11 September 1996 External T.I. 9610575 - FISCAL PERIOD - CO-OWNERSHIP

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.

									961057
XXXXXXXXXX							B. Kerr

Attention: XXXXXXXXXX

September 11, 1996

Dear Sir:

Re: Fiscal Period

This is in response to your letter of February 8, 1996, in respect of the legislation concerning fiscal periods.

The situation described in your letter relates to the co-ownership of a rental property by a corporation, an individual and a trust. You have stated that the arrangement is not a partnership. The income from the rental property has been reported based on a fiscal period ending on June 30. The fiscal period and taxation year of the corporation ends on June 30.

You have asked us to confirm your views: that the co-ownership would now be required to report on a calendar year basis; and that the individual and the trust would therefore have to report 18 months of income in 1995 and would not be eligible to claim a reserve. In addition, you have asked whether the corporation would be entitled to a reserve for the 6 months of income for the period ending December 31, 1995 that it will report in its 1996 taxation year.

Our Comments

In your letter you have outlined an actual fact situation related to a past transaction. The review of such transactions falls within the responsibility of the Tax Services Offices and it is the practice of this Department not to comment on such transactions when the identities of the taxpayers are not known. However, we can provide the following general comments which we hope will be of assistance to you.

Since a co-ownership is not a taxpayer nor a person, the reporting of the income from such an arrangement is at the co-owner level. A taxpayer's income for a taxation year is determined under section 3 of the Income Tax Act (the "Act"). A taxpayer's income from each office, employment, business and property must be included under paragraph 3(a) of the Act. Section 249 of the Act provides that in the case of an individual, which includes a trust, the taxation year is the calender year. In the case of a corporation, the taxation year is a fiscal period. The definition of a "fiscal period", found in section 248 for periods that began prior to 1995, pertained to the business of a taxpayer. Section 11 of the Act only allows an individual that is a proprietor to report income from a business on a fiscal period basis, not income from property. Although it is a question of fact whether the rental of property would constitute a business, it appears that in the situation you describe the income is from property and, therefore, should have been reported by the individual and the trust on a calendar year basis. Since the corporation's taxation year is a fiscal period, the corporation has been correctly reporting its share of the income.

On March 28, 1996, the Honourable Paul Martin, Minister of Finance, retabled the Notice of Ways and Means Motion to implement changes to the Act introduced in the February 27, 1995 budget including legislation in respect of fiscal periods. The original motion was tabled on December 12, 1995. This legislation was included in Bill C-36, which received Royal Assent on June 20, 1996.

The definition of "fiscal period" in section 248 was repealed and replaced by a new definition of that term in new section 249.1 applicable for fiscal periods that begin after 1994. New paragraph 249.1(1)(b) applies to certain individuals, partnerships and professional corporations and provides that no fiscal period may end after the end of the calendar year in which the period began. As a result, even if the income is from business, in our view, the provisions of paragraph 249.1(1)(b) would apply to any co-owner that is a person referred to in that paragraph.

The legislation also contains provisions that allow for the retention of an off-calendar fiscal period by providing for an election under subsection 249.1(4) and a transitional reserve under new subsection 34.2(4) for the additional income that an affected taxpayer would have to include in income for the stub period that ends on December 31, 1995. However, in essence the application of these provisions, inter alia, requires income from business. Accordingly, in our view the individual and the trust in your situation would not be entitled to a reserve if the income is from property.

With respect to the corporation described in your situation, since the corporation has been correctly reporting its income based on its taxation year, and since it would not be affected by the new definition of fiscal period, no additional amount would be required to be included in its income for the period ending December 31, 1995 nor would it be entitled to any reserve. In other words, it would continue to report its income from the rental property based on its June 30 fiscal period and taxation year.

We trust that these comments will be of assistance.

Yours truly,

R. Albert
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch