3 November 2003 External T.I. 2003-0038545 - CPP CONTRIBUTION 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Determination of whether certain partnership allocations are Contributory self-employed earnings for CPP purposes if the partner is inactive in the business of the partnership and has borrowed to finance the purchase of partnership units.

Position:

Business income allocated to a partner must be included in Contributory self-employed earnings. Interest expense incurred to earn partnership business income would be deductible from that income in computing contributory self-employed earnings.

Reasons:

The Canada Pension Plan requires the inclusion of income from business in computing contributory self-employed earnings; as the courts have held that each member of a partnership carries on business regardless of the particular partner's risk or involvement - partnership allocations, other than those earned from non-business, sources would be contributory self-employed earnings. Interest expense is deductible from business income generated from partnership interest acquired with the borrowings per s. 20(1)(c).

XXXXXXXXXX 2003-003854
L. Holloway
613-957-2104
November 3, 2003

Dear XXXXXXXXXX:

Re: Canada Pension Plan Contributions and Partnership Income Allocations

This is in reply to your letter of September 5, 2003, requesting our opinion on whether partnership income allocations to individual partners would be considered contributory self-employed earnings for purposes of the Canada Pension Plan, R.S.C., c. C-8 (the "CPP"). In particular you outlined the following scenario:

? An individual is resident in Canada for the full year.

? The individual is a partner in a Canadian partnership.

? The partnership owns no real estate, so the exclusion in s.14(a) of the CPP is not applicable.

? The individual does not participate in any way in the business of the partnership.

? Professional managers run the business.

? The individual's only contribution is a monetary one.

You had asked whether partnership income allocated to this individual would be considered contributory self-employed earnings for purposes of the CPP. Your second question assumed the same scenario but added that the individual borrowed to purchase the partnership units and questioned whether interest expense would be deducted in computing contributory self-employed earnings for purposes of CPP.

Our Comments

Section 10 of the CPP provides that every individual who is resident in Canada for the purposes of the Income Tax Act (the "Act") during a year and who has contributory self-employed earnings for the year shall make a contribution for the year under the Act. Section 13 of the CPP provides, among other things, that the amount of the contributory self-employed earnings of a person is the amount of his self-employed earnings for the year. The expression "self-employed earnings" is defined in section 14 of the CPP. Paragraph 14(a) of the CPP provides that:

14. The amount of the self-employed earnings of a person for a year is the aggregate of

(a) an amount equal to

(i) his income for the year from all businesses, other than a business more than fifty per cent of the gross revenue of which
consisted of rent from land or buildings, carried on by him,

minus

(ii) all losses sustained by him in the year in carrying on those businesses,

as such income and losses are computed under the Income Tax Act, except any such income or losses from the performance of services described in paragraph 7(1)(d) that has been included in pensionable employment by a regulation made under subsection 7(1) or by a regulation made under a provincial pension plan.

Although non-active partners do not participate in the activities of the partnership, the courts have held that each member of a partnership carries on business regardless of the particular partner's risk or involvement (see The Queen v. Robinson et al., 98 DTC 6232 (FCA); Grocott v. The Queen, 96 DTC 1025 (TCC)). Hence an allocation of business income made by a partnership to a person in respect of a period in which that person was a partner would represent income from a business carried on by him and would, therefore, be subject to contributions under section 14 of the CPP as outlined above.

Where a partner borrows funds in order to acquire an interest in a partnership for the purpose of earning income from the partnership business, the interest expense will generally be deductible by the partner under paragraph 20(1)(c) of the Act and such deduction would be wholly applicable to that particular business source for the purpose of computing income from that particular business. Therefore, we are of the view that interest expenses relating to the acquisition of a partnership interest would be netted against the allocation of income from the partnership in computing self-employed earnings. If, however the partner incurs interest expense to earn partnership income that is from a non-business source, such as from property, the interest expense would not be deductible. If the partnership has income from both a business source and a non-business source, an allocation of the interest expense may be required depending on the facts of the case.

We trust our comments will be of some assistance.

Yours truly,

Daryl Boychuk, LL.B.

For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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