4 February 1994 External T.I. 9335575 F - Income From a Business

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.

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Attention:  XXXXXXXXXX

Dears Sirs:

RE:  Reporting Limited Partnership Income and Expenses

This is in reply to your letter of December 3, 1993, requesting our interpretation as to how net income derived through a partnership interest is to be calculated and reported for income tax purposes.

Your request is made as a follow-up to an earlier request only made in respect of rental income. In your letter of December, you refer to profession or other business income.

In our opinion, the income from a partnership follows the same pattern of taxation whether this income is from a business or from a property. Therefore, our previous comments regarding rental income apply to business income.

A partner should report on line 135, 137, 139, 141 or 143, as the case may be, on his/her T1 return his/her share of the business income or loss derived through a partnership interest. As we stated in our first letter, the income or loss of the partnership is its net income or loss after deducting the expenses incurred by it. The expenses incurred by the partner do not enter in the computation of the partnership income or loss. However, the expenses incurred personally by the partner and directly attributable to the business activities of the partnership should be deducted from the amount reportable on line 135, 137, 139, 141 or 143, as the case may be, of the T1 return. We are still of the view that the carrying charges and interest expenses related to the acquisition of an interest in the partnership, such as the interest on money borrowed to acquire the interest, are deductible in the computation of the partner's net income by reporting the amount of these expenses on line 221 (Carrying charges and interest expenses) of the T1 return.

Concerning the definition of "investment expense" in section 110.6(1) of the Income Tax Act (the "Act"), you ask why the reference to "specified member" of a partnership in subparagraph (b)(i) of that definition is necessary as all 20(1)(c) amounts in respect of financing partnership interests would automatically be included under paragraph (a) thereof.

A deduction under paragraph 20(1)(c) regarding an interest in a partnership must be included under paragraph (b) of the definition of investment expense in section 110.6(1) of the Act if the taxpayer is a specified member of the partnership. Therefore, we are of the opinion that this deduction cannot be included under paragraph (a) of the definition of investment expense since the wording of paragraph (a) specifically excludes a deduction included under paragraph (b) of that definition.

Regarding the application of paragraph 146(1)(c) of the Act, we also reiterate our comments as to expenses incurred by the partner in relation to the acquisition of an interest in the partnership. These will not reduce the "earned income".

We trust these comments will be of assistance to you.

Yours truly,

for DirectorManufacturing Industries, Partnerships and Trusts Division Rulings DirectorateLegislative and Intergovernmental Affairs Branch