19 November 1997 External T.I. 9713085 - CALENDAR YEAR-END RULES

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 a partnership would be entitled to a reserve under 34.2(4) where, among other things, the corporation's taxation year which previously ended on December 30, 1995 was changed to end on December 31, 1995. December 31 has always been the partnership's year end. Would the change of the corporation's taxation year arise because of the application of paragraph 249.1(1)(b).

Position:

It appears that the change of the corporation's year-end would arise because of the application of 249.1(1)(b). Whether it qualified for the reserve would depend on whether it had a qualifying fiscal period, earned income in that period and had December 31, 1995 income.

Reasons:

Based on paragraph 2 of IC 70-6R3, general comments provided on apparent actual fact situation.

971308
XXXXXXXXXX F.B. Fontaine, FCCA

Attention: XXXXXXXXXX

November 19, 1997

Dear Sirs:

Re: Calendar Year-end Rules

This is in reply to your letter dated November 8, 1996 in respect of sections 34.2 and 249.1 of the Income Tax Act (the “Act”) as they apply to a professional corporation that is a member of a partnership.

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 the income tax effects of the particular situation, we are prepared to offer only the following general comments:

1. Whether or not a professional corporation that is a member of a partnership is entitled to the reserve described in paragraph 34.2(4) of the Act is a question of fact. Such entitlement would depend, among other things, on whether the corporation:

(a) had a "qualifying fiscal period",

(b) earned income from a business in the qualifying fiscal period,

(c) because of the application of paragraph 249.1(1)(b), had a taxation year that ended on December 31, 1995, and

(d) had December 31, 1995 income.

2. With regard to:

(a) the definition of “qualifying fiscal period” under subsection 34.2(1) of the Act,

(i) paragraph 249.1(1)(b) of the Act requires professional corporations that are members of a partnership to have fiscal periods that coincide with the calendar year,

(ii) each fiscal period of the partnership that ends in the professional corporation’s taxation year ending at the end of 1995 where the partnership's business was carried on by the corporation as a member of the partnership at the end of 1994 is considered to be a qualifying fiscal period for the purposes of section 34.2 of the Act.

(b) the definition of “fiscal period” under subparagraph 249.1(1)(b)(iii) of the Act,

(i) the fiscal period of a professional corporation cannot end after the end of a calendar year in which its fiscal period began where the corporation would, if its fiscal period ended at the end of that calendar year in which the period began, be in the period a member of a partnership.

Accordingly, a professional corporation described in (a) and (b) whose fiscal year-end ended on December 31, 1995 because of the application of paragraph 249.1(1)(b) would have a qualifying fiscal period that corresponded with the fiscal period of the partnership ending on December 31, 1995.

3. For the purpose of computing the “December 31, 1995 income” of a corporation in accordance with the definition under subsection 34.2(1) of the Act, any income allocation made to the corporate member by the partnership for a qualifying fiscal period described in paragraph 2 above would represent “A” of the formula described in that definition. “F” and “G” of the formula would represent the number of days in the qualifying fiscal period and in the taxation year of the corporation, respectively.

4. In conclusion, it is our opinion that a reserve under subsection 34.2(4) of the Act would be available to a corporation that meets the requirements described above.

These comments represent an expression of our opinion. As indicated in paragraph 22 of the Circular, such an opinion is not an advance 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