Income Tax Technical News, No. 30, 21 May 2004

Although there is no impediment to the creation of partnership interests that carry different entitlements to share in the income or other attributes of the partnership, the sharing of these tax attributes is subject to section 103.

As noted earlier, loss consolidation transactions must be legally effective. ...However, we would not feel comfortable providing a ruling on a loss consolidation transaction that contemplates dollar amounts and time frames that are blatantly artificial. Thus, in order to be provided with a ruling, we must be able to satisfy ourselves that the transactions are plausible, and the quickest way for us to obtain such assurance is through a commitment letter. ...

While we have not reached the point where we would state that CRB Logging is no longer good law, we have provided rulings on some upstream shareholding situations. The key criteria to be met in such situations is the existence of other assets in the parent company that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary.

The Agency "would not feel comfortable providing a ruling on a loss consolidation transaction that contemplates dollar amounts and time frames that are blatantly artificial".

Although, as a general rule the inclusion/deduction mechanism provided under ss.12(1)(a), 12(1)(e) and 20(1)(m) should apply to amounts received in a year by a taxpayer in the course of a business in respect of services not rendered or goods not delivered before the end of the year or that otherwise may be regarded as not having been earned in the year, in some circumstances a full inclusion (without reserve) under s. 9(1) may be more appropriate, for example, where the taxpayer has substantially performed all its obligations, or where the taxpayer would be allowed to retain the prepayment even if it did not perform.

The GE Capital case is consistent with the views of the Agency that at common law a rescission of a debt obligation will be implied when the parties have effected such an alteration of its terms as to substitute a new obligation in its place which is inconsistent with it to an extent that goes to the very root of it; and the Agency has ruled that there was no new obligation coming into existence when the terms of an existing obligation were changed to defer the payment of interest payments until maturity, to amend the security interests of the debt holders, and to change the conversion ratio.

Under the scheme of the Act it is acceptable to transfer deductions within an affiliated group of corporations. The Agency will not feel comfortable providing a ruling on a loss consolidation transaction "that contemplates dollar amounts and time frames that are blatantly artificial". Respecting CRB Logging, the Agency has "provided rulings on some upstream shareholding situations. The key criteria to be met in such situations is the existence of other assets in the parent company that can generate sufficient income to pay the dividends on the preferred shares held by the subsidiary".

Remuneration received by a partner for work performed in the course of the partnership business is properly treated as a distribution of income or a draw against capital (given that an agreement between a partnership to employ a partner "would be an attempt by the particular partner to enter into a contract of employment with himself or herself ... [which] agreement would, at law, be a nullity") and would not be deductible in computing partnership income . However, CRA also stated (FN 9):

It is important to note that the prohibition against entering into a contract with oneself may be overridden by statute. For example, section 60 of the Partnership Act (Alberta), section 60 of the Partnership Act (Saskatchewan) and section 13 of the Limited Partnership Act (Nova Scotia) authorize a limited partner to loan money to and transact other business with the limited partnership. See also paragraph 12(2)(b) of the Limited Partnership Act (Ontario) which authorizes a limited partner to act as a contractor for the limited partnership.

Although there is no impediment to the creation of partnership interests that carry different entitlements to share in the income or other attributes of the partnership, the sharing of these tax attributes is subject to section 103.