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: Would paragraph 249.1(1)(c) of the Act apply to a partnership if its wholly-owned corporation becomes a member of another partnership?
Position: No. A partnership's indirect investment in another partnership through its wholly-owned corporation would not, in and of itself, cause the partnership to be within the ambit of paragraph 249.1(1)(c).
Reasons: Paragraph 249.1(1)(c) is concerned with tiered partnership structures and contemplates a membership interest in a partnership that is held directly, or indirectly through one or more partnerships, by a partnership.
XXXXXXXXXX
2014-052800
Chrys Tzortzis, CPA, CA
August 18, 2014
Dear XXXXXXXXXX:
Subject: Subsection 249.1(1) and the fiscal period end of a partnership
This is in response to your email of April 14, 2014, as amended by your email of April 16, 2014, concerning subsection 249.1(1) of the Income Tax Act (the "Act") and the fiscal period end of a partnership. More specifically, you wonder whether or not paragraph 249.1(1)(c) of the Act would apply in a particular scenario to force a partnership to have a fiscal period end of December 31st.
You describe a situation where a partnership (Partnership A) has XXXXXXXXXX members all of which are individuals that have elected under subsection 249.1(4) of the Act since 1995 to have an off-calendar fiscal period end of June 30th for Partnership A. As such, the partners have adopted the alternative method and are subject to the "additional business income" rules under section 34.1 of the Act. You state that Partnership A is considering incorporating a wholly-owned company (Aco) that will form a new partnership (Partnership B) with XXXXXXXXXX professional corporations that deal at arm's length with the members of Partnership A. You recognize that Partnership B would have a fiscal period end of December 31st pursuant to subparagraph 249.1(1)(b)(ii) of the Act (unless the business is not carried on in Canada) since a professional corporation would be a member of that partnership. In addition, you realize that it is not possible to retain an off-calendar fiscal period end pursuant to subsection 249.1(4) if the partnership becomes a member of another partnership as the requirement in subparagraph 249.1(4)(b)(ii) would not be met. In your view, Partnership A should be able to continue to retain its off-calendar fiscal period end pursuant to subsection 249.1(4) even if Aco becomes a member of Partnership B. However, you wonder whether or not new paragraph 249.1(1)(c) would apply to force Partnership A to have a fiscal period end of December 31st.
This technical interpretation provides general comments about the provisions of the 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 249.1(1) defines "fiscal period" for the purposes of the Act. In general terms, paragraph 249.1(1)(b) provides restrictions on the timing of fiscal periods to ensure that certain businesses will have a fiscal period end at the end of the calendar year. Subparagraph 249.1(1)(b)(ii) applies to the fiscal period of certain partnerships including a partnership that has an individual (subject to certain exclusions) or a professional corporation (as defined under subsection 248(1) of the Act) as a member. However, where certain conditions are met, an election is available under subsection 249.1(4) to have paragraph 249.1(1)(b) not apply and to retain an off-calendar fiscal period end. Where the election is made, the "additional business income" rules under section 34.1 are applicable. In general, these rules were introduced in 1995 to limit tax deferral opportunities that existed for individuals who carry on business through a partnership or sole proprietorship.
Budget 2011 introduced a measure to limit the deferral of tax on income earned by a corporation through a partnership that arises if the partnership has a fiscal period that differs from the corporation's taxation year. The main rules implementing this measure are found in new sections 34.2 and 34.3, and amended section 249.1 of the Act. Subsection 249.1(1) was amended to introduce new paragraph 249.1(1)(c) which provides that no fiscal period may end in the case of a partnership (other than a partnership to which subparagraph 249.1(1)(b)(ii) or subsection 249.1(9) applies) that is a member of a partnership or has a member that is a partnership, after the end of the calendar year in which it began, if at the end of the calendar year:
(i) a corporation has a significant interest, as defined in section 34.2, in the partnership,
(ii) the partnership is a member of another partnership in which a corporation has a significant interest as defined in section 34.2,
(iii) a membership interest in the partnership is held directly, or indirectly through one or more partnerships, by a partnership described in (i) or (ii) above, or
(iv) the partnership holds directly, or indirectly through one or more partnerships, a membership interest in a partnership described in any of (i) to (iii) above.
The October 2011 Explanatory Notes provide the following explanation for new paragraph 249.1(1)(c):
New paragraph 249.1(1)(c) of the Act provides that, where the paragraph applies, a fiscal period of a partnership in a tiered partnership structure ends on December 31 of the calendar year in which the fiscal period began. The paragraph applies to a partnership (other than a partnership that has an individual or professional corporation as a member, or a partnership for which a one-time multi-tier alignment election is made) that is a member of a partnership or has a partnership as a member if any one of four conditions applies.... [Emphasis added]
Based on the foregoing, in our view, paragraph 249.1(1)(c) would not apply to force Partnership A to have a fiscal period end of December 31st as the conditions for the application of that provision would not be met since Partnership A would not be in a tiered partnership structure. More specifically, Partnership A's indirect investment in Partnership B through its wholly-owned corporation (Aco) would not, in and of itself, cause Partnership A to be within the ambit of paragraph 249.1(1)(c) since that provision is concerned with tiered partnership structures and contemplates a membership interest in a partnership that is held directly, or indirectly through one or more partnerships, by a partnership.
Additionally, with regard to subsection 249.1(4), we note that the requirement in subparagraph 249.1(4)(b)(ii) is that "the partnership is not a member of another partnership". Accordingly, in our view, Aco becoming a member of Partnership B would not preclude Partnership A from retaining its off-calendar fiscal period end under subsection 249.1(4). As such, the individual members of Partnership A would continue to utilize the alternative method and be subject to the "additional business income" rules under section 34.1.
Please note that in the situation described above, if Aco is a professional corporation, Aco would have a fiscal period end of December 31st pursuant to subparagraph 249.1(1)(b)(iii) of the Act where the remaining conditions are also met. If Aco is not a professional corporation and chooses a fiscal period end that is not aligned with the fiscal period end of Partnership B (i.e. December 31st), the application of the new rules under section 34.2 should be considered.
We trust the above comments will be of assistance.
Yours truly,
G. Moore
for Director
Partnerships & Corporate Financing Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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