Section 34.1

Subsection 34.1(1) - Additional Business Income


MacKay v. Canada, 2015 FCA 94, aff'g 2014 DTC 1059 [at 2959], 2014 TCC 33

no relief for "harsh" (timing difference) consequences

The taxpayer's dentistry practice had a January 31 fiscal year end. His practice income increased dramatically from his 2005 to 2006 fiscal year, and fell again for 2007. Accordingly, his taxable income for his 2006 taxation year was "extremely high relative to the actual income earned for any 12 month period" (para. 11), as he had an addition of 11/12 of his income for fiscal 2006 and a deduction of 11/12 of the much lower income for fiscal 2005.

In rejecting a submission that this represented a harsh result, Woods J noted that the effect reversed in the following year – and in any event "it is well established that this Court cannot grant relief on grounds only that the result is harsh: Lans v The Queen, 2011 FCA 290."

Ryer JA added (at FCA para. 3, quoting Chaya, 2004 FCA 327, at para. 4): "The Court must take the statute as it finds it."

Locations of other summaries Wordcount
Tax Topics - Statutory Interpretation - Ordinary Meaning no relief for "harsh" (timing difference) consequences 82

Administrative Policy

10 September 2014 External T.I. 2014-0522551E5 - Income for retired partner

retroactive effect of s. 96(1.1) agreement to require s. 34.1(1) inclusion

The "Retired Partner" retired from a partnership of individuals (the Partnership – which had an off-calendar fiscal period ending January 31 pursuant to an election under s. 249.1(4)) at the end of its January 31, 2014 fiscal period. In January 2015 (i.e. before the end of the fiscal period ending January 31, 2015), all of the partners, including the Retired Partner, enter into an agreement (the "Retirement Agreement") to allocate a share of the income of the Partnership to the Retired Partner starting with the fiscal period ending January 31, 2015. Would the Retired Partner be required to report additional income under s. 34.1(1) representing 11 months of income for the period to December 31, 2014 – or could such income be deferred?

After noting that under s. "96(1.6), a retired member is deemed to carry on the business of the partnership in Canada at any time that the retired member is deemed to be a member of the partnership pursuant to paragraph 96(1.1)(a)," CRA stated:

[A] taxpayer who at any time ceased to be a member of the partnership is deemed [by s. 96(1.1)] to be a member of the partnership provided that the members have entered into an agreement to allocate a share of the income or loss of the partnership. Since the time referred to in paragraph 96(1.1)(a) is the time that the retired member ceased to be a member, it is our view that a retired member would be subject to this provision starting at that time even if the agreement referred to in that provision is entered into after that time. …[Accordingly] subsection 34.1(1)… would apply to the Retired Partner in the 2014 taxation year… .

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1.1) retroactive effect of agreement to require s. 34.1(1) inclusion 270

11 February 1999 External T.I. 9808185 - SECTION 34.2 RESERVE34.2

S.34.1(8) relieved an individual who had left a partnership of any additional income inclusion under s. 34.1(1) in the year of departure.

Subsection 34.1(8)

Administrative Policy

17 May 2002 External T.I. 2001-0107815 F - APPLICATION DE LA LOI

s. 34.1(8) would apply if an old partnership is replaced by a new one, provided no tax avoidance motivation

Messrs. A, B and C carried on a business as partners in the ABC partnership, which has a June 30 fiscal period end. In order to form a partnership with Mr. D., they wind up ABC under s. 98(3) and transfer their undivided interests in the property to the new partnership ABCD pursuant to s. 97(2). Have A, B and C ceased carrying on the business for the purposes of s. 34.1(8) of the Act given that partnership ABC ceased to exist?

CCRA was prepared to accept that s. 34.1(1) did not apply, provided that the dissolution of ABC and the creation of the new partnership was not motivated by tax considerations.

S. 34.1(1) applied at the partner level and not at the partnership level and there were arguments that the partners were carrying on the same business both before and afterwards, so that s. 34.1(8) should not apply and so that the partners would be required to estimate their income from the new partnership in accordance with s. 34.1(1). However, there were arguments that ss. 34.1(1) and (8) should be interpreted in light of s. 249.1, which contemplates the carrying on of a business at the partnership level – so that the business would cease to exist at the time the partnership ceased to exist, with the result that s. 34.1(8) would render s. 34.1(1) inapplicable.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 96 s. 249.1(1) overrode the normal perspective that the partnership business was carried on by the partners both before and after a new partnership was formed 170