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: (1) Is an amount included in income under subsection 34.2(2) to be included in the amount determined for G in the formula definition of "specified partnership income" in subsection 125(7) if the amount is deemed to be active business income under the characterization rules in subsection 34.2(5)? (2) Is an amount included in income under subsection 34.2(2) to be included in the amount determined for K in the formula definition of "specified partnership income" in subsection 125(7) if the amount is deemed to be active business income under the characterization rules in subsection 34.2(5)? (3) For the purposes of determining the "specified partnership income" of a corporate partner of a top-tier partnership in a multi-tier partnership structure, should amounts deducted at the corporate partner level in respect of the partnerships be apportioned on a partnership-by-partnership basis?
Position: (1) Yes. (2) No. (3) Yes.
Reasons: (1) Wording of provision. (2) Wording of provision. (3) Based on subsection 125(6.1) and wording for H in the formula definition of "specified partnership income" in subsection 125(7).
XXXXXXXXXX
2013-049808
February 24, 2014
Dear XXXXXXXXXX:
Re: Section 34.2 and the Small Business Deduction
This is in response to your letter of July 10, 2013, concerning the interaction between section 34.2 of the Income Tax Act and the small business deduction available under section 125 of the Act. We also acknowledge our telephone conversations of September 12, 2013 and November 19, 2013 (Tim Hum/XXXXXXXXXX).
More specifically, you seek our confirmation that an amount included in income under subsection 34.2(2) is to be included in the amount determined for "G" in the formula definition of "specified partnership income" (SPI) in subsection 125(7) if the amount is deemed to be active business income under the characterization rules in subsection 34.2(5). Additionally, you provide a hypothetical situation where a Canadian-controlled private corporation (Corp) is a member of a top-tier partnership (Partnership A) which is a direct member of two other partnerships (Partnership B and Partnership C) each of which carries on an active business in Canada and has income for the year. However, you state that Partnership A itself does not have any business activities (i.e. it is a holding partnership). Additionally, you state that all the partnerships are Canadian partnerships and that Corp has incurred expenses directly and has deducted those expenses at the corporate partner level in computing its income from those partnerships. Although you recognize that subsection 125(6.1) is applicable to the situation at hand, you wonder whether the amounts deducted by Corp at the corporate partner level relating to the partnerships should be apportioned on a partnership-by-partnership basis for the purposes of determining the SPI of Corp.
This technical interpretation provides general comments about the provisions of the Income Tax Act and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.
Our Comments
Subsection 125(7) provides definitions for certain terms used in section 125 in respect of the corporate "small business deduction" (SBD) for Canadian-controlled private corporations (CCPCs). The term "specified partnership income" (SPI) is defined in subsection 125(7) by reference to a formula and is used in determining the SBD of a CCPC that carries on an active business through a partnership. A corporation's SPI is the aggregate of two components, which are identified as variables A and B. In general terms, variable A represents the corporation's eligible share of income from partnerships from active businesses carried on in Canada. More precisely, variable A 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. The second component, variable B, of a corporation's SPI is an additional amount to ensure that any losses of the corporation for the year from active businesses carried on by it in Canada are offset first against business income that is not eligible for the SBD before reducing the income that would otherwise qualify for the SBD.
In general terms, 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 the income of the other partnership for a fiscal period shall be deemed to be equal to the amount of that income to which it is directly or indirectly entitled. In effect, this provision "looks through" tiers of partnerships. Accordingly, in the situation described, we agree with you that Corp would be deemed, because of subsection 125(6.1), to be a member of Partnership B and Partnership C and its share of that partnership's income would be the amount to which it is indirectly entitled. As noted above, variable A of the definition of SPI in subsection 125(7) 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. Therefore, in the situation described, variable A will equal the total of each separate amount determined for each of Partnership A, Partnership B and Partnership C. As such, it is our view that all amounts deducted at the partner level in computing Corp's income for the year from a partnership business (other than amounts deducted in computing the income of the partnership from the business) should be apportioned and allocated on a partnership-by-partnership basis in accordance with the description of H in the SPI formula in subsection 125(7).
As mentioned to you during our telephone conversation, the Department of Finance Canada released draft income tax legislation on December 21, 2012 and on October 18, 2013 to amend the descriptions of G and H in the formula definition of SPI in subsection 125(7) consequential on the introduction of the corporate partnership deferral rules in section 34.2. These technical amendments have now been enacted and apply to taxation years that end after March 22, 2011. The description of G which refers to a corporation's share of income of an active business carried on in Canada by a corporation as a member of a partnership in paragraph (a) of the description of A in the formula in the definition has been amended to expressly refer to amounts included in the corporation's income for the year under subsections 34.2(2), (3) and (12) in respect of the business because of the corporate partnership deferral rules. A similar amendment has been made to the description of H which refers to a corporation's deductions in computing the corporation's income for the year from the business (other than amounts deducted by the partnership) in paragraph (a) of the description of A in the formula in the definition to expressly refer to amounts deducted for the year by the corporation under subsections 34.2(4) and (11) in respect of the business because of the corporate partnership deferral rules. Accordingly, an amount included in income under subsection 34.2(2) in respect of the partnership is to be included in the amount determined for G in the formula definition of SPI in subsection 125(7) if the amount is deemed to be active business income under the characterization rules in subsection 34.2(5).
As you noted in your correspondence, with respect to each partnership, paragraph (b) of variable A provides a limitation based on the corporation's proportionate share of $500,000 (or a proportionately smaller amount when the number of days in the fiscal period of the partnership is less than 365) which is determined by reference to the corporation's share of the income of the partnership (determined in accordance with subdivision j of Division B of the Act) for a fiscal period ending in the year from an active business carried on in Canada (i.e. formula element K). Therefore, an amount included in the corporation's income for the year in respect of the partnership under any of subsections 34.2(2), (3) and (12) is not to be included in determining the limiting amount provided under paragraph (b) of variable A since income inclusions under section 34.2 are not considered to be income of the partnership for a fiscal period. Also, section 34.2 is in subdivision b of Division B of the Act.
In conclusion, as you have already noted in your correspondence, notwithstanding that income inclusions under section 34.2 that are deemed to be active business income under the characterization rules in subsection 34.2(5) are included in the SPI formula under formula element G, the limitation provided under paragraph (b) of variable A of the SPI definition and, more particularly, formula elements K and L, may still limit the amount to be included in the SPI of the corporate partner with respect to the partnership.
We trust the above comments will be of assistance.
Yours truly,
Chrys Tzortzis, CPA, CA
For Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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