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, in a particular situation, the corporation would be entitled to a small business deduction (up to $200,000) in the current year with respect to the amount of the reserve included in income pursuant to subsection 34.2(5) of the Act that exceeds the corporation's share of the loss of the partnership.
Position:
In that particular situation, no.
Reasons:
In that particular situation, the amount included in computing the income of the corporation for the year pursuant to subsection 34.2(5) of the Act would represent income from a business carried on by the corporation as a member of a partnership that would form part of the amount determined as "specified partnership income" as defined under subsection 125(7) of the Act. The reserve under subsection 34.2(5) of the Act would be included under item "G" of this definition. As such, this reserve would be excluded in computing the total under subparagraph 125(1)(a)(i) of the Act. Furthermore, the corporation's specified partnership income and specified partnership loss in respect of the partnership would be offset.
5-972736
XXXXXXXXXX Sylvie Labarre, CA
December 2, 1997
Dear Sir:
Re: Reserve included in income pursuant to subsection 34.2(5)
Small business deduction
This is in reply to your letter of April 7, 1997 wherein you requested our views regarding the above-noted subject as it relates to the following hypothetical situation.
A corporation is a member of a professional partnership that incurs a loss for a fiscal period ending in the year from an active business carried on in Canada. Pursuant to subsection 34.2(4) of the Income Tax Act (the "Act"), the corporate partner deducted an amount, as a reserve in respect of December 31, 1995 income, in computing its income for the previous year from the business carried on as a member of the partnership. This reserve, which is included in computing the corporation's income for the year, exceeds the corporation's share of the loss of the partnership. The corporation does not deduct a reserve under subsection 34.2(4) of the Act in computing its income for the current year. The corporation does not have any other income or losses.
You have asked whether the corporation would be entitled to a small business deduction (up to $200,000) in the current year with respect to the amount of the reserve included in income pursuant to subsection 34.2(5) of the Act that exceeds the corporation's share of the loss of the partnership.
As explained in Information Circular 70-6R3, it is not the Department's practice to comment on proposed transactions other than in the form of an advance income tax ruling. Taxpayers seriously contemplating a proposed transaction are best advised to seek a formal ruling, submitting a complete statement of facts and issues as well as copies of all relevant documents. Should your situation involve completed transactions, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. We are therefore not in a position to give a definitive response to your enquiry. However, we can offer you the following general comments which may be of assistance although, in certain circumstances, they may not be appropriate to your specific situation
In the situation described in your letter, it is our view that the corporation would not be entitled to a small business deduction under section 125 of the Act in respect of the amount of the reserve included in income pursuant to subsection 34.2(5) of the Act that exceeds the corporation's share of the loss of the partnership.
We do not agree with your analysis of paragraph 125(1)(a) of the Act. In our view, the amount included in computing the income of the corporation for the year pursuant to subsection 34.2(5) of the Act would represent income from a business carried on by the corporation as a member of a partnership that would form part of the amount determined as "specified partnership income" as defined under subsection 125(7) of the Act. The reserve under subsection 34.2(5) of the Act would be included under item "G" of this definition. As such, this reserve would be excluded in computing the total under subparagraph 125(1)(a)(i) of the Act.
Subparagraph 125(1)(a)(ii) includes the "specified partnership income" which, in your example, would be equal to $100,000 and subparagraph 125(1)(a)(iv) regarding the "specified partnership loss" would be equal to $100,000.
As indicated in paragraph 22 of Information Circular 70-6R3 dated December 30, 1996, this opinion is not a ruling and accordingly, is not binding on the Department.
We trust our comments will be of assistance to you.
Yours truly,
Marc Vanasse, CA
for Director
Resources, Partnerships and Trusts Section
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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