A father and son effect the equivalent of an estate freeze on their 50-50 partnership, so that each receives a preferred partnership interest, then all the sons (or, in the alternative, a family trust) subscribe a nominal amount for common units. The allocation of the partnership's profit will be made first in payment of the return on the preferred interests and the balance of the profit will be allocated to the sons. Is this allocation reasonable, so that ss. 103(1) and (1.1) will not apply? CRA stated:
[T]he allocation of partnership income must recognize the capital contribution, as well as the non-cash contribution of each partner. Otherwise, subsections 103(1) or 103(1.1) could apply to modify the allocation of the partnership's income, loss or other partnership attributes provided for in the partnership agreement. …Krauss ... supports that position.
…[Y]our example is similar to the situation in Krauss and that subsection 103(1.1) could apply in your example.