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:
How are partnership earnings to be treated in determining the capital of a corporate partner for purposes of Part I.3 tax?
Position:
Partnership earnings for fiscal period of partnership ended in corporate partner's taxation year are included in the corporate partner's capital based on the partner's allocation of partnership income. Stub period earnings are only included in the corporate partner's capital to the extent the partner has received a distribution of the stub period earnings.
Reasons:
Generally the capital of a corporate partner is determined with reference to the fiscal year end of the partnership.
XXXXXXXXXX 2003-018169
Alison Campbell
July 11, 2003
Dear XXXXXXXXXX:
Re: Partnership Income and Large Corporation Tax
This is in reply to your letter of January 7, 2003 with regard to the treatment of partnership earnings in the computation of capital for Part I.3 tax purposes, of a corporate partner. The particular situation outlined in your letter appears to relate to a proposed transaction, 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. However, we are prepared to offer the following general comments which may be of assistance.
It is our understanding that the proper accounting treatment for an interest in a partnership under generally accepted accounting principles ("GAAP"), depends upon the level of influence or control the corporate partner has over the partnership. We also understand that the appropriate GAAP treatment will depend upon the characterization of the relationship between the parties as a partnership or a joint venture under the relevant provincial or territorial legislation. Accordingly, the proper GAAP treatment will depend upon the facts of the particular situation.
The general views of the CCRA, with respect to the treatment of partnership earnings in computing the capital of a corporate partner for purposes of Part I.3 tax, can be summarized as follows:
1) A corporate partner's share of earnings from a partnership's fiscal period ended in the corporate partner's taxation year are included in the corporate partner's taxable capital, whether or not such earnings have been distributed to the corporate partner.
2) No portion of the earnings of a partnership for the period between the fiscal year end of the partnership and the fiscal year end of the corporate partner for a particular year (the "stub period") are included in computing the capital of the corporate partner unless the corporate partner has received a distribution of stub period earnings. Where a corporate partner has received a distribution of a partnership's stub period earnings in the partner's fiscal period, and 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, the amount of the distribution is 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.
We acknowledge that the provisions in Part I.3 of the Act are somewhat ambiguous as they relate to the treatment of partnership earnings in the calculation of a corporate partner's capital and have requested that the Department of Finance amend the legislation to clarify the policy intent with respect to this issue.
We trust our comments are of assistance to you.
Yours truly,
F. Lee Workman
Section Manager
Financial Institutions Section
Income Tax Rulings Directorate
Policy and Legislation Branch
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