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.
Principal Issues: Examples of the application of the revised administrative policy.
Position: See document.
Reasons: 2011-042958
XXXXXXXXXX
2011-043146
R. Ferrari
January 10, 2012
Dear XXXXXXXXXX :
Re: Revised Administrative Policy for Participants in Joint Ventures
This is in reply to your email of December 16, 2011 with respect to the Canada Revenue Agency's ("CRA") revised administrative policy for participants of joint ventures ("JV"). You ask for confirmation as to how transitional relief will be provided for the incremental income that arises as a result of the change in the CRA's administrative policy as announced in the CRA document number 2011-042958, dated November 29, 2011.
Your email provided a hypothetical scenario in which two corporations are participants in a JV. The corporations had established a fiscal period end of December 31 for the JV and computed their income based on the fiscal period of the JV pursuant to the CRA's previous administrative policy. The first corporate participant, Corporation A, has a taxation year end ("TYE") of November 30 and the second corporation, Corporation B, has a TYE of January 31.
Our Comments
The CRA's previous administrative policy was announced at the 1989 Canadian Tax Foundation Conference. It had allowed, on an administrative basis, participants of the JV to establish a fiscal period for the JV that differed from the fiscal periods of the participants where the participants had different fiscal periods and there was a valid business reason that justified a separate fiscal period for the JV. Where a participant had relied on this administrative policy, the income earned by a taxpayer as a participant (participant taxpayer) of the JV was allowed to be included in the participant taxpayer's income for the taxation year in which the fiscal period of the JV ended.
As a result of the 2011 Budget proposals to eliminate the deferral of income from partnerships, the CRA announced the withdrawal of this administrative policy and advised that taxpayers who had entered into JV arrangements would no longer be eligible to compute income as if the JV had a separate fiscal period. (See our document number 2011-040308, dated June 6, 2011.) The CRA subsequently announced the revised administrative policy in document number 2011-042958.
Deferred Income
Document 2011-042958 confirms participant taxpayers of JVs will be expected to include in income all amounts in the first taxation year ending after March 22, 2011 that had been deferred as a result of fiscal periods that differed from the taxation years of the participant taxpayer.
In the scenario described in your email, the first TYE of Corporation A that is after March 22, 2011 is its TYE of November 30, 2011. Corporation A would be required to include in its income for that taxation year, the income earned through the JV for the twelve month period of January 1, 2010 to December 31, 2010. In addition, as a result of the change in CRA's administrative policy, Corporation A would also be required to include the additional income from the JV for the eleven month period of January 1, 2011 to November 30, 2011. With respect to Corporation B, its first TYE after March 22, 2011 is its TYE of January 31, 2012. Corporation B would be required to include in its income for that taxation year, the income from the JV for the twelve month period of January 1, 2011 to December 31, 2011, as well as for the one month period of January 1, 2012 to January 31, 2012.
Transitional Relief: Conditions and Computation Rules
There can be significant incremental income that is required to be included in the income of a participant taxpayer of a JV for the first taxation year of the participant taxpayer ending after March 22, 2011 as a result of the change in the CRA's administrative policy. Subject to certain conditions, the revised administrative policy provides for transitional relief with respect to this additional income.
In the circumstance of the scenarios provided in your email, the incremental income that may qualify for transitional relief for Corporation A would be the income from the JV for the eleven month period from January 1, 2011 to November 30, 2011. Similarly, the incremental income that may qualify for transitional relief to Corporation B would be its income from the JV for the one month period of January 1, 2012 to January 31, 2012.
In order to qualify for transitional relief, document number 2011-042958 stipulated that participant taxpayers are required to file an election in writing by attaching a letter with their return of income on or before the filing due date of the first taxation year ending after March 22, 2011. If a return has already been filed, participant taxpayers are required to send a letter to their Taxation Centre indicating their election to benefit from this administrative policy in respect of transitional relief. The CRA has subsequently extended the filing due date for the election to be made on or before September 22, 2012.
Document number 2011-042958 outlined certain conditions that must be met in order for transitional relief to be allowed, including inter alia, being subject to the conditions that are similarly stipulated under section 34.2. For example:
- Transitional relief is not available to participant taxpayers of JVs who had not relied on the former administrative policy to calculate income based on the fiscal period established for the JV.
- Transitional relief is not available where a participant taxpayer fails to include all the accrued income in the first taxation year that ends after March 22, 2011.
- Income that would otherwise have been included in the income for the taxation year of the participant taxpayer will not qualify for transitional relief.
- Income for which a deduction is available under section 112 or 113 will not qualify for transitional relief.
- The limitations, conditions and rules as stipulated for corporate members of partnerships under paragraphs 34.2(11)(a), (b), and (c), and subsections 34.2(5), 34.2(13), 34.2(18) and 34.2(15) of the Income Tax Act (the "Act") will be applied in a similar manner for participant taxpayers of JVs.
Transitional Relief and Reserve Mechanisms
The administrative policy allows for transitional relief for the incremental income in a similar manner as the reserve mechanism provided for under subsections 34.2(11) and 34.2(12) of the Act. Subsection 34.2(11) allows for a deduction of the reserve for qualifying transitional income and requires the amount deducted be included in income in the subsequent year pursuant to subsection 34.2(12). The maximum reserve permitted pursuant to paragraph 34.2(11)(a) is based on a declining "specified percentage" as defined under subsection 34.2(1). The specified percentages as provided for in paragraphs (a) and (b) of that definition means:
(a) if the first taxation year for which the corporation has qualifying transitional income ends in 2011 and the particular year ends in (i) 2011, 100%, (ii) 2012, 85%,(iii) 2013, 65%, (iv) 2014, 45%, (v) 2015, 25%, and (vi) 2016, 0%, and
(b) if the first taxation year for which the corporation has qualifying transitional income ends in 2012 and the particular year ends in (i) 2012, 100%, (ii) 2013, 85%, (iii) 2014, 65%, (iv) 2015, 45%, (v) 2016, 25%, and (vi) 2017, 0%.
Unless the reserve is otherwise limited or restricted, Corporation A would be allowed to deduct 100% of the incremental income for its TYE for November 20, 2011. For the TYE of November 30, 2012, Corporation A would also be required to include the prior year reserve in its income and would be allowed a deduction of 85% of the incremental income. This mechanism could continue to apply until its TYE of November 20, 2016, at which time the full amount of the incremental income will have been included in the income of Corporation A. Effectively, the percentage of the incremental income brought into the income of Corporation A is 15% for its TYE of November 30, 2012, 20% for each of its TYEs of 2013 to 2015, and 25% in its TYE of 2016.
This same mechanism will also apply for Corporation B, except that its first taxation year ending after March 22, 2011 is its TYE of January 31, 2012. Accordingly, paragraph (b) of the definition of the specified percentage would similarly apply so that the incremental income would effectively be brought into its income for is 15% for TYE January 31, 2013, 20% for its TYE in 2014 to 2016, and 25% in its TYE of 2017.
We trust our comments above are of assistance.
Yours truly,
G. Moore
for Director
Business and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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