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:
Whether a professional corporation that is a member of partnership will be allowed to claim a small business deduction in its taxation year that will end on December 31, 1995, as a result of the proposed Legislation concerning fiscal periods.
Position:
Yes. However several questions of fact must be resolved to determine the amount of the corporation's "specified partnership income", and the corporation's "business limit" for the year will be subject to proration under the provisions of subsection 125(5)(b) of the Act.
REASON:
Paragraph 249.1(1)(b) of the proposed legislation will create new fiscal periods for both the corporation and the partnership that will end on December 31. Accordingly, this will create a new taxation year for the corporation that will end on December 31, 1995, which is less than 51 weeks.
952033
XXXXXXXXXX B. Kerr
Attention: XXXXXXXXXX
January 22, 1996
Dear Sirs:
Re: Subsection 125(7) and the Legislation on Fiscal Periods
This is in response to your letter of August 1, 1995, wherein you requested our views on what effect the legislation concerning the December 31, fiscal period will have on the small business deduction that a professional corporation that is a member of a partnership may claim. The fiscal periods of the professional corporation and the partnership have previously ended on May 31 and June 30, respectively. We apologize for the delay in responding.
Specifically, you have asked whether the corporation will be entitled to a small business deduction in respect of the partnership income. If so, what percentage of $200,000 of its share of the partnership's income is the corporation entitled to.
Subsection 125(1) of the Income Tax Act (the "Act) provides, inter alia, that a Canadian-controlled private corporation may deduct in computing its tax otherwise payable for a taxation year 16% of the least of three amounts. The first of those amounts includes the specified partnership income of the corporation for the year and the third amount is its business limit for the year.
A Notice of Ways and Means Motion to amend the Act, dated November 27, 1995, was tabled in the House of Commons on December 12, 1995. These amendments implement certain measures announced in the Federal Budget of February 27, 1995, including legislation in respect of fiscal periods (the "proposed legislation").
The proposed legislation will affect the amount that a professional corporation may claim as a small business deduction in that both the professional corporation and the partnership will have fiscal periods that end on December 31 by virtue of draft paragraph 249.1(1)(b), thus creating additional fiscal periods that end in 1995 for each of the corporation and the partnership and therefor affecting the calculations that determine the small business deduction. The professional corporation will have a fiscal period that begins on June 1, 1995, and ends on December 31, 1995. The partnership will have a fiscal period that begins on July 1, 1995, and ends on December 31, 1995. Accordingly, since the taxation year of a corporation is defined to mean its fiscal period, the corporation will report in its taxation year ending December 31, 1995, its share of the partnership income for the partnership's fiscal period ending June 30, 1995, and for the partnership's fiscal period ending December 31, 1995. These amounts are relevant in the determination of the corporation's specified partnership income.
The term "specified partnership income" is defined in subsection 125(7) of the Act based on the formula A + B. The "A" component is the total of all amounts each of which is an amount in respect of a partnership of which the corporation was a member in the year equal to the lesser of paragraph (a) and (b). Paragraph (a), inter alia, is based on the formula G - H and paragraph (b), inter alia, is based on the formula K/L * M. Components "G" and "K" are dependent on the corporation's share of the income of the partnership for a fiscal period ending in the year. Component "L" is dependent on the income of the partnership for a fiscal period ending in the year. Component "H" takes into account deductions in computing the corporation's income from business. Component "M" is either $200,000 or a lesser amount that is dependent on the number of days contained in a fiscal period of the partnership that ends in the year. Since you have not provided us with any indication of the corporation's share of the partnership income for any of the fiscal periods, we cannot determine what the percentage of $200,000 will be for the purpose of paragraph (b) or the specified partnership income of the corporation. However, each of components "G", "K", "L", and likely "H" will be the total of two amounts since there will be two fiscal periods of the partnership that end in the corporation's taxation year that ends on December 31, 1995, and, since the total number of days in the two fiscal periods exceeds 365, we can conclude that the amount for component "M" will be $200,000.
The proposed legislation includes a legislative change to the meaning of "G" of the definition of "specified partnership income" in subsection 125(7). As proposed "G" will also include the amount brought into the corporation's income under draft subsection 34.2(5) representing the amount deducted as a reserve under draft subsection 34.2(4) in the preceding taxation year. For the December 31, 1995 fiscal period, there would not be any amount under draft subsection 34.2(5). However, "H" of the definition of "specified partnership income" would include the amount deducted in the taxation year under draft subsection 34.2(4).
The "business limit" of a corporation for the year is generally $200,000 by virtue of subsection 125(2) of the Act. However, in certain situations it may be less, such as when it is associated as described in subsection 125(3) or when it has a taxation year that is less than 51 weeks as provided under paragraph 125(5)(b) of the Act. When the taxation year of the corporation is less than 51 weeks, the business limit would be pro-rated based on the proportion of the business limit otherwise determined that the number of days in the year is of 365. Since in your case the taxation year of the corporation that ends on December 31, 1995 would only have 274 days, the business limit would be 274/365th's of the business limit otherwise determined.
For additional comments on the small business deduction, please refer to Interpretation Bulletins IT-73R4 entitled "The Small Business Deduction - Income from an Active Business, a Specified Investment Business and a Personal Services Business" and IT-189R2 entitled "Corporations Used by Practising Members of Professions".
As stated in paragraph 21 of Information Circular 70-6R2 dated September 28, 1990, the opinions expressed in this letter are not rulings and are consequently not binding on the Department.
We trust that these comments will be of assistance.
Yours truly,
R. Albert
for Director
Business and General Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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