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.
Principal Issues: Are we in agreement with the calculation of a particular corporation's specified partnership income, as defined in subsection 125(7) of the Act, for a hypothetical tiered partnership structure.
Position: We agree with the calculation.
Reasons: Subsection 125(6.1) provides that, for purposes of the provisions in section 125, a corporation that is a member (or deemed to be a member under subsection 125(6.1)) of a partnership which in turn is a member of another partnership shall be deemed to be a member of the other partnership and its share of income therefrom shall be deemed to be the amount to which it is directly or indirectly entitled through those partnerships of which it is a member.
2003-005232
XXXXXXXXXX Karen Power, CA
(613) 957-8953
May 12, 2004
Dear XXXXXXXXXX:
Re: Specified Partnership Income
We are writing in reply to your letter of December 9, 2003, wherein you requested whether we are in agreement with your calculation of a particular corporation's specified partnership income, as defined in subsection 125(7) of the Income Tax Act (the "Act"), for a hypothetical tiered partnership structure.
You describe the hypothetical situation as follows:
1. CORPA has always been a Canadian-controlled private corporation as defined in subsection 125(7) of the Act.
2. PSA, PSB, PSC, PSD and PSE are all limited partnerships.
3. CORPA is a limited partner of PSA and as such is entitled to 15% of PSA's income (the entitlement to the remaining 85% of PSA's income is held by persons not related to, nor associated with, CORPA and who are neither non-resident nor public corporations).
4. PSA is a limited partner of PSB and as such is entitled to 45% of PSB's income (the entitlement to the remaining 55% of PSB's income is held by persons not related to, nor associated with, any of the partners of PSA who are neither non-residents nor public corporations).
5. PSB is a limited partner and is entitled to 99.999% of the income of each of PSC, PSD and PSE.
6. Subsection 125(6.2) of the Act does not apply in respect of the any of the above partnerships.
7. CORPA and all the limited partnerships have a January 1 to December 31, 2003 taxation year.
8. You indicate that separate limited partnerships were created for bona fide business reasons and not for the purpose of increasing the amount of the small business deduction under subsection 125(1) of the Act (i.e. subsection 125(6) does not apply). As requested, for purposes of our reply, we have assumed that subsection 125(6) does not apply; however, we are not in a position to make such a determination.
9. Each of PSA, PSB, PSC, PSD and PSE carries on a single active business in Canada, and does not carry on any other business. Each has in excess of $225,000 of its own income from that active business carried on in Canada ("it's own income" means excluding any income allocations from a lower tier partnership).
10. CORPA has no business activities of its own, no other investments and has no associated corporations.
11. Neither CORPA nor any of the partnerships have losses from an active business carried on in Canada (i.e. subparagraphs 125(1)(a)(iii) and (iv) of the Act are not applicable and term B in the specified partnership income definition under subsection 125(7) of the Act is nil).
12. Term H in the definition of specified partnership income under subsection 125(7) of the Act is nil in all cases.
13. CORPA is not subject to the business limit reduction under subsection 125(5.1) of the Act.
14. Subsection 34.2(5) of the Act is not applicable in all cases.
15. CORPA's business limit for its December 31, 2003 taxation year-end is $225,000. Paragraph 125(1)(b) of the Act is not the limiting factor in determining CORPA's small business deduction.
In general terms, subsection 125(6.1) of the Act provides that, for purposes of the provisions in section 125 relating to the small business deduction, a corporation that is a member (or deemed to be a member under subsection 125(6.1)) of a partnership, which in turn is a member of another partnership shall be deemed to be a member of the other partnership and its share of income therefrom shall be deemed to be the amount to which it is directly or indirectly entitled through those partnerships of which it is a member. This provision effectively "looks through" tiers of partnerships. Consequently, we agree with your analysis that CORPA will be deemed to be a member of each of PSB, PSC, PSD and PSE.
Variable A of the definition of "specified partnership income" in subsection 125(7) of the Act is the total of separate amounts, each of which is an amount with respect to a particular partnership of which the corporation was a member in the year (see also paragraph 20 of IT-73R6). In the above situation, variable A will be equal to the total of separate amounts determined for each of PSA, PSB, PSC, PSD and PSE.
Furthermore we would agree that in the above situation it is each partnership's December 31, 2003 taxation year that will be relevant in determining variables G, K and L in establishing the amount of CORPA's specified partnership income for it's December 31, 2003 taxation year, as defined in subsection 125(7) of the Act. Subsection 249(2) of the Act provides that a reference in the Act to a taxation year ending in another year includes a reference to a taxation year ending coincidentally with that other year, and a reference to a fiscal period ending in a taxation year includes a reference to a fiscal period ending coincidentally with that year.
Based on the above analysis, and the above facts and assumptions, we agree that CORPA's specified partnership income, as defined in subsection 125(7) of the Act, for its December 31, 2003 taxation year would be $94,499.
As indicated in paragraph 22 of Information Circular 70-6R5, the above comments do not constitute an income tax ruling and accordingly are not binding on the CRA.
We trust our comments will be of assistance to you.
Milled Azzi, CA
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Planning Branch
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