ARCHIVED – Partnerships – Deferral of Corporate Tax

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1. What was announced in the 2011 budget with respect to corporations that are members of a partnership?
2. What is a corporation's stub period?
3. When will these new rules apply?
4. To which corporations will these new rules apply?
5. What is a significant interest in a partnership?
6. Will these rules affect a corporation if it does not have a significant interest in a partnership?
7. What additional income amount will be required to be included in a corporation's income when it has a significant interest in a partnership?
8. How will the stub period accrual income be calculated?
9. What is the formulaic approach?
10. What is the designation approach?
11. What if the corporation chooses to use the designation approach and therefore designates less income than the actual amount of its share of partnership income for the stub period (determined when the partnership's fiscal period that includes the stub period has ended)?
12. If a corporation will have to accrue additional partnership income because of these new rules, what transitional relief will be available?
13. Will it be possible for a partnership to change its fiscal period?
14. Where can I get more information about these changes?

1. What was announced in the 2011 budget with respect to corporations that are members of a partnership?

The budget proposes that certain corporations will be required to accrue additional income (other than dividends) from the partnership of which it is a member for the portion of the partnership's fiscal period that falls within the corporation's taxation year (stub period accrual income).

2. What is a corporation's stub period?

The stub period is the portion of the partnership's last fiscal period that begins within the corporation's taxation year and ends in the same taxation year end.

Example:
Taxation year end = TYE
Fiscal period end = FPE

Fig. 1

In this example, the stub period begins on February 1, 2011 (the first day of the partnership's fiscal period) and ends on December 31, 2011 (the last day of the corporation's taxation year).

Single-tier Partnerships
These new rules apply to both single-tier partnership structures and multi-tier structures with corporate partners. While the proposed rules are similar for both types of structures, the following questions and answers relate to single-tier partnership structures.

3. When will these new rules apply?

The new rules will generally apply to taxation years of a corporation that end after March 22, 2011, where the corporation is a member of a partnership.

4. To which corporations will these new rules apply?

Generally, these rules will apply to a corporation (other than a professional corporation*), for a taxation year if:

• the corporation is a member of a partnership at the end of the taxation year;
• the partnership's last fiscal period that began in the taxation year ends in a subsequent taxation year of the corporation; and
• the corporation has a significant interest in the partnership.

*Under existing law, a partnership and a professional corporation that is a member of that partnership must both have a December 31 year end.

5. What is a significant interest in a partnership?

A corporation has a significant interest in a partnership where the corporation, together with affiliated and related parties, was entitled to more than 10% of the partnership's income (or assets in the case of wind-up) at the end of the last fiscal period of the partnership that ended in the corporation's taxation year.

6. Will these rules affect a corporation if it does not have a significant interest in a partnership?

It is possible that the new rules may affect a corporation that does not have a significant interest in a partnership, if the partnership has one or more members that has a significant interest and the partnership elects to change its fiscal period under the new rules. In this case, the corporation may have additional partnership income due to this one-time alignment.

7. What additional income amount will be required to be included in a corporation's income when it has a significant interest in a partnership?

Generally, and subject to specific rules, the amount of the additional income accrual is the corporation's estimated share of the amount of partnership income related to the stub period.

8. How will the stub period accrual income be calculated?

The corporation will have two choices for calculating the stub period accrual income: the "formulaic approach" or the "designation approach".

9. What is the formulaic approach?

Using the formulaic approach, the stub period accrual income in a taxation year of a corporation will be determined as follows:

A × B/C

Where:

A is the corporation's share of income, if any, from the partnership (other than dividends) for the partnership's fiscal periods that end in the taxation year;

B is the number of days in the stub period; and

C is the number of days in the partnership's fiscal periods that end in the taxation year.

10. What is the designation approach?

Under the designation approach, corporations may choose to designate a stub period accrual that is lower than the amount determined under the formulaic approach, but never less than nil.

11. What if the corporation chooses to use the designation approach and therefore designates less income than the actual amount of its share of partnership income for the stub period (determined when the partnership's fiscal period that includes the stub period has ended)?

Where the designated amount is less than the lesser of: the actual amount of the share of partnership income for the stub period and the amount calculated under the formulaic approach, the corporation will be subject to an additional income inclusion in the following taxation year that varies depending on the extent to which the designated amount is underestimated.

12. If a corporation will have to accrue additional partnership income because of these new rules, what transitional relief will be available?

Depending on the situation, a transitional reserve may be available to spread the additional income over the five taxation years ending after the corporation's first taxation year ending after March 22, 2011. As a consequence of the transitional reserve, a corporation with a December 31, 2011, taxation year end will generally be required to include 15% of the additional income in the taxation year ending in 2012; 20% in 2013, 2014 and 2015; and 25% in 2016.

13. Will it be possible for a partnership to change its fiscal period?

Yes. A partnership may file a one-time election with the Minister of National Revenue to change its fiscal period if all members of the partnership are corporations and certain other conditions are met.

14. Where can I get more information about these changes?

The CRA is committed to providing taxpayers with up-to-date information. The CRA encourages taxpayers to check its Web pages often. All new forms, policies, and guidelines will be posted as they become available.

These questions and answers are general in nature and do not reflect the complexity of the new proposals. Please consult the Department of Finance Canada's Budget 2011 documents for details.

Date modified:

2015-07-15