29 November 2011 External T.I. 2011-0429581E5 - revised joint venture administrative policy

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: Revised joint venture policy

Position: see document

Reasons: revised administrative policy

November 29, 2011
Administrative Policy
Fiscal Period End for Joint Ventures

Question:

At the 1989 Canadian Tax Foundation Conference, the CRA announced it would allow, on an administrative basis, a joint venture to establish a fiscal period that may differ from the fiscal periods of the joint venture participants where the participants have different fiscal periods and there is a valid business reason that justifies a separate fiscal period for the joint venture. As a result, the income earned by a taxpayer as a participant (participant taxpayer) of the joint venture has been allowed to be included in the participant taxpayer’s income for its taxation year in which the fiscal period used by the joint venture ends.

On March 22, 2011, the 2011 Budget proposed to limit the tax deferral opportunities for certain corporations with significant interests in partnerships where the partnership fiscal period is different from the corporation's taxation year (a stub period).

Will the CRA continue its administrative policy to allow a joint venture to establish a fiscal period and to permit the participant taxpayers of the joint venture to report their income earned from the joint venture on the basis of that fiscal period?

Response

The CRA subsequently announced that, assuming the 2011 Budget proposals are enacted as proposed, participant taxpayers who entered into joint venture arrangements will no longer be eligible to compute income as if the joint venture had a separate fiscal period. For taxation years ending after March 22, 2011, income from a joint venture will be required to be calculated for each participant taxpayer based on the fiscal period of the particular participant taxpayer.

This may result in the inclusion of significant incremental income of a participant taxpayer of a joint venture for the first taxation year of the participant taxpayer ending after March 22, 2011. Accordingly, for the first taxation year that ends after March 22, 2011, the CRA will allow, on an administrative basis, transitional relief similar to the relief as proposed under section 34.2 of the Income Tax Act (proposed section 34.2 is included in Bill C-13) for “qualifying transitional income” to members of partnerships.

The income that may generally qualify for this transitional relief will be based on the actual additional income for the stub period to the extent the amount would not have otherwise been included in income for the first taxation year of the participant taxpayer that ends after March 22, 2011.

This transitional relief will generally result in no additional income being included in the first taxation year of the participant taxpayer in the joint venture. Instead, the participant taxpayer will bring the additional income into its income over the five taxation years that follow that first taxation year in a manner similar to the reserve mechanism as provided for under proposed section 34.2. In general, and subject to the conditions as similarly stipulated under proposed section 34.2, the reserve mechanisms will effectively allow the participant taxpayer to include 15% of additional income in 2012, 20% in 2013, 2014 and 2015, and 25% in 2016.

For greater clarity:

• All participant taxpayers of joint ventures will be expected to include in income all amounts that had been deferred as a result of fiscal periods that differed from the taxation years of the participant taxpayer, including those structures in which the participant taxpayer has taken the position that income was deferred as a result of tiered structures.
• In order for a participant taxpayer to avail itself of this joint venture transitional relief for the first taxation year ending after March 22, 2011, a participant taxpayer will be required to file an election in writing, on or before the filing due date for that taxation year, by attaching a letter to their return of income for that taxation year. The letter should indicate that the participant taxpayer is including income from the joint venture for which it is seeking transitional relief. If a return has already been filed, to be eligible a participant taxpayer will be required to send a letter to their Taxation Centre indicating their election to benefit from this administrative policy in respect of transitional relief.
• Failure to report all the accrued income in a participant taxpayer’s first taxation year that ends after March 22, 2011 in accordance with this administrative policy will result in the participant taxpayer’s ineligibility for transitional relief.
• In circumstances in which a partnership is a participant in a joint venture, for the first fiscal period of the partnership ending after March 22, 2011, the income from the joint venture (including any deferred income) will be required to be included in the computation of the partnership’s income for that fiscal period. This income will be computed in accordance with the provisions of the Income Tax Act (e.g., subsection 96(1) and proposed amended section 249.1).
• This administrative policy, which allows for transitional relief, is not available to participant taxpayers of joint ventures who did not rely on the former administrative policy to calculate income based on the fiscal period established by the joint venture.