Principal Issues: 1. Where do you report on your individual income tax return in Canada your share of the net income or loss of a US partnership? 2. What exchange rates should be used in the calculations?
Position: 1. Generally, you enter your share of the net income or loss from the US partnership on line 122 of the T1 General Return if the partnership did not include a rental or farming operation and you were a limited partner or not actively involved in the partnership and not otherwise involved in a business. 2. Exchange rate in effect at the time of the transaction or the average annual exchange rate published by the Bank of Canada.
Reasons: 1. T1 General Income Tax and Benefit Guide 2009. 2. Subsection 261(2)
XXXXXXXXXX 2010-038469 Minguy Choi (613) 957-2062
January 4, 2011
Dear XXXXXXXXXX :
Re: Reporting of US partnership income or loss
This is in reply to your e-mail correspondence of 25th October 2010, in which you enquired about how you should report your share of the income or loss of a US partnership.
You are an individual who is a resident of Canada and a citizen of the United States of America ("US"). Also, you are a partner of a US partnership that generates only ordinary business income or loss. The partnership reports your share of the annual income or loss on the US Internal Revenue Service Schedule K-1 (Form 1065), Partner's Share of Income, Deductions, Credits, etc.
The particular circumstances outlined in your e-mail appear to relate to factual situations involving specific taxpayers. As explained in Information Circular 70-6R5, Advance Income Tax Rulings, this Directorate does not comment on transactions involving specific taxpayers except by way of an advance income tax ruling in respect of proposed transactions. When a situation involves a specific taxpayer and a completed transaction, the question should be directed to the appropriate Tax Services Office for their views, along with all relevant facts and documentation. However, we are prepared to offer the following general comments.
As you may know, Interpretation Bulletin IT-221R3, Determination of an Individual's Residence Status, sets out the Canada Revenue Agency's (the CRA) comments with respect to determining residence status for Canadian tax purposes. This publication, along with the Information Circular referred to above, can be obtained from our website at www.cra-arc.gc.ca under the heading "forms and publications."
In the event that you are a resident of both Canada and US, your residence status for purposes of the Canada-US Tax Convention must be determined under the "tie-breaker rules" (please refer to paragraphs 25 and 26 of IT-221R3).
The questions and answers follow.
Question No. 1: Where do you report on your individual income tax return in Canada your share of the net income or loss of the US partnership, if you were a resident of Canada for the purposes of the Income Tax Act (the "Act")?
Our Comments
A Canadian resident partner of a US partnership is required to include his or her share of the income of the partnership in computing his or her income for Canadian tax purposes. Such income should be computed in accordance with Canadian tax law (i.e., the income calculated under the US rules should be adjusted for Canadian tax purposes).
Generally, you enter your share of the net income or loss from the US partnership on line 122 of the T1 General Return if the partnership did not include a rental or farming operation and you were a limited partner or not actively involved in the partnership and not otherwise involved in a business. If the partnership has a loss, the amount you can claim could be limited.
Question No. 2: What exchange rates should be used in the calculations?
Our Comments
You report foreign income and other amounts in Canadian dollars, and use the Bank of Canada exchange rate in effect at the time of the transaction. If the amount was paid at various times throughout the year, please visit the Bank of Canada Web site at www.bankofcanada.ca, or visit our website at www.cra-arc.gc.ca under the heading "currency exchange rates" for the average annual exchange rate.
We trust that the comments above are of assistance.
Yours truly,
Olli Laurikainen,
for Director
International and Trusts Division
Income Tax Rulings Directorate