9 December 1998 Income Tax Severed Letter E9829820.txt - PART I.3 - PARTNERSHIP EARNINGS

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:

Treatment of undistributed partnership income for the fiscal period of the partnership that ends in the corporate partner’s taxation year as well as the treatment of distributions of current earnings to the corporate partner in the period that begins after the end of the partnership’s fiscal period but before the end of the corporate partner’s taxation year for Part I.3 purposes.

Position:

If such amounts are credited to the corporate partner’s retained earnings in accordance with GAAP, it is our view that such amounts would be included in the corporate partner’s taxable capital.

Reasons:

Legislation.

TEI Conference
December 9, 1998

Question XXI.

LARGE CORPORATIONS TAX - INTEREST IN A PARTNERSHIP

Retained earnings are included in taxable capital for purposes of computing the Large Corporations Tax (LCT). Under generally accepted accounting principles (GAAP), a corporate partner in a partnership is required to include in retained earnings the corporate partner’s ratable share of the partnership’s earnings through the balance sheet date. For purposes of Part I of the Act, however, partnership earnings are included in the partner’s income only up to the end of the partnership’s fiscal period which ends in the partner’s taxation year. During the period 1991 to 1994, Revenue Canada stated that for purposes of computing LCT corporations may use a retained earnings figure that excludes the partnership earnings for the period from the end of the partnership’s fiscal period to the end of the corporate partner’s taxation year. In a letter dated October 13, 1994, Revenue Canada confirmed this position. Can Revenue Canada confirm that this position still applies.

Department’s Position

In our October 13, 1994 letter, we stated that it was our view that a corporation would be required to include, in the calculation of its capital, its share of the earnings of the partnership of which it is a member, on the same basis that the corporate partner would report its share of the partnership earnings for the purposes of Part I of the Act regardless of whether the earnings are distributed or not. We should clarify that this statement was not intended to suggest that any distributions of current partnership earnings made to a corporate partner would not be added to the corporate partner’s taxable capital. Rather, our intent was to indicate that a corporate partner’s share of earnings from the partnership’s fiscal period ending in the corporate partner’s taxation year would have to be included in the corporate partner’s taxable capital even if such earnings were not distributed at the end of the partnership’s fiscal period.

Where the amount of undistributed partnership income for the fiscal period of the partnership that ends in the corporate partner’s taxation year is credited to the corporate partner’s capital account and is, in accordance with GAAP, reflected in the corporate partner’s balance sheet as retained earnings, it is our view that such amount would be required to be included in the corporate partner’s taxable capital.

Where, in the period that begins after the end of the partnership’s fiscal period but before the end of the corporate partner’s taxation year, the partnership distributes its current earnings to the corporate partner and such amount is credited to the corporate partner’s retained earnings in accordance with GAAP, it is our view that such amount would also be included in the corporate partner’s taxable capital. However, if the amount of the distribution received by the corporate partner was in respect of its share of the partnership’s income of a prior fiscal period that was already included in the corporate partner’s taxable capital (i.e., not previously distributed) then no further inclusion in respect of the current distribution would be required.

Author:	Jenie Leigh
File:		982982
Date:		November 18, 1998