Principal Issues: How does a general partner show no self-employed income from a [50/50] general partnership during the benefit period under the [new] initiative "Employment Insurance Benefits for Self-Employed People (EIBforSEP)"?
Position: Any such agreed allocation of partnership income is generally acceptable, subject, of course, to the anti-avoidance provisions in section 103.
Reasons: Previous files
XXXXXXXXXX
2010-036542
George A. Robertson, CMA January 10, 2011
Dear XXXXXXXXXX :
Re: Self-Employed Maternity Leave
This is in response to your request of April 22, 2010 requesting our views on how a general partner shows no self-employed income from a [50/50] general partnership during the benefit period under the [new] initiative, "Employment Insurance Benefits for Self-Employed People".
Written confirmation of the tax implications inherent in particular transactions may only be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency ("CRA") publications can be accessed on the Internet at http://www.cra-arc.gc.ca/formspubs/menu-e.html. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office.
Our Comments
The Income Tax Act ("the Act") does not define a "partnership", but outlines the tax consequences if one exists. Paragraph 2 of the Partnership Act [RSBC 1996] CHAPTER 348 defines Partnership as: ". . . the relation which subsists between persons carrying on business in common with a view of profit." Paragraph 12(1)(l) of the Act provides that a taxpayer that is a member of a partnership must include in income its share of the partnership income, calculated under subdivision j (i.e., sections 96 through 103 of the Act) for the year.
Generally, a partner's share of the income or loss from a partnership depends on the partner's contribution of capital or other services rendered in the course of the partnership business and are generally set out in the partnership agreement. In the situation described, you indicated that one partner, you, will be taking a leave for the 50 weeks, during which time; the other partner will be the sole person working the business. In determining a commensurate value attributable to work performed by a partner in the activities of the partnership, both the time expended and the expertise provided are taken into consideration. In such circumstances, we would not normally consider an allocation of the partnership income to the partner actually providing the labour which gives rise to the partnership income earned, attributable to that period, to be unreasonable.
However, where two or more partners not dealing with each other at arm's length have agreed to share any income or loss from any activity of the partnership in unreasonable proportions, the CRA reserves the right to adjust each partner's share to an amount which is considered reasonable in the circumstances pursuant to subsection 103(1.1) of the Act. The basis for the sharing of income from partnerships by partners who do not deal at arm's length is ultimately a question of fact that can only be ascertained from an examination of all the facts of a particular situation. Further information relevant to this matter may be found in Interpretation Bulletin IT-231R2, Partnerships - Partners not Dealing at Arm's Length, which is available at CRA's website.
We trust that the above comments address your concerns.
Yours truly,
Sharmini Ratnasingham
Assistant Director
Ontario Corporate Tax Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch