for purposes of computing Part I.3 tax. This position was most recently confirmed in the Agency's response to a question posed at the 1998 TEI Conference (our document number 9829820, dated December 9, 1998). Paragraph 49 of IT-532 Large Corporations Tax, is intended to address the earnings of the partnership for its fiscal period ended in the corporate partner's taxation year and is not intended as a comment on earnings of the partnership for the period between the partnership's fiscal period end and that of its corporate partner (the "stub period earnings").

In the final paragraph of the December 1998 document, we commented on the situation where a partnership distributes some or all of its stub period earnings to a corporate partner prior to the end of the corporate partner's fiscal period. Our general view in this situation remains that where a corporate partner receives a distribution from a partnership and the following are true:

(a) the distribution is in respect of amounts earned by the partnership during the stub period (i.e. not a distribution of amounts earned in prior fiscal period(s) of the partnership), and

(b) the amount of the distribution has been recorded in the corporate partner's accounts in accordance with GAAP by a debit to cash and a credit to retained earnings,

then, the amount of the distribution should be included in the capital of the corporate partner under paragraph 181.2(3)(a). This same result would occur if the distribution were characterized as an advance.

With respect to undistributed stub period earnings of a partnership, it is our general view that such amounts would not be included in the corporate partner's taxable capital.

Bank Overdrafts

Our views on the issue of netting bank overdrafts with positive bank balances are found in paragraphs 8 through 10 of IT-532 Large Corporations Tax. The offsetting or netting of assets and liabilities is generally not permissible under GAAP except in a few cases such as where a debtor, as a result of an agreement with a creditor, has a legal right to offset or eliminate all or a portion of an obligation due to a creditor by applying, against that obligation, an amount of an obligation due to the debtor by that same creditor and the parties intend to act upon that right. Where netting is permissible under GAAP, the net amount of an item reflected on the balance sheet will represent the carrying value of that item for the purposes of determining the capital tax base. This net amount may be aggregated with balances of other accounts for financial statement purposes.

Recent court decisions support a view that the components that make up the amount shown on the face of the balance sheet, are amounts reflected in the balance sheet for the purposes of subsection 181(3) and each component may be considered separately in determining the carrying value of the item to be included in computing capital or the investment allowance. Where the amount on the balance sheet that reflects the corporation's cash/indebtedness position at the end of the year is composed of a number of different bank account balances (both positive and negative), except for those balances for which there is a legal right of offset, it is our view that these balances have simply been aggregated and may be considered separately. Therefore, it is our view that the corporation's capital should include the net amount of those bank balances netted in accordance with GAAP (i.e. those for which there is a legal right of offset) and the balance of the bank accounts that are in an overdraft position at the end of the year.

We trust our comments will be of assistance to you.

Yours truly,

F. Lee Workman
Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Brach
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