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: Whether a partnership can claim different CCA amounts for federal and Ontario purposes under the CTA. If so, how is the difference shown on Schedule 506 in calculating the transitional tax dr. and cr.
Position: A partnership can claim different CCA amounts under the CTA. The income of the partnership flows through to the adjusted cost base of the partnership which is included in the total federal balance and total Ontario balance.
Reasons: As provided by legislation.
June 12, 2009
Ross Cunningham Income Tax Rulings Directorate
Advisor Ontario Corporate Tax Division
Professional Practice Division Julie White
Compliance Programs Branch (905) 721-5202
Re: Transitional Tax Debit / Credit and Partnership CCA
I am responding to your email dated January 19, 2009 in which you asked the following questions:
- Were partnerships permitted, under the Ontario Corporations Tax Act (CTA), to claim a different capital cost allowance (CCA) amount than that claimed for federal purposes? If so, was there a partnership schedule 8? Where would the difference have been reconciled on the CT23 Corporations Tax and Annual Return?
- If partnerships were permitted to claim different CCA for Ontario and federal purposes, how does the difference get reconciled on Schedule 506 Ontario Transitional Tax Debit and Credits? Is this done by the partner or the partnership?
Subsection 96(1) of the Income Tax Act (Canada) (ITA) provides for the calculation of partnership income or loss (including deductions for CCA) at the partnership level. The resulting partnership income or loss is then allocated to the partners pursuant to paragraph 96(1)(f) or (g), to the extent of each partner's share thereof. Paragraphs 96(1)(f) and (g) do not allow any partner to be allocated an amount of income from the partnership in excess of the partnership's net income for the year, or to be allocated a partnership's loss as "their share" of the partnership's net income for the year.
For Ontario purposes, section 31 of the CTA ties into the rules in section 96 of the ITA. In calculating the income or loss of the partnership for Ontario purposes, where the Ontario rules differ from the federal rules, the Ontario rules apply. In the case of CCA, section 11(10) of the CTA specifically states that paragraph 20(1)(a) of the ITA does not apply for Ontario purposes, instead the rules in Ontario regulation 183, section 201 are applicable.
The term "adjusted cost base" (ACB) is defined in section 54 of the ITA as cost plus or minus the adjustments listed in section 53. With respect to capital contributions and drawings of the partner, the adjustments to the ACB of the partnership interest are made at the time of the contribution or drawing pursuant to subparagraphs 53(1)(e)(iv) and 53(2)(c)(v) of the ITA respectively. In contrast the adjustments related to allocations of income are not made during the period in which the income arises. Rather, these adjustments to the ACB of a partnership interest are made on the first day of the following fiscal period. It is the allocation, not the receipt of funds that creates income for the partners that is subject to tax. The partner's share of partnership income is included in income for tax purposes and added to the ACB of the partnership interest, pursuant to subparagraph 53(1)(e)(i). Where different CCA amounts have been claimed by the partnership for federal and Ontario purposes it will be reflected in the adjusted cost base of the partnership interest for federal and Ontario purposes.
Pursuant to subsection 1(1) and 26(1) of the Taxation Act, 2007 (TA), where a taxation year ends after December 31, 2008, the Ontario taxable income is equal to the federal taxable income multiplied by the Ontario allocation percentage. As a result, federal pool balances are used in determining a corporation's Ontario taxable income for a taxation year ending after 2008. Where an amount is claimed for federal purposes, the same amount is claimed for Ontario purposes.
Sections 46 to 52 of the TA provide the computation of the transitional tax debits and credits and are designed to offset any benefit or hardship that a corporation may face on the adoption of the federal tax pools.
Under subsection 47(1) of the TA, a specified corporation is generally required to pay additional Ontario corporate income tax over a five year period to reflect the extent to which its "total federal balance" exceeds its "total Ontario balance" at the beginning of its first taxation year ending after 2008. Conversely, subsection 47(7) provides that a specified corporation is generally entitled to a transitional tax credit over a five year period to reflect the extent to which its "total Ontario balance" exceeds its "total federal balance".
A corporation's "total federal balance" is computed under subsection 48(4) of the TA and is largely comprised of the federal tax pools, including the adjusted cost base of a partnership interest for federal purposes. A corporation's "total Ontario balance" is computed under subsection 48(6) of the TA and is largely comprised of a corporation's Ontario tax pools, including the adjusted cost base of a partnership interest for Ontario purposes. These tax pools are determined at the corporation's "transition time" which is defined in subsection 46(1) of the TA as the corporation's taxation year that includes the beginning of 2009. As the ACB of the partnership interest is increased by the partner's proportionate share of the partnership income on the first day of the following fiscal period, the ACB of the partnership interest used in the calculation of the total federal and total Ontario balances will, where the taxation year of the corporate partner and the fiscal year of the partnership coincide, include the prior year's income of the partnership.
The adjusted cost base of a partnership interest is increased by the amount of a partner's share of the income of the partnership and is decreased by the partner's share of a partnership's loss for a fiscal period. If a partnership claims more CCA for Ontario purposes than it does for federal purposes, the income of the partnership will be lower for Ontario purposes than for federal purposes resulting in a lower adjusted cost base for Ontario purposes. With everything else being equal, the higher federal adjusted cost base will result in a transitional tax debit for the corporate partner. Conversely, where more CCA is claimed for federal purposes than for Ontario purposes, a higher Ontario adjusted cost base will result in a higher total Ontario balance and a transitional tax credit.
In respect of your specific questions we offer the following comments:
- Partnerships were permitted, under the CTA, to claim a different CCA amount for Ontario purposes. Where a partnership chose to claim different amounts, a schedule 8 would be filed for both Ontario and federal purposes in support of the different claims. A partnership would disclose the reconciliation of federal and Ontario income on a separate schedule prepared by the partnership in support of the Ontario income.
For federal purposes, the corporate partner adds its proportionate share of the income of the partnership for tax purposes on line 109 of federal Schedule 1 and deducts its proportionate share of the book income of the partnership on line 305 of the same schedule.
Pages 14 and 15 of the CT23 reconcile the net income for federal purposes with the net income for Ontario purposes. Unfortunately, there are no specific lines on the CT23 for the difference in partnership net income for Ontario and federal purposes. The corporate partner's proportionate share of the partnership's net income for Ontario tax purposes must be added to the corporate partner's federal income for tax purposes and the proportionate share of the partnership's federal net income for tax purposes must be deducted. It is suggested that the corporate partner use line 614 for the addition and line 664 for the deduction.
- Any difference in the partnership's CCA claims for federal and Ontario purposes flow through to the income of the partnership which is a component of the adjusted cost base of the partnership interest to the partner. The partner's adjusted cost base is included in the total Ontario balance and the total federal balance. The adjusted cost base for federal and Ontario purposes of the partnership interest at transition time is included on Schedule 506 lines 160 and 260 respectively.
I trust the above answers your questions.
Roger Filion, CA
For Acting Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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