Section 103

Subsection 103(1) - Agreement to share income, etc., so as to reduce or postpone tax otherwise payable

Cases

Canada v. 594710 British Columbia Ltd., 2018 FCA 166

s. 103(1) likely applies to the allocation of most of the partnership profits at year end to a lossco that never had significant economic interest or risk in the partnership business

Income account treatment of the profits realized by a condo-project limited partnership was avoided by the corporate partners (the Partnercos) of the partnership paying safe income dividends (out of the realized but unallocated condo profits) to their respective Holdco shareholders through the payment of stock dividends of preferred shares followed by a redemption of those preferred shares – in turn, followed by a sale by the Holdcos of the Partnercos to a public company with substantial resource pools (Nuinsco). The income of the partnership for the year in which the condo sales had occurred was allocated to Nuinsco following the winding up into it of the Partnercos.

The sale of the Partnercos to Nuinsco two days before the partnership’s year end resulted in the deemed commencement of new taxation years for the Partnercos, which thereby permitted most of the income of the partnership to be allocated to Nuinsco as the principal partner at year end. In finding that such allocation was abusive for purposes of s. 245(4), Woods JA stated (at paras. 68-69, 71) that it “divorc[ed] the economic consequences of the arrangement from the allocation of taxable income” given that “Nuinsco had virtually no economic interest or risk in the real estate development… except for a 10 percent ‘deal fee’.”

Similarly, in finding that there also was an abuse having regard to the object, spirit or purpose of s. 103(1), she stated (at para. 75):

It may often be reasonable to allocate taxable income to persons who are partners at year end, but it was not reasonable in the transactions that took place here that are devoid of any material substance except for the “deal fee”.

She then went on to state (at para. 76):

I would also point out for clarification that the Minister may not have had to resort to the GAAR in this case because subsection 103(1) appears to apply on its own.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) allocation of most partnership profits to a lossco that acquired its interest at year end without economic risk was vacuous and abused ss. 96(1)(f), 103(1) and 160 596
Tax Topics - Income Tax Act - Section 160 - Subsection 160(1) stock dividend followed by redemption of the stock dividend shares effected in combination a transfer of property for no consideration 314
Tax Topics - Income Tax Act - Section 152 - Subsection 152(8) s. 152(8) cured an error in an assessment as to when the taxation year in question commenced 361
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) purpose of s. 96 is for income allocation to be allocated in accordance with economic participation 100

Signum Communications Inc. v. The Queen, 88 DTC 6427, [1988] 2 CTC 239 (FCTD)

S.103 did not apply to limit a limited partner's share of partnership losses to the amount of capital invested by him. "[W]hen there is a rational, reasonable and normal formula employed in the allocation of the losses, as there was in this case where they were allocated in proportion to the capital contributed, there are no grounds on which the Minister can invoke the provisions of section 103."

See Also

Stow v. The Queen, 2010 TCC 406, 2010 DTC 1275 [at 3916]

The taxpayer bought an 80% share of a partnership from his wife's business corporation for $1 million and then reported 80% of the partnership's $7.5 million loss. The minister disputed the loss under ss. 103(1) and (1.1).

Subsection 103(1) applies to agreements where apportionment of income or loss is distorted for tax purposes. There was no such distortion here - the $1 million the taxpayer paid represented 80% of the partnership at the time of purchase, so he was entitled to claim 80% of the loss.

Jones Development Corp. v. The Queen, 2009 DTC 1452, 2009 DTC 1266

Capital gains realized by a partnership, of which the taxpayer was a partner, as a result of land being disposed of by the partnership which had a low cost amount attributable to the partnership acquiring the land from other taxpayers on a rollover basis were not allocable to the taxpayer in light of a clause in the Partnership Agreement that provided that all tax consequences of the transfer of the land to the partnership by a partner were the sole responsibility of that partner.

Penn West Petroleum Ltd. v. The Queen, 2007 DTC 715, 2007 TCC 190

In order to accomplish a sale of two oil and gas properties that were held by a partnership of which the taxpayer was a substantial partner, it was agreed that the purchaser ("Phillip") would become a 5.27% partner of the partnership and, some days later, receive a distribution to it of the two properties in substantial satisfaction of its partnership interest and, pursuant to a clause in the partnership agreement that was amended with this transaction in mind, be allocated 100% of the proceeds of disposition arising under subsection 98(2) to the partnership as a result of the resulting disposition of the two properties (as well as its 5.27% share of the partnership income for the 25 days that it was a member of the partnership).

After "tentatively" indicating his view that partnership income for purposes of section 103 meant income computed using the rules of the Act, so that such income included notional items of income such as deemed proceeds of disposition arising under subsection 98(2), Bowman C.J. went on to find that the allocation of 100% of the proceeds of disposition to Phillips was unreasonable given that the gain on the transferred properties was not attributable to Phillips having rolled assets into the partnership, it was only entitled to 5.27% of the other income of the partnership and it merely joined the partnership (for 25 days) in order to extract the two properties.

XCO Investments Ltd. v. The Queen, 2005 DTC 1731, 2005 TCC 655

A partnership owned by the taxpayers admitted a third party ("Woodward") as a member of the -partnership with a view to selling an apartment building of the partnership and allocating 80% of the resulting gain for tax purposes to Woodward with Woodward also receiving 80% of the net proceeds of sale of the property (which was to be a substantiated lower amount due to the leveraging of the property) and would cease to be a partner.

The allocation of 80% of the income to Woodward was found to be unreasonable given that "Woodwards' contribution was both ephemeral and for all practical purposes risk free". The reasonable treatment of the arrangement under s. 103 would be to treat Woodward's share of the income as the amount of income it actually received.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 245 - Subsection 245(4) GAAR could be applied to unreasonable partnership allocation 174
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) 99

MacKinlay v. Arthur Young McClelland Moores & Co., [1989] S.TC 898 (HL)

In discussing the nature of a partnership, Lord Oliver stated (p. 900):

"A partner working in the business or undertaking of the partnership is in a very different position from an employee ... If, with the agreement of his partners, he pays himself a 'salary', this merely means that he receives an additional part of the profits before they fall to be divided between the partners in the appropriate proportions. But the 'salary' remains part of the profits."

Administrative Policy

7 October 2016 APFF Roundtable Q. 19, 2016-0655841C6 F - Reimbursement of attributed income

no obligation to repay income reallocated to other partner

Partner B (a corporation) is assessed under s. 103 on the basis that 40% rather than 10% of the income of the LP should have been included in its income (so that the share of Partner A, who is a related individual, should have been 60% rather than 90%). Is the income allocated to B required to be reimbursed by the taxpayer (i.e., A) who received the income? CRA stated:

[S. 103 does] not provide for a reimbursement obligation by a taxpayer where a benefit was allocated or where income was attributed to another taxpayer. …

[I]f under civil law or common law, as applicable, partner A did not obtain a loan nor become the debtor of the partnership or of partner B by reason of distributions in favour of partner A under the partnership agreement, the conditions for the application of subsection 15(2)…would not be satisfied. …[T]here is not enough information to reach a conclusion as to the application of subsection 15(1)… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 74.1 - Subsection 74.1(1) no domestic secondary adjustment doctrine 200
Tax Topics - Income Tax Act - Section 69 - Subsection 69(1) - Paragraph 69(1)(b) excess disposition proceeds not required to be repaid 85

28 October 2014 Internal T.I. 2014-0529981I7 - Allocation of partnership loss to a former partner

allocation of full loss to purchasing partner at year end

The Taxpayer entered into the "Purchase Agreement" for the purchase of a limited partnership (the "Partnership") with substantial current losses from its partners, principally the "Trust" holding essentially all the LP units. The TSO reduced the Partnership loss allocated at year end to the Taxpayer by allocating a pro rata portion of the loss (based on the days in the year up to the sale) to the Trust.

In finding that this approach was not justified by s. 103(1) or (1.1), the Directorate quoted with approval a statement at the 1985 CTF Annual Roundtable that "the income or loss of any partner for income tax purposes in respect of a particular year of partnership operations will be his share of the partnership's income or loss allocated to him pursuant to the partnership agreement, notwithstanding the fact that he may not have been a partner throughout the whole of the fiscal period of the partnership," and then stated:

the allocation made to the Taxpayer for the fiscal year in question does not appear to be unreasonable in the circumstances as the Taxpayer continued to be a partner in the Partnership in subsequent years.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 80.01 - Subsection 80.01(6) underwater debt funnelled through GP to avoid debt parking rules 254

2 December 2014 CTF Roundtable, Q5

streaming of partnership income

Does CRA accept the streaming of certain types of income (e.g., interest income) to a particular partner of a partnership where the partnership agreement so provides? CRA responded:

[T]he streaming of certain types of income to a particular partner is not acceptable by virtue of subsection 103(1). [For] example…[a]ssume a partnership is made up of two corporate members. One partner (Partner A) expects to incur losses in excess of its income from the partnership. The second partner (Partner B) expects to earn income from partnership as well as from sources other than the partnership. Partner A and B agree to amend the partnership agreement so that the interest income of the partnership will be allocated to Partner A and the dividend income will be allocated to the Partner B. The dividend income is deductible under subsection 112(1). …

The CRA would seek to apply subsection 103(1) (and may also apply the general anti-avoidance rules…) to the allocation of income under the amended partnership agreement.

10 March 2014 Internal T.I. 2013-0493971I7 F - Application of section 120.4

income-splitting partnership terms

The professional income generated by an individual was earned, at least in part, by a limited liability partnership (SENCRL) of which one of the partners was a trust for the benefit of related minors, that received distributions of such income, and another partner was a services corporation that incurred the relevant expenses. After finding that the pre-2014 version of the split income rules in s. 120.4 did not apply in this situation, CRA went on to paraphrase s. 103(1) and state (TaxInterpretations translation):

[A]n argument could be made that there does not appear to be any real reason for implementing the structure other than income splitting.

After also noting that s. 103(1.1) might apply, CRA then stated:

[T]he GAAR should not apply to the situation in this case because subsections 103(1) and (1.1) are of sufficient breadth to adjust the income-sharing terms agreed between the partners of the partnership.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 103 - Subsection 103(1.1) allocation of income to partner not responsible for expenses 177
Tax Topics - Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (c) LP income not from property provision or services 120

2012 Ruling 2011-0421261R3 - Partnership Allocation

discretionary unequal capital distributions

A majority of the shares of BCo (a taxable Canadian corporation) are held by ACo (also a taxable Canadian corporation), while the balance of the shares of BCo are held by arm's length shareholders (the Vendors) with ACo or persons who are related to ACo being obligated to acquire all of the Vendors' shares over a specified period. BCo currently is unprofitable and ACo has been funding it with loans, and the business requires further funding until it becomes profitable.

BCo will transfer its business on a rollover basis to a newly formed subsidiary limited partnership (New LP) in consideration for the assumption of liabilities and the issuance of Class A units; and ACo will fund New LP from time to time in consideration for the issuance of Class B units (which are not described in the letter to have much difference from the Class A units – including equal per-unit allocations of income or loss - except as described below) at a subscription price equal to a valuation of the NAV per Class A unit and Class B unit.

The limited partnership agreement provides that after distributions of accumulated income which have been allocated proportionately to the number of units held

any further distributions may then be credited by the general partner to the capital account of each partner as a return of capital, at the discretion of the general partner.

When BCo becomes a wholly-owned subsidiary of ACo, it may be wound-up into ACo or amalgamated with it.

Ruling that s. 103(1) or (1.1) will not apply.

28 December 2011 Internal T.I. 2011-0422791I7 F - Fraction à risque

CRA continues to accept that where a partner has contributed knowledge or know-how to the partnership rather than making a financial contribution, the value of that knowledge or contribution should be taken into account in determining the partner's share of partnership profits.

10 October 2006 Internal T.I. 2006-0169051I7 - Successor Pool Issues

Adverse comments on a situation where all the income allocable to one of the two partners of a resource partnership comprised income purportedly attributable to a particular property of the partnership (in order to maximize deduction by that partner of its successored pools).

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.

25 March 1997 T.I. 963490

The use of a services partnership (the members of which includes inter vivos trusts for the benefit of members of the families of various members of the professional firm) to provide non-professional services to a professional firm may be acceptable, although the examination of a actual arrangement would be necessary to determine whether there is an avoidance of s. 103 of the Act.

2 August 1995 Internal T.I. 7-951344 -

S.103(1) or (1.1) likely would apply where a corporation that was carrying on an R&D project formed a general partnership, transferred its assets to the partnership under s. 97(2), the other members of the partnership contributed capital by way of cash and services to finance completion of the project, and losses of the partnership were allocated to all the partners except the corporation until such time as the aggregate losses allocated to the other partners equalled their capital contributions.

Rulings Directorate Discussion and Position Paper on Motion Picture Films and Video Tapes as Tax Shelters, Version 29/3/93 930501 (C.T.O. "Motion Picture Films - C.C.A.")

"Revenue Canada could argue that it is not reasonable to allocate to the limited partners the losses referable to the partnership property for the payout, and in effect, treat the limited partners as owners of the property in that period, when they cease to have any substantial equity interest in the property after payout. This argument would be more persuasive if the sharing of income and losses was changed after payout to provide that the limited partners were entitled to only, say, a 1% interest in the profits and losses of the partnership. However, the more sophisticated agreements provide that the limited partners will share pro rata following the payout of the creditor/partner."

92 C.R. - Q.13

Whether or not a partnership is used for estate-freezing purposes, the allocation of income should recognize the partners' respective capital and non-monetary contributions; otherwise s. 103(1) or (1.1) may apply.

30 November 1991 Round Table (4M0462), Q. 6.1 - Contribution of Knowledge vs. Financial Contribution (C.T.O. September 1994)

A payment made, or a credit made to a partner's 'capital' account, in consideration of its commitment to perform work for the partnership will be considered to be business income for the partner. The Department agrees that the value of the partner's knowledge or know-how should be taken into account in determining the partner's share of the partnership profits.

91 C.R. - Q.4

One of the considerations in determining the reasonableness of profit allocation is any personal use by a partner of partnership property.

17 July 1991 T.I. (Tax Window, No. 6, p. 14, ¶1356)

A minimum return on capital paid to a partner may be considered interest income of the partner even though no deduction is available to the partnership.

Where two partners in a partnership each contribute capital at a minimum rate or a return on capital is paid to only one partner, s. 103 potentially can apply.

90 C.P.T.J. - Q.8

Generally partnership agreements provide for the sharing of profits and losses on the same basis from year to year, and any deviation from this pattern should be supported by valid reasons.

88 C.R. - Q.18

RC will not ordinarily apply s. 103 to challenge an allocation where it is clear that the profits and losses of the partnership are determined solely by open market forces and the allocation to each partner is based on the change in unit value during the period an investor is a partner.

79 C.R. - Q.36

Generally, partnership agreements provide for the sharing of profits and losses on the same basis, and a deviation from this pattern should be supported by valid reasons.

IT-338R, para. 4

RC generally will accept the sharing of profits and losses on a basis which takes into account that one of the partners received his partnership interest in consideration for a "rolling in" of property under s. 97(2).

IT-138R "Computation and Flow-through of Partnership Income"

Salaries paid by a partnership to its members are a method of distributing partnership income. Such distributions are to be allocated as taxable income to the recipient even where doing so results in a taxable loss.

Subsection 103(1.1) - Agreement to share income, etc., in unreasonable proportions

Cases

Filion v. Canada, 2004 DTC 6579, 2004 FCA 135

There was no patently unreasonable error in the finding of the Tax Court judge that the individual taxpayer had income of the partnership allocated to him, his wife and two teenage sons on the basis of the minimization of tax burden without objective reference the respective contributions of the family members, so that the Minister's reassessment under s. 103(1.1) was properly affirmed.

See Also

Aquilini (Estate) v. The Queen, 2019 TCC 132

partnership income and losses should be allocated proportionately to capital invested and recognizing work performed

The real estate rental and development business for the family of Luigi Aquilini and his wife, Elisa, was reorganized such that most of the assets (held in subsidiary partnerships, corporations and a trust, and having a net value of around $150 million) were transferred to an umbrella limited partnership (“AIGLP”) having multiple classes of units. Net losses (from subsidiary partnerships) were solely allocated to Class C units, of which Elisa had none. There was no correlation between contributions to capital by the partners and entitlement to distribution of income; Elisa who initially contributed 8.8406% of the capital of the subsidiary partnerships (rolled into AIGLP) was entitled to 35% of such distributions up to $1,000,000 and each of the three sons (Francesco, Roberto and Paolo) who had so contributed, directly and indirectly, 23.7330%, was entitled (through intermediate entities) to 17.34% of such distributions up to $1M. Four family trusts, who had contributed only a nominal amount, were entitled to 100% of the annual distributions in excess of $1M. Five years later, a taxable capital of $46.4M was allocated to AIGLP from a lower-tier sale, with the result that most of this amount was allocated to the four family trusts – who purported to offset this income allocation through losses transferred out of a loss company that had been acquired by them. In the meantime, losses from a lower tier partnership (the GERI partnership) were allocated to the three brothers by virtue of the holdings of the Class C units.

CRA reassessed the taxpayers so as to reallocate the AIGLP income and losses allocated to it by lower tier partnerships pro rata in accordance with their initial capital contributions, and at the time of the December 2001 reorganization. Pizzitelli J dismissed their appeal.

He found that in light of ss. 96(2) and 102(2), partnership members of AIGLP were to be treated as members of it for s. 103 purposes – as were the trust members of AIGLP. In rejecting the taxpayers’ submissions that “all circumstances, including personal family circumstances and personal estate planning goals must be considered” (para. 90) and that the income and loss allocation methodology could be supported from the standpoint of estate planning objectives, he stated (at paras. 94, 97):

[T]he reasonable business person would only consider factors relevant to their own business considerations having regard to their own business interest. He or she decides on what is objectively best for him or her and arrives at a business decision.

“[O]ther relevant factors” are limited to the class of factors to which the specific capital invested in or work performed for the partnership belong; namely factors relevant to the carrying on of business that bear a relationship to the income or loss thereof.

In applying these principles, he noted that the allocations were highly disproportionate to capital and the inverse of work performed, stating (at paras. 108, 128):

[T]he allocation to the partners were extremely unreasonable, whether it be the allocation of the first $1 million of the formula or the balance. ….

The evidence not in dispute is that the Aquilini brothers managed the GERI Partnership and thus performed some work for it, yet notwithstanding such contribution were rewarded with losses instead of income, something a reasonable business person would not accept. Based on the work performed factor I find the allocation to be unreasonable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(2) s. 96(2) reinforced application of s. 102(2) 34

Paajanen v. The Queen, 2011 DTC 1229 [at 1333], 2011 TCC 310 (Informal Procedure)

The taxpayers were a married couple. Mrs. Paajanen ran a retail business, and formed a partnership with her sister, whose husband had died and who was facing financial hardship. While Mrs. Paajanen and her sister contributed equal labour to the business, Mrs. Paajanen took only around 15% of the partnership income in many taxation years, and as little as 6.5% in one of the years under review. Mr. Paajanen claimed personal credits based on his wife's reported income. Woods J. allowed the credits, stating that "it would be wrong in my view to state as a general principle that allocations between non-arm's length partners must always be based solely on business criteria." She determined (at para. 24):

In this case, the agreement between Mrs. Paajanen and Mrs. Andet to share income unequally was not at all motivated by tax considerations. There was a modest tax saving to Mr. Paajanen with respect to personal credits, about $1000 per year. It does not make sense that this factor influenced the partners' agreement to share income unequally.

Stow v. The Queen, 2010 TCC 406, 2010 DTC 1275 [at 3916]

The taxpayer bought an 80% share of a partnership from his wife's business corporation for $1 million and then reported 80% of the partnership's $7.5 million loss. The minister disputed the loss under ss. 103(1) and (1.1).

Subsection s. 103(1.1) did not apply. The subsection non-exhaustively lists two indicia of reasonableness - capital invested and work performed. The members' respective investment and work supported the 80% allocation to the taxpayer. It was irrelevant that the taxpayer's purchase of the partnership interest was partially motivated by claiming the loss.

Krauss v. The Queen, 2009 DTC 1394 [at 2155], 2009 TCC 597

family trust allocated unreasonable return on its nominal-cost units

The taxpayer and her son transferred real estate on a rollover basis to a partnership in consideration for Class A units of the partnership having a redemption value, subject to a price adjustment clause, of approximately $1.25 million for each of them. Several days later, the partnership issued Class C units to a family trust for consideration of $100. In the following taxation year, the partnership earned approximately $343,000, of which approximately $127,000 was allocated to the family trust in respect of the Class C units.

McArthur, J. stated (at para. 58) that:

"To the extent an estate freeze can be effected through a corporate vehicle, if the same economics can be replicated through a partnership, ... an estate freeze could be effected through a partnership."

However, he went on to find that the above transaction did not replicate an acceptable estate freeze transaction as the Class A units were not retractable by their holders and were required to fund ongoing cash requirements in respect of the partnership properties. Furthermore, it was patently unreasonable for the family trust to receive a 126,721% return on its nominal capital investment given that the trust did not make any contribution of services or (more than nominal) capital to the partnership.

Fraser v. The Queen, 97 DTC 1305 (TCC)

The taxpayer borrowed $707,000 from a bank, contributed this sum to a partnership between her, her husband and her sister (but without any increase to the number of units in the partnership held by her), with her sister then withdrawing the same sum from the partnership in order to make a matrimonial settlement with the sister's husband. It was reasonable for the partnership to make special allocations of cash and income to the taxpayer equal to the interest on her loan given that the purpose for her borrowing and contribution of the $707,000 was to facilitate carrying on the partnership business by avoiding lengthy litigation from her sister's estranged husband.

Archbold v. The Queen, [1995] 1 CTC 2872 (TCC)

A partnership between the taxpayer and his wife provided that she was to receive a commission equal to 10% of sales, and 30% of residual profits, with the taxpayer to receive 70% of residual profits and to bear all losses of the partnership. Lamarre Proulx TCJ. accepted the Minister's view that the losses of the partnership instead should be shared for income tax purposes on a 50-50 basis in light of the taxpayer's admission that he would not have entered into the same agreement if he had been directed by business reasons and had been dealing at arm's length, and taking into account that all the capital of the partnership had been provided by the taxpayer. However, the partnership was permitted to deduct the amounts paid to the wife as salary in the computation of its income.

Administrative Policy

5 October 2018 APFF Roundtable Q. 12, 2018-0768831C6 F - Tax on Split Income and Partnership

having non-contributing children as members of a family stock market partnership is subject to challenge under s. 103

CRA confirmed that the tax on split income is inapplicable to a family partnership that invested in the stock market where the children had not contributed anything or participated in the trading decisions or other management of the partnership, given the exclusions from “split income” for dividends on shares listed on designated stock exchanges and for taxable capital gains realized on such shares. However, given such lack of contribution by them, CRA would review the application of inter alia ss. 103(1). 103(1.1), 74.1 and 96(1.8).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (a) - Subparagraph (a)(i) family partnership investing in designated stock exchange shares not subject to TOSI rules 132
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1.8) having non-contributing children in a family portfolio investment partnership subject to potential challenge under ss. 74.1 and 96(1.8) 89

9 October 2015 APFF Roundtable Q. 18, 2015-0595821C6 F - Ss. 96(1.01) and s. 103

s. 103 can be applied to reallocate income to a deemed s. 96(1.01) partner

On September 1, 2015, Mr. X, who held 50% of the units of an LP (“SENC”), transferred his units to a wholly-owned corporation ("Xco"). On December 31, 2015, SENC allocated its 2015 income to the other partner (Mr. Y) and Xco on a 50-50 basis. Would CRA apply ss. 96(1.01) and 103(1.1) to reallocate income to Mr. X? CRA responded:

When a taxpayer ceases to be a partner of a partnership in the course of a fiscal period of the partnership, the deeming rule in paragraph 96(1.01)(a) applies so as to deem the taxpayer – for purposes inter alia of subsection 96(1) and section 103 – to be a partner of the partnership at the end of its fiscal period. Therefore, the specific anti-avoidance rules of section 103 could apply to ensure that income was allocated to X for the year of X’s withdrawal from the partnership. However, …we cannot comment [on any application of s. 103] without first having examined all the facts….

9 October 2015 APFF Roundtable Q. 13, 2015-0595781C6 F - Reimbursement of attributed income

no secondary adjustments are required for the operation of most income attribution provisions

Most of the income of a partnership has been allocated and distributed to a partner which is a personal trust, but CRA reallocates most of such income under s. 103 to the other partner, which is a corporation (subject to a lower tax rate than the trust). Notwithstanding that the trust partner has enjoyed income on which it is not subject to tax, CRA acknowledges that there is no obligation for the trust to make any reimbursement payment to the other partner. More generally, CRA acknowledges that the operation of s. 15(1), 51(2), 69(1), 74.1(1) or (2), 74.4(2), 75(2), 85(1)(e.2), 86(2), or 103 to attribute income of one taxpayer to a second taxpayer does not obligate the first taxpayer to reimburse the second taxpayer therefor.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 15 - Subsection 15(1) no secondary adjustments are required for the operation of most income attribution provisions 130

10 March 2014 Internal T.I. 2013-0493971I7 F - Application of section 120.4

allocation of income to partner not responsible for expenses

The professional income generated by an individual was earned, at least in part, by a limited liability partnership (SENCRL) of which one of the partners was a trust for the benefit of related minors, that received distributions of such income, and another partner was a services corporation that incurred the relevant expenses. After finding that the pre-2014 version of the split income rules in s. 120.4 did not apply in this situation, CRA noted that s. 103(1) could apply, paraphrased s. 103(1.1) and stated (TaxInterpretations translation):

[A]n argument could be made that inasmuch as the agreed sharing is not reasonable since it does not take into account the fact that one of the partners, namely, the corporation, has assumed all the expenses related to the practice of the profession, of approximately $XXXXXXXXXX per annum. It seems to us that additional facts should be obtained to support this position. …

[T]he GAAR should not apply to the situation in this case because subsections 103(1) and (1.1) are of sufficient breadth to adjust the income-sharing terms agreed between the partners of the partnership.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - 101-110 - Section 103 - Subsection 103(1) income-splitting partnership terms 146
Tax Topics - Income Tax Act - Section 120.4 - Subsection 120.4(1) - Split Income - Paragraph (c) LP income not from property provision or services 120

5 October 2012 Roundtable, 2012-0454001C6 F - Travail d'un associé d'une société de personnes

number of employees not necessarily relevant to determining relative partner contribution

CRA was asked whether, in the determination of the reasonableness of income allocated to one of the partners of a partnership, CRA considers that the importance of the work accomplished by a partner in connection with partnership activities depends on the number of employees of the partnership (with a higher number reducing the relative value of the work performed by the partner). CRA stated (TaxInterpretations translation):

Although the CRA reserves the right to revise the share of income or loss of a partner in a partnership to be an amount that is reasonable under subsection 103(1.1), the number of employees of a partnership is not necessarily a relevant factor in the context of this determination. In particular, we believe that it is preferable to examine the contribution of each partner in the light of the contribution of the other partners in order to determine if the income or loss which is allocated to the partner is reasonable.

7 October 2011 Roundtable, 2011-0399411C6 F - Société de personnes - 103(1.1)

potential application of s. 103(1.1) where adult children form partnership with money gifted by parent and share pro rata to capital

A parent donates money to the parent’s adult children, who jointly invest those amounts in a family partnership newly-formed by them, with income being distributed and allocated to each in proportion to the respective amounts invested. Could s. 103(1.1) apply? CRA responded:

Determining a reasonable allocation of income of a partnership among non-arm's length partners for the purposes of subsection 103(1.1) is a question of fact that depends on the circumstances of each case.

Thus, it appears to us that in your example, subsection 103(1.1) could apply even if the partnership agreement provides for a prorated share of the amounts invested by each partner.

80 C.R. - Q.40

RC will challenge income allocation where one spouse neither actively engages in or invests his or her property in the partnership business.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 67 8