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 CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
How to allocate partnership capital for purposes of Part I.3 tax where one partner is allocated the first $100,000 in income, and the balance of income or loss is divided equally.
Each partner includes that proportion of the amount defined in paragraph 181.2(3)(g) that their share of income or loss for the last fiscal period of the partnership was of the total income or loss for that period. However, the amount of income or loss "allocated" to a partner in respect of the period cannot exceed the total partnership income or loss for the period. Moreover, a partner cannot be allocated a loss where the partnership realized income, nor can it be allocated income where the partnership realized a loss.
Reasons: The Act.
June 20, 2002
Re: Paragraph 181.2(3)(g) of Income Tax Act
This is in reply to your letter of January 2, 2002, in which you request a technical interpretation on the application of the above-noted paragraph in the following circumstances.
A partnership has three corporate partners that are not associated with each other (Partners A, B and C). The partnership agreement specifies that income of $100,000 will be paid first to Partner A, leaving the remaining income or loss to be shared equally by all three partners. What would each of Partners A, B, and C include in their capital pursuant to paragraph 181.2(3)(g) where:
1) The partnership had a loss for the year of $20,000, resulting in income of $60,000 to Partner A, and a loss of $40,000 to each of Partners B and C?
2) The partnership has income for the year of $20,000, resulting in income of $73,333 to Partner A and a loss of $26,667 to each of Partner B and C.
The particular situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. As explained in Information Circular 70-6R5, it is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an Advance Income Tax Ruling. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views.
However, we are prepared to offer the following general comments, which may be of assistance. These comments are made on the assumption that the hypothetical partnerships are not limited partnerships and that none of the partners are tax exempt entities.
In general, the income or loss of a partnership is allocated to its members for tax purposes (e.g., for the purposes of paragraph 96(1)(f) and (g) of the Act) in accordance with the partnership agreement. This allocation, however, is subject to subsections 103(1) and (1.1) of the Act which will vary the contractual allocation, in computing the partners' shares for tax purposes, in circumstances where the purpose of the allocation agreed upon was to reduce or postpone the payment of tax or where the allocation was not reasonable having regard to the capital invested or work performed by the partners (or such other factors as may be relevant).
Subsection 96(1) of the Act provides for calculation of partnership income and loss at the partnership level, with resulting income of loss then being allocated. Thus, an individual partner could not be allocated partnership income or losses in respect of a period that was in excess of that experienced by the partnership.
If the partnership agreement allocates income or loss to a partner in excess of that actually experienced by the partnership, the Canada Customs and Revenue Agency ("CCRA") would have to consider all the facts to ascertain the actual substance of the agreement. For example, where a partner has been "allocated" income in excess of that earned by the partnership for the period, the CCRA has taken the position that the excess constitutes an allocation of partnership capital and not income.
Thus, subject to a complete examination of the facts, and provided subsections 103(1) and (1.1) do not apply in respect of the allocation of partnership income and loss, where the partnership has income for the year that is less than $100,000, 100% of the partnership income is allocated to Partner A and so 100% of the partnership's capital amount would be included in Partner A's capital for Part I.3 purposes.
Where the partnership income exceeds $100,000, the first $100,000 is allocated to Partner A and one-third of the balance is allocated to each of Partners A, B and C. Therefore, the three partners would each include, in computing their capital for purposes of paragraph 181.2(3), that proportion the partnership's capital amount that their income entitlement is to the income of the partnership for the year. For example: If total income is $175,000, Partner A includes that proportion of the partnership's capital amount equal to $125,000 / $175,000 and Partners B and C each include that proportion equal to $25,000 / $175,000.
If the partnership experiences a loss, Partners A, B and C would each share proportionately the loss. Therefore, each partner would include one third of the partnership's capital amount in computing their capital for Part I.3 purposes for the year.
While these comments are not binding on the Canada Customs and Revenue Agency, we trust that they are helpful.
F. Lee Workman
Financial Institutions Section
Financial Industries Division
Income Tax Rulings Directorate
Policy and Interpretations Branch
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