Principal Issues: [TaxInterpretations translation] Can subsection 103(1.1) of the Income Tax Act (the "Act") apply in a situation where a parent donates money to the parent’s adult children and the children all agree to jointly invest those amounts in a partnership for education purposes, to the extent that the amounts were invested by each partner in the partnership?
Position: Question of fact. The income distribution of the partnership must recognize the capital contribution as well as the non-monetary contribution of each partner. Otherwise, subsections 103(1) or 103(1.1) could apply.
Reasons: Application of subsections 103(1) and 103(1.1) of the Act.
APFF - Financial Strategies and Instruments Roundtable 5 OCTOBER 2012
2012 CONFERENCE
Question 12 Investment Partnership and Section 103 ITA
By virtue of subsection 103(1.1), where two or more members of a partnership who are not dealing with each other at arm’s length agree to share any income or loss of the partnership and the share of any such member of that income or loss is not reasonable in the circumstances having regard to the capital invested in or work performed for the partnership, that share shall, notwithstanding any agreement, be deemed to be the amount that is reasonable in the circumstances.
Assume the following situation: a parent donates money to the parent’s adult children and all the adult children agree to jointly invest those amounts in a family partnership. Income is distributed and allocated to each of the partners in proportion to the amounts invested by each partner in the partnership, even if they arose from the parent's gift.
Such a joint investment made by all family members will not attract the attribution rules as it entails a gift of money and adult children.
Can you indicate whether section 103(1.1) applies in the circumstances described above where a partnership is used?
CRA Response
We have assumed that the partnership is not a limited partnership and the parent is not a partner in the partnership. We have also assumed that the partnership is not yet in existence, that it does not have assets and that only adult children would be partners.
Where a partnership is used, the allocation of partnership income must recognize the capital contribution, as well as the non-monetary contribution of each partner. Otherwise, subsections 103(1) or 103(1.1) could apply to change the allocation of the partnership's income, loss or other attributes of the partnership, as set out in the partnership agreement.
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.
Given the limited facts of your example, it is not possible to determine whether other legislative provisions apply.
Lucie Allaire
(613) 957-2046
October 7, 2011
2011-039941