19 February 1998 External T.I. 9639785 - PARTNERSHIP INCOME

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 the computation of income of a member of a partnership is dependent on amounts paid to the member by the Partnership.

Position:

No. Amounts paid or distributed to a partner by a partnership are a method of distributing the income of the partnership. For income reporting purposes by the member, the member's share of the partnership income for a fiscal period must be reported by the member for his/her taxation year in which the fiscal year ends, whether or not any amount of the partnership's income is received or receivable by the member.

Reasons:

Subsection 96(1) of the Act does not require that the computation of the member's income be determined on distributions or payments made by the partnership. In any event, the income of a partnership may be accumulated, depending on the requirements and obligations of the partnership, without making any distributions to the members. However, such accumulated income must be reported by the members for tax purposes.

963978
XXXXXXXXXX F. B. Fontaine, FCCA

February 19, 1998

Dear Sir:

Re: Computation of Income of Members of a Partnership

Further to our telephone conversation (Fontaine/XXXXXXXXXX) of February 11, 1998, this is in reply to your letter requesting a technical interpretation in respect of the above-captioned subject.

The scenario described refers to a farm partnership of two partners where one partner who contributes more time and effort in the partnership is first allocated an agreed portion of any partnership income and receives an equal share of any residual income or loss.

The situation that you have described appears to be an actual fact situation. Whether or not the situation is a completed or contemplated transaction, paragraph 22 of Information Circular 70-6R3 (the "Circular") outlines the procedure to be followed in respect of such transaction. Accordingly, while we are unable to provide confirmation of the income tax effects of the particular situation, we are prepared to offer the following general comments:

1. We agree that (i) the income of a partnership should be allocated to its members based on the particular partnership agreement to share profits and losses and that (ii) paragraphs 96(1)(f) and (g) of the Income Tax Act (the "Act") do not require, for the purpose of computing the partner's income, that the partnership income be paid or distributed to the members.

2. Based on subsection 96(1) of the Act, each partner is required to take into account, in computing income or loss for tax purposes for a taxation year, his or her share of the partnership income or loss for the partnership's fiscal period ending in that taxation year, regardless of whether or not any distributions (payments) from the partnership have been received or will be received.

3. Income earned by a partnership may be accumulated and held in the partnership. Such accumulated revenue must nevertheless be taken into account by a partner at the end of each calendar year for income tax purposes and the partner will have to report such income and may pay tax on amounts that are not distributed to him or her due to accumulations.

4. Normally, a partner's share of the profits or losses of a partnership depends on the amount of the partner's interest in the partnership, based on the partner's contribution in capital or other property, or service rendered, to the partnership. This would generally be included in the partnership agreement which may provide that because of a particular transfer of property or special services provided by a partner, the partner may receive a greater share of the profits.

5. It is our view that an amount allocated or distributed by a partnership to a partner would not constitute a business expense for the purposes of the Act and, therefore, would not be a deductible outlay in computing income. A distribution made by a partnership is considered to be a method of distributing income or capital, as the case may be, to a member or members of the partnership.

6. Notwithstanding an allocation (or distribution) of income under the terms of a partnership agreement, the allocation of partnership income or loss may, nevertheless, be subject to the application of subsections 103(1) or 103(1.1) of the Act. It is a question of fact, based on the particular circumstances, whether (i) the principal reason for a particular partnership agreement is to achieve a reduction or postponement of tax under the Act and (ii) amounts allocated under any partnership agreement would be reasonable, in accordance with these provisions.

The comments above represent an expression of our opinion which, as indicated in paragraph 22 of the Circular, is not an advance income tax ruling and, accordingly, is not binding on Revenue Canada.

Yours truly,

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