13 April 1999 Internal T.I. 9906457 - CONTRACT EXPENSE PAID TO A SPOUSE PARTNER

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 or not a payment described as a contract expense made by the wife partner to her husband partner qualifies as a deduction in computing the wife’s income from the partnership business.

Position: No.

Reasons:

There is no basis in the legislation to permit such a payment to be deductible.

		April 13, 1999

	EDMONTON TSO	HEADQUARTERS
	Randy Mann	Jacques E. Grisé
	Assistant Director	957-2059
	Verification and Enforcement

	Attention: Hermi Miranda		990645

Contract Expenses to a Spouse - XXXXXXXXXX

This is in reply to your memorandum of March 3, 1999, requesting our opinion on payments identified as contract expenses made by a partner (the wife) to the only other partner, her husband.

You have related the following pertinent facts:

• The wife and husband are equal partners in a farming business and share the partnership’s net income or loss equally.
• The wife is a full-time employee of the provincial government and the husband tends the farm on a full-time basis.
• The wife deducted contract expenses paid to her husband of XXXXXXXXXX in XXXXXXXXXX, respectively. These amounts were added to her share of the partnership losses for the three years and were used to offset her employment income from the province.
• The husband reduced his share of the partnership’s losses for the three years by the amounts received from his wife.
• The partnership agreement does not require expenses incurred by a partner (e.g., automobile or advertising expenses) to be personally paid by the partner and thus paragraph 13 of Interpretation Bulletin IT-138R, Computation and Flow-through of Partnership Income, has no application.

A partnership is, generally speaking, the relation that subsists between persons carrying on business in common with a view of profit. In the situation you have described, the partnership, consisting of the wife and husband, carries on the farming business. In order to determine the wife and husband’s income or farm loss from the business, paragraph 96(1)(a) of the Income Tax Act requires the partnership to compute its income as if it were a separate person resident in Canada. The wife and husband’s share of the partnership income or loss then flows through to them pursuant to paragraph 96(1)(f) or (g) of the Act.

In our view, the payment made by the wife to the husband, identified as a contract expense, is not an expense or outlay of the partnership that is made or incurred by the partnership for the purpose of gaining or producing income from the partnership’s business. Thus, the payment may not be deducted by the partnership in computing its income or loss from the business. Similarly, since the wife is not carrying on a business outside of the partnership, there is no basis for her claim for an increased business loss equal to the amount paid to her husband. It is also our view that any contract expense denied as a deduction in the hands of the wife should not be included in the husband’s farm income.

We cannot envisage any situation where the payment of wages by a partner to another partner (whether at arm’s length or otherwise) would result in a deductible expenditure to the partnership or the partner paying the wages. However, with respect to amounts described as salaries paid by a partnership to a partner as a method of distributing partnership income among members, please refer to paragraphs 10 and 11 of IT-138R.

We are not aware of the provenance of the statements made in the Farming Income Tax Guide that a taxpayer can deduct wages paid to a spouse as long as the spouse is not a partner. However, it may simply be that there is no employment relationship between partners in a particular business. On the other hand, it is possible and common for an individual who carries on a business as a sole-proprietor to employ a spouse or child in the business. Wages to such employees would be deductible if laid out for purposes of gaining or producing income from a business.

For your information a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Legislation Access Database (LAD) on the Department’s mainframe computer. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, they can be provided with the LAD version, or they may request a copy severed using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Jackie Page at 613 957-0682. The severed copy will be sent to you for delivery to the client.

J.F. Oulton, CA
Manager
Business, Property and
Employment Income Section III
Income Tax Rulings and
Interpretations Directorate