A couple (Mr. and Mrs. A), who hold 80% and 20%, respective interests in, and devote themselves full time to the business of, a general partnership ("SENC"), transfer 1% of their units to a corporation whose common shares are owned by them on an 80% /20%.basis – and they and the two other employees become employees of the corporation. The income of SENC (over and above a return of 1% on each partner's capital) is shared among the three partners in the proportions: Mr. A - 4%; Mrs. A - 1%; Corporation - 95%. However, gains (or losses) are allocated (based on the capital invested) to: Mr. A - 79%; Mrs. A - 20%; and Corporation - 1%. CRA stated:
[Our] long-standing position … is that subsection 103(1) or (1.1) could apply if the allocation of partnership income does not take into account the contribution of each partner. …
… [W]e are of the view that, on the face of it, the allocation of income does not take into account the contribution of each partner.
Consequently … the Agreement could result in the application of subsections 103(1) or 103(1.1).