2 May 1990 Ruling 59573 F - Agreement Between Partnership and Non-Arm's Length Person

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.

May 2, 1990

19(1)

This is in reply to your letter of February 6, 1990.  We apologize for the delay in our response.

You have asked whether the Department would accept as valid an agreement between a partnership and a person with whom the partnership does not deal at arm's length pursuant to paragraph 78(1)(b) of the Income Tax Act.

It is the Department's position that section 78 can apply to a deductible outlay or expense incurred by a partnership.  Thus, for example, an unpaid amount could be included by virtue of paragraph 78(1)(a) in the income of the partnership under section 96.

Since, as you have pointed out, a partnership is not required by section 150 to file a return, it is arguable that paragraph 78(1)(b) cannot apply where the deductible expense or outlay is incurred by a partnership.  However, since taxpayers that are members of a partnership are required by section 150 to file returns, the Department will accept a paragraph 78(1)(b) agreement which is filed on or before the earliest day on which a return is required by section 150 to filed by any of the partners in respect of a taxation year that includes the last day of the third taxation year of the partnership following the taxation year of the partnership in which the outlay or expense was incurred.

Yours truly,

for DirectorBusiness and General DivisionSpecialty and Ruling DirectorateLegislative and Intergovernmental Affairs Branch