22 March 1996 External T.I. 9531565 - FISCAL PERIOD-RETIRED PRO-CORP.-SBD

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 retired professional corporation that retains an income interest in a partnership would be subject to the provisions of new paragraph 249.1(1)(b) and entitled to the small business deduction as a result.

Position:

Would be subject to the provisions of new paragraph 249.1(1)(b), but would not be entitled to the small business deduction.

Reasons:

The amended provisions of subsection 96(1.1) will apply to deem the retired professional corporation to be a member of the partnership for the purposes of section 249.1. However, the provisions of subsection 96(1.6) will not apply to deem the corporation to be carrying on the business for the purposes of section 125.

									953156
XXXXXXXXXX							B. Kerr

Attention: XXXXXXXXXX

March 22, 1996

Dear Sirs:

Re: Legislation on Fiscal Periods

This is in response to your letter of October 4, 1995, wherein you requested our views on whether a particular professional corporation would have a fiscal period that ends on December 31, 1995.

The situation described in your letter involves two professional corporations that each own a 50% interest in a partnership. The fiscal period of each corporation and the partnership is June 30. On October 1, 1994, one of the professional corporations retired from the partnership, but retained a residual income interest for 5 years. At that time, the individual shareholder of the other professional corporation acquired a 50% interest in the partnership.

The partnership will be required to have a fiscal period that ends on December 31, 1995. You have asked whether the retired professional corporation would have a fiscal period that ends on December 31, 1995, and whether it is entitled to a small business deduction for that taxation year.

Our Comments

A Notice of Ways and Means Motion to amend the Income Tax Act (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 repeals the meaning of fiscal period in subsection 248(1) of the Act and replaces it with a new meaning under new subsection 249.1(1). New paragraph 249.1(1)(b) will apply to certain individuals, partnerships and professional corporations and will provide, inter alia, that no fiscal period may end after the end of the calendar year in which the period began.

New subparagraph 249.1(1)(b)(ii) applies to a professional corporation that would, if the fiscal period ended at the end of the calender year in which the period began, be in the period a member of a partnership. Where the principal activity of a partnership is carrying on a business in Canada and its members have entered into an agreement to allocate a share of the income of the partnership to any taxpayer who at any time ceased to be a member of the partnership, subsection 96(1.1), for certain purposes, deems the taxpayer to be a member of the partnership. The proposed legislation amends subsection 96(1.1) to also apply for the purposes of new sections 34.1, 34.2 and 249.1. Accordingly, in our view, the retired professional corporation would be deemed to be a member of the partnership such that the provisions of subparagraph 249.1(1)(b) would apply.

In order to claim a small business deduction under subsection 125(1) of the Act, the corporation must have an amount under paragraph 125(1)(a) of the Act. This requires the corporation to have income from an active business carried on by it or specified partnership income which requires the corporation to have income from an active business carried on by the corporation as a member of a partnership. Although subsection 96(1.1) deems the corporation to be a member of the partnership, it does not deem it to be carrying on the business of the partnership. Thus the need for subsection 96(1.6) which for purposes of subsection 2(3) of the Act deems a taxpayer to carry on business in Canada if that taxpayer is deemed to be a member of a partnership by virtue of paragraph 96(1.1)(a). The proposed legislation amends subsection 96(1.1) to also apply for the purposes of section 34.1 and 34.2. It does not, however, apply for the purposes of section 125. Therefore, in our view, the retired professional corporation would not be entitled to a small business deduction.

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