Section 34.2

Old 34.2

Administrative Policy

4 May 2004 Internal T.I. 2004-0062671I7 F - Associé qui se joint à une société de personnes

former s. 34.2(3) permitted the continuation of the former Dec. 31, 1995 professional income reserve on joining a similar partnership

A taxpayer departed a partnership in respect of which he had been annually deducting a reserve from income on December 31, 1995 to join another existing partnership that performed similar services. The Directorate noted that former s. 34.2(3) likely permitted the taxpayer to continue claiming the reserve.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 249.1 - Subsection 249.1(4) taxpayer bound by previous off-calendar year election of partnership which he joined 347

19 February 1997 External T.I. 9624745 - FISCAL PERIOD - JUDGES

A newly-appointed judge is provided with a numerical example "which reflects that the allocation of income between the year of appointment and the year subsequent to the year of appointment would be approximately the same whether the appointment to the bench occurs in 1994, when the provisions of former section 24.1 and subsection 99(2) applied, or the appointment to the bench occurs in 1996 and the provisions of paragraph 249.1(1)(b) in section 34.2 of the Act apply".

20 February 1997 Internal T.I. 9637077 - FISCAL PERIOD - SIMILAR SERVICES

"It is unlikely that the services of a financial planner would be considered to be similar to those of an accountant. In any event, in your particular case, the fact that the taxpayer is precluded from providing accounting services would also appear to prevent the taxpayer from meeting the all or substantially all test."

Subsection 34.2(1) - Definitions

Adjusted Stub Period Accrual Income

Administrative Policy

12 April 2012 External T.I. 2012-0436121E5 - ASPA, QTI and significant interest

A corporation with a July 31 taxation year holds an interest in a single-tier partnership with August 31 fiscal period ends. However, the corporation does not have a significant interest in the partnership until August 31, 2012; and in August 2013 it disposes of a portion of its partnership interest so that it no longer holds a significant interest in the partnership on August 31, 2013.

The ASPE is not required to be computed for the corporation's July 31, 2011 and July 31, 2012 taxation years, as it will not hold a significant interest on the August 31 fiscal period end included in those years - and conversely, for the July 31, 2013 taxation year for which the ASPA will be required to be computed under the single-tier branch (para. (a)) of the definition. For this latter year, the ASPA amount will not be eligible as qualified transitional income, as the July 31, 2013 year is not the corporation's first taxation year which ends after March 22, 2011.

As the corporation will not hold a significant interest in the partnership on August 31, 2013, ASPA will not be required to be computed for its July 31, 2014 taxation year.

8 February 2012 External T.I. 2011-0425411E5 - Change in fiscal period & transitional reserve

a corporation with a June 30 year end and which is a member of a calendar year partnership switches to a calendar year. Discussion including numerical example as to how this affects its ASPA and the transitional reserve adjustments.


Janette Pantry, Robyn Campbell, "Partnerships and ASPA on Acquisition of Control", Canadian Tax Highlights, Vol. 24, No. 10, October 2016, p. 3

Assumptions respecting application of adjusted stub period accrual (ASPA) rules (p.3)

Assume that Partnership AB has a limited partner (ACo) whose wholly owned subsidiary (BCo) is the general partner. ACo's shares are acquired by a third party…. ACo has a December 31 year-end, the partnership has a January 31 fiscal period-end, and acquisition of control of ACo occurs on April 1, 2016 (creating a deemed year-end on March 31, 2016)….

Example showing shunting of income to second calendar year following AOC (p. 4)

… ACo's share of Partnership AB's income is $1,200 for the fiscal periods ending January 31, 2015 and January 31, 2016, and $1,500 for the fiscal period ending January 31, 2017. The following summarizes ACo's approximate share of Partnership AB's income for calendar years 2016 and 2017.

ACo's Partnership Income for Calendar 2016 and 2017

January 1, 2016 to March 31, 2016

Income from Partnership (February 1, 2015 to January 31, 2016)


ASPA inclusion (February 1, 2016 to March 31, 2016


ASPA deduction (February 1, 2015 to December 31, 2015



April 1, 2016 to December 31, 2016

Income from partnership


ASPA inclusion


ASPA deduction (February 1, 2016 to March 31, 2016



January 1, 2017 to December 31, 2017

Income from partnership (February 1, 2016 to January 31, 2017


ASPA inclusion (February 1, 2017 to December 31, 2017


ASPA deduction



Total income from January 1, 2016 to December 31, 2017


Timing of income realization following AOC (p.4)

In the example above, ACo's income for the February 1, 2016 to March 31, 2016 partnership period (the stub period before acquisition of control) is based on the income of Partnership AB in the prior period—which may be lower than the actual partnership income for the stub period. Also, the example demonstrates that notwithstanding the ASPA rules, some stub periods may not include partnership income. ….

[I]if the acquisition of control in the example had occurred in January 2016, the pre-acquisition-of-control stub period would not have a partnership income inclusion. Accordingly, in a sale transaction…it may be necessary to consider the amount of partnership income that is taxed in the pre-acquisition-of-control period compared with the amount taxed in the post-acquisition-of-control period.

Shane Onufrechuk, Warren Pashkowick, "Tax Considerations of Major Construction Projects", 2014 Conference Report, Canadian Tax Foundation, 10:1-35.

Deferral with choice of partnership year-end with partnership in start-up (p. 10:5)

Many major construction projects are not taxable for a number of years, and their tax exposure may grow over time as operational efficiencies are achieved. Therefore, significant tax deferral benefits may result from choosing fiscal periods for the partnership that differ from the partners' taxation year-ends.

Specifically, although the stub period accrual rules as set out in section 34.2 require the partners to include an estimate of the stub period income in their taxable income, this amount is generally determined on the basis of the prior year's income of the partnership. To the extent that taxable income associated with the major construction project is likely to increase over time, the deferral of this growth in taxable income may be possible if the fiscal period of the partnership is different from that of its partners.

Paragraph (a)

Element B

Administrative Policy

12 June 2020 External T.I. 2018-0788161E5 F - Adjusted stub period accrual amount

ASPA not reduced by s. 111(1)(e) losses

Opco, with a November 30 year end, holds, as a limited partner, a significant interest in a calendar year partnership ("LP"), which had previously allocated losses to Opco, a portion of which were deducted in computing Opco's income to the extent of its at-risk amount ("ARA") LP for its previous taxation years, and the balance of which represent limited partnership losses carried forward by Opco.

For the current fiscal year, LP earned income, some of which was allocated to Opco and increased the ARA of Opco's interest in LP under s. 96(2.2)(b), and generated a deduction to Opco under s. 111(1)(e), but with Opco still having significant undeducted limited partnership losses derived from LP.

Could limited partnership losses be considered in computing the adjusted stub period accrual (“ASPA”) of Opco? CRA responded:

The description of element "B" in paragraph (a) of the definition ASPA in subsection 34.2(1) refers to the total of all amounts each of which is the corporation's share of a loss or allowable capital loss - to the extent that the total of all allowable capital losses does not exceed the total of all taxable capital gains included in the description of A - of the partnership for a fiscal period of the partnership that ends in the year.

Element “B" does not take into account losses that may be deducted in computing a corporation's taxable income by virtue of subsection 111(1), in particular, limited partnership losses under paragraph 111(1)(e).

Consequently … no limited partnership loss can be deducted by Opco in computing the ASPA so as to reduce the amount to be added to its income under subsection 34.2(1).

Subsection 34.2(2) - Income inclusion — adjusted stub period accrual

Administrative Policy

10 May 2017 External T.I. 2017-0687051E5 F - Addition to ACB of a partnership interest

no partnership-interest ACB addition for inclusion

CRA considered that an amount included in a corporation’s income under s. 34.2(2) will not be added to the adjusted cost base of its partnership interest, given that s. 53(1)(e)(i) only boosts ACB for a pro rata share of income earned at the partnership level rather than (imputed) income earned directly by the partner.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(i) no s. 53(1)(e) addition for s. 34.2(2) stub period income inclusion 127

4 November 2014 External T.I. 2014-0539191E5 - ASPA under 34.2(2)

no income inclusion where no partnership year end in corporate partner's year

Corp A, which has a significant interest in a partnership which, like Corp A, has a calendar year end, amalgamates on august 1, 2014 so that it has tow 2014 year ends on July 31 and December 31. Does Corp A have an income inclusion under s. 34.2(2) for its July 31, 2014 year? CRA stated:

Corp A will not have an income inclusion under subsection 34.2(2) in respect of the partnership for its taxation year ending July 31, 2014 since no fiscal period of the partnership ends in that short taxation year. Furthermore, Amalco will not have an income inclusion under subsection 34.2(2)…since there will be no misalignment between its taxation year-end and the partnership's fiscal period end (i.e. both end December 31, 2014).

Subsection 34.2(11) - Transitional reserve

Administrative Policy

2015 Ruling 2015-0601441R3 - XXXXXXXXXX Partnership - winding up

continuation of s. 34.2(11) reserve following partnership wind-up
Current structure

Sub1 and Sub2 (both taxable Canadian corporations and wholly-owned subsidiaries of Parent who, like them, has a calendar year end) are currently the sole partners of a general partnership (“Partnership”). Following the purchase of Sub2 by Parent, Partnership was formed by a predecessor by amalgamation to Parent and Subco2 in order for income from the Partnership business to be allocated to Sub2, which had non-capital losses. Parent and Sub2 made a “single-tier fiscal period alignment,” as a consequence of which each had “eligible alignment income” which was included in “qualifying transitional income” and each was eligible to claim a transitional reserve under s. 34.2(11). S. 34.2(14) preserved Parent’s eligibility to continue to claim the reserve after Parent’s transfer of its interest in Partnership to Corp1 (a corporation related to Parent). Sub1 was indebted to Partnership under the demand non-interest bearing “Sub1-Partnership Note”), and Parent was indebted to Partnership under the “Parent-Partnership Note,” which was interest bearing and payable on demand.

Proposed transactions

Sub2 will transfer its interest in Partnership to Sub1 in consideration for Sub1 Preferred Shares and a non-interest bearing promissory note (the “Sub1 Note”), jointly electing under s. 85(1). As a consequence Partnership will cease to exist, Sub1 will become the sole owner of all the Partnership property and Sub1 will become subject to all the remaining obligations of Partnership, and immediately after the time that Partnership ceased to exist, Sub1 will carry on alone the business that was the business of Partnership.


Parent will be deemed, for purposes of s. 34.2(13)(a) to be a member of Partnership continuously until the end of Parent’s taxation year ending on XXXXXXXXXX. Parent and Sub2 may, in computing its income for its taxation year ending on XXXXXXXXXX, claim a reserve as provided in s. 34.2(11). Neither s. 34.2(13) nor s. 34.2(18) will apply to deny Parent’s or Sub2’s claim under s. 34.2(11) in computing its income for its taxation year ending on XXXXXXXXXX.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 98 - Subsection 98(5) 98(5) wind-up through s. 85 transfer of partnership interest of one partner to the other and preceded by debt assumptions 292
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(c) - Subparagraph 20(1)(c)(ii) interest deductible following assumption of interest-bearing internal debt on s. 98(5) wind-up 297
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(m) continued availability of s. 20(1)(m) reserve following s. 98(5) wind-up 296
Tax Topics - Income Tax Act - Section 20 - Subsection 20(1) - Paragraph 20(1)(n) flow-through of s. 20(1)(n) reserve on s. 98(5) wind-up 289
Tax Topics - Income Tax Act - Section 20 - Subsection 20(24) s. 20(24) election on s. 98(5) wind-up 307
Tax Topics - Income Tax Act - Section 18 - Subsection 18(9) s. 18(9) deduction claimable by transferee former partner following s. 98(5) wind-up 241
Tax Topics - Income Tax Act - Section 147.2 - Subsection 147.2(8) s. 147.2 continuity following s. 98(5) wind-up 368
Tax Topics - Income Tax Act - Section 6 - Subsection 6(1) - Paragraph 6(1)(i) no income inclusion on assumption on s. 98(5) wind-up of DSUs and RSUs 356
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Salary Deferral Arrangement - Paragraph (k) no income on RSU/DSU assumption 22

9 April 2014 External T.I. 2013-0503421E5 F - Transitional reserve

transitional adjustment where partnership loss in year 1 followed by 2 profitable years

Can a corporation with qualifying transitional income respecting a partnership in which it has a significant interest claim a transitional reserve (in circumstances where there is no multi-tier alignment) under s. 34.2(11) when the partnership realizes a loss in the first taxation year ending after March 22, 2011 and earns income in the second and third taxation years? CRA stated (TaxInterpretations translation):

Given the wording of subsections 34.2(11) and 34.2(16), and the tax policy underlying the transitional relief provided for in subsection 34.2(11), we are of the view that a corporation, in the above situation, generally can claim a transitional reserve in the course of the second or third taxation year ending after March 22, 2011 if the partnership in which it hold a significant interest generates income in the course of those two taxation years, if all the conditions contemplated in subsection 34.2(11) are satisfied and if the reserve is neither limited by the application of subparagraph 34.2(11)(a)(iii) nor is prohibited by the terms of subsection 34.2(13).

14 February 2014 External T.I. 2012-0454481E5 F - Safe Income

transitional reserve deduction is in taxpayer's discretion

The only source of income of ABC, a CCPC, is its interest in a partnership with a fiscal period end of XX. ABC has an income inclusion under s. 34.2(2) and claims a reserve under s. 34.2(11).

CRA confirmed that the claiming of the s. 34.2(11) reserve and its amount was in the discretion of ABC.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 55 - Subsection 55(2.1) - Paragraph 55(2.1)(c) not claiming s. 34.2(11) transitional reserve to increase SIOH 379
Tax Topics - Income Tax Act - Section 55 - Subsection 55(5) - Paragraph 55(5)(c) no departures permitted from s. 34.2 adjustments 194

Subsection 34.2(13) - No reserve

Paragraph 34.2(13)(a)

Administrative Policy

4 December 2013 External T.I. 2013-0499681E5 - Transitional reserve - tiered partnership

Can a corporate partner of a top-tier partnership in a multi-tier partnership structure continue to claim a transitional reserve under s. 34.2(11) in respect of the top-tier partnership after the top-tier partnership has been dissolved? After referencing s. 34.2(13)(a), CRA stated:

Thus, the transitional reserve under subsection 34.2(11) in respect of a particular partnership cannot be claimed after that partnership ceases to exist as the requirement that the corporation continue to be a member of that partnership to the end of the taxation year would not be met.

Additionally, subparagraph 34.2(13)(c)(i) provides that a corporation cannot claim an amount under subsection 34.2(11) in respect of a partnership for a taxation year if the taxation year ends immediately before another taxation year at the beginning of which the partnership no longer principally carries on the activities to which the reserve relates.

Subsection 34.2(14) - Deemed partner

Administrative Policy

2014 Ruling 2013-0516071R3 - Reorganization

transfer by Profitco of profitable LP to Lossco which is affiliated by virtue of common NR indirect parent

The units of an LP (LP1) which already has earned profits for the year and which holds most of the units of LP2 will be transferred to a Lossco (which is affiliated and related by virtue of a common indirect parent) before the fiscal year end of LP1 – so that most of those LP1 profits will be allocated to Lossco. CRA ruled that s. 34.2(14) will deem Profitco to be a member of LP1 continuously until the end of its XX taxation year for purposes of s. 34.2(13)(a).

See summary under s. 111(1)(a).

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 111 - Subsection 111(1) - Paragraph 111(1)(a) transfer of already-earned profits to Lossco by transfer of LP units with income allocation at LP year end 326
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) transfer of profitable LP to Lossco followed by allocation of previously-earned profits of LP to Lossco 95