2 August 1995 Internal T.I. 9513447 - ALLOCATION OF PARTNERSHIP PROFITS AND LOSSES

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.

Principal Issues:

Comments requested on application of section 103 to a situation where a partnership allocates losses to all of the limited partners execpt one which is a corporation.

Position TAKEN:

Section 103 would probably apply.

Reasons FOR POSITION TAKEN:

It is questionable whether it is reasonable in the circumstances to allocate none of the losses to a particular limited partner for the sole reason that the partnership would like the other limited partners to be allocated losses up to their level of capital contributions first.

		August 2, 1995

Vancouver District Office	Rulings Directorate
	Attention:  S.W. Holmes	Manufacturing Industries,
		Partnerships and Trusts	        								J.Thompson
		957-8954

                                       			7-951344

Section 103 of the Income Tax Act (Canada) (the "Act")
Allocation of Partnership Profits and Losses

This is in reply to your facsimile transmission of May 16, 1995 wherein you requested our comments with respect to the interpretation of section 103 the Act in a particular fact situation.

Facts

A corporation which is carrying on a research and development project forms a general partnership for the purpose of completing the project and transfers its assets to the partnership and files an election in respect of the transfer pursuant to subsection 97(2) of the Act. Other members of the partnership contribute capital to the partnership by way of cash and services to finance completion of the project.

Losses of the partnership are allocated to all of the other partners except the corporation until such time as the aggregate losses allocated to these partners equals their capital contribution. After such time, the allocation of profits and losses will be allocated on pro-rata basis among all the partners.

The taxpayer's representative seeks confirmation that section 103 will not apply to redetermine the above profit and loss sharing arrangement.

Comments

Generally, partnership agreements provide for the sharing of profits and losses on the same basis from year to year. Any deviation from this pattern should be supported by valid reasons. Subsection 103(1) of the Act applies where the principal reason for the agreement to share profits in a certain manner ".... may reasonably be considered to be the reduction or postponement of the tax that might otherwise have been or become payable under this Act, the share of each member of the partnership in the income or loss, as the case may be, ........is the amount that is reasonable having regard to all the circumstances .....". Similarly, subsection 103(1.1) provides that where the allocation of income, losses or other amounts between non-arm's length partners is not reasonable in the circumstances having regard to the capital invested or work performed for the partnership by the members thereof, the share of income or loss or other amount shall notwithstanding any agreement, be deemed to be an amount that is reasonable in the circumstances.

It is a question of fact whether the tests in subsection 103(1) or subsection 103(1.1) have been satisfied. However, we are of the view that in the circumstances of the situation you describe, the provisions of subsection 103(1) or subsection 103(1.1) of the Act would likely apply.

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch