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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
RULINGS DIRECTORATE
CORRESPONDENCE SUMMARY
Principal Issues:
TREATMENT OF PART I.3 TAX TO CORPORATE PARTNERSHIP(S): (1) LOAN TO A PARTNERSHIP BY CORPORATE MEMBER, (2) LOAN TO A CORPORATE MEMBER FROM PARTNERSHIP,
(3) LOAN BETWEEN CORPORATE PARTNERSHIPS,
(4) EQUITY BASED ACCOUNTING FOR PARTNERSHIP INTERESTS.
Position TAKEN:
SEE RESPONSE.
Reasons FOR POSITION TAKEN:
(1) -(3) LEGISLATION,
(4) PREVIOUS RULING POSITIONS & 1991 CDN.TAX CONF. Q.37
941309
XXXXXXXXXX G. Donell
Attention: XXXXXXXXXX
October 13, 1994
Dear Sirs:
Re: Capital Tax (Part I.3 of the Act) - Corporate Partnerships
This is in reply to your letter of March 9, 1994 and further to your telephone conversation with Mr. Gary Donell October 3, 1994. We apologize for the delay of our response.
You have requested our interpretation of the application of Part I.3 of the Income Tax Act (the "Act") to loans to and from corporate partnerships, loans between partnerships and the impact of equity-based accounting for partnership interests relative to the capital and investment allowance components of subsections 181.2(3) and (4) of the Act respectively.
Paragraph 181.2(3)(g) of the Act, among other things, adds, to the capital of a corporation an amount equal to a proportion of all loans made to a partnership at the end of the partnership's fiscal period, where it is a member of that partnership. The proportion is based upon the corporate member's share of the partnership income or loss for its fiscal period ending in the corporation's taxation year. Paragraph 181.2(3)(g) of the Act however specifically excludes, by the parenthetical words "...(other than amounts owing to the member or to corporations that are other members of the partnership)...", loans made to the partnership by any corporate member of that partnership. Corporate members would still be required to include in their capital, the proportionate interest of loans made to their partnerships by, for example, corporations who are not members, natural persons, trusts and other partnerships.
Subsection 181.2(4) does not provide an investment allowance to a corporation with respect to a loan made by it to a partnership of which it is a member. However paragraph 181.2(4)(d.1) of the Act does provide an investment allowance to a corporation that makes a loan to a corporate partnership of which it is not a member with respect to the amount of the loan as long as the corporate partners do not include "financial institutions", as that term is defined in subsection 181(1) of the Act or corporations (other than non-resident corporations that at no time in the year carried on business in Canada through a permanent establishment) that are exempt from tax under Part I.3 of the Act. Furthermore we do not consider that a loan to a partnership is a loan to another corporation for purposes of Part I.3 of the Act.
Paragraph 181.2(3)(c) of the Act requires that the amount of a loan to a corporation at the end of the year be included in the corporation's capital regardless of the nature of the lender, be it another corporation, natural person, trust or a partnership. Where the lender is a partnership a corporate member will be entitled to an investment allowance equal to the carrying value of its interest in that partnership pursuant to paragraph 181.2(4)(e) of the Act. Subsection 181.2(5) of the Act generally deems the carrying value of the partnership interest for purposes of subsection 181.2(4) of the Act to equal the prorated carrying values of certain partnership assets described in paragraph 181.2(4)(a) to (d) and (f) of the Act. As was the case with paragraph 181.2(3)(g) of the Act, the proration is based upon the corporate member's share of the partnership income or loss for its fiscal period ending in the corporation's taxation year. In the case of a loan by a partnership, paragraph 181.2(5)(a) of the Act includes, in the carrying value of the partnership interest, an asset of the partnership that is a loan to a corporation that is not a "financial institution", as defined in subsection 181(1) of the Act, nor a corporation (other than a non-resident corporation that at no time in the year carried on business in Canada through a permanent establishment) that is exempt from tax under Part I.3 of the Act. The loan would be prorated according to the income/loss ratio indicated in subsection 181.2(5) of the Act. Subsections 181.2(4) and (5) do not provide an investment allowance to a corporate member of a partnership with respect to a loan made by that partnership to another partnership regardless of whether that member is or is not a member of the borrowing partnership.
You have also addressed the issue of the accounting for an investment in a partnership or the partnership interest. In your opinion where a partnership interest is accounted for on an equity basis, that is where, at year end, the interest is increased by a debit with a balancing credit to retained earnings, the increase to retained earnings should not be recognized for Part I.3 purposes where the partnership has not distributed the earnings to which the corporation would be entitled. We disagree. It is our view that a corporation would be required to include, in the calculation of its capital, its share of the earnings of a partnership of which it is a member, on the same basis that the corporation would report its share of the partnership earnings for the purposes of Part I of the Act regardless of whether the earnings are distributed or not. Accordingly, no adjustment would be required to the retained earnings of the corporate partner with respect to its share of the partnership earnings. This reflects the departmental position as stated in Round Table Question 37 of the 1991 Canadian Tax Conference.
The foregoing opinion is not a ruling and, in accordance with the guidelines set out in Information Circular 70-6R2 dated September 28, 1990, is not binding on the Department. We trust that the above comments are of assistance to you.
Yours truly,
for Director
Financial Industries Division
Rulings Directorate
Policy and Legislation Branch
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