24 January 2003 Internal T.I. 2002-0176287 - FISCAL PERIOD OF PARTNERSHIP

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.

Principal Issues: Determining the cost of labour for purpose of the M&P profits calculation, and the gross revenue and salaries and wages allocation, for a corporation that is a member of a partnership that has two fiscal periods ending in the same taxation year of the corporation.

Position: The amounts are computed for each fiscal period of the partnership that ends in or coincides with the taxation year of the corporation.

Reasons: Result dictated by legislation.

		January 24, 2003

	London Tax Services Office	HEADQUARTERS
	Morris Zambon	Bob Naufal, CMA
	Verification & Enforcement Division	(613) 957-2744

		2002-017628

1) Cost of Labour for M&P profits calculation
2) Revenue and salaries and wages paid by a partnership for purpose of Reg. 402(6)

We are writing in response to your memorandum dated November 26, 2002, wherein you requested our interpretation of the phrase "fiscal period ending in or coinciding with" a taxation year in the circumstances described below.

Your memorandum describes a situation whereby XXXXXXXXXX ("Canco"), a member of the XXXXXXXXXX (the "Partnership"), has a taxation year ending XXXXXXXXXX. Historically, the Partnership's fiscal period also ended on XXXXXXXXXX. On XXXXXXXXXX, Canco sold a significant portion of its interest in the Partnership to an arm's length party. Prior to the sale, Canco requested and was granted permission by the CCRA to change the fiscal period of the Partnership from XXXXXXXXXX to XXXXXXXXXX, effective for the year XXXXXXXXXX, thus establishing a fiscal period for the Partnership of XXXXXXXXXX to XXXXXXXXXX. After the sale, the third party requested a second change in the fiscal period of the Partnership from XXXXXXXXXX to XXXXXXXXXX, effective for the year XXXXXXXXXX, thereby establishing a second fiscal period of XXXXXXXXXX to XXXXXXXXXX.

Canco has taken the position that, the cost of labour for purposes of the M&P profits calculation under Regulation 5204 and revenue and salaries and wages paid for purposes of allocating taxable income under Regulation 402, should be based on the relevant amounts for the Partnership for its fiscal period XXXXXXXXXX to XXXXXXXXXX since this is the fiscal period that coincides with the taxation year of Canco.

Our Comments

Section 5204 of the Regulations requires a portion of a partnership's "cost of labour" to flow through to a corporate member of the partnership for the purpose of determining the corporation's M&P profits. The portion of such costs allocated to a corporation equals the corporation's share of the income or loss of the partnership for the fiscal period of the partnership ending in or coinciding with the taxation year of the corporate member.

Similarly, for the purpose of computing the taxable income earned in a province by a corporation for a taxation year, Regulation 402(6) provides that where part of a corporation's operations are conducted in a partnership, the corporation's gross revenue and salaries and wages for the taxation year include, in respect of those operations, the portion (determined by reference to the corporation's interest in the income or loss of the partnership) of the partnership's gross revenue and salaries and wages for the partnership's fiscal period that ends in or coincides with the taxation year of the corporation.

In our view, Regulations 5204 and 402(6) require Canco to include, for the purpose of the computations described therein, the amounts referable to each fiscal period of the Partnership that ends in, or coincides with, the taxation year of Canco. In this case, each of XXXXXXXXXX and XXXXXXXXXX is a fiscal period of the Partnership that ends in or coincides with Canco's XXXXXXXXXX taxation year end. In our view, it is not necessary for these provisions to refer to "fiscal periods" rather than "fiscal period". Even if a reference to the plural were necessary, we note that subsection 33(2) of the Interpretation Act, which applies to the Income Tax Act, provides that references to singular words include the plural.

We trust our comments will be of some assistance.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and place in the Canada Customs and Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the electronic library version, or they may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Mrs. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.

Daryl Boychuk, LL.B
for Director
Business and Partnerships Division
Income Tax Rulings Directorate

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