Principal Issues: [TaxInterpretations translation] (1) Is there a taxable benefit to be included in the income of a partner who personally uses property owned by the partnership?
(2) If no benefit is included in the income of a member personally using property owned by the partnership, will there be an amount received by the member as a payment distibuting the member's share of the partnership profits or capital, thereby reducing the adjusted cost base of the member's interest pursuant to subparagraph 53(2)(c)(v)?
Position: (1) No.
(2) No.
Reasons: (1) Except for paragraph 12(1)(y), there is no statutory provision that would apply to a partner by reason of the partner’s personal use of partnership property.
(2) The partner does not receive any sum in respect of, or as full or partial payment for, a distributiont of the partner’s share of the partnership profits or capital.
XXXXXXXXXX 2006-020934 F. Bordeleau, Advocate June 14, 2007
Dear Sir,
Subject: Property used personally by a partner in a partnership
This is in response to your letter received on October 6, 2006, in which you wish to determine the tax consequences of a partner's use of property owned by a partnership.
Unless otherwise indicated, all statutory references herein are to the provisions of the Income Tax Act (the "Act").
In your letter, you indicated that a partnership carries on a farming business in which the partners are actively involved on an ongoing basis. One of the assets owned by the partnership is a building that is used as the principal residence of one of the partners. You also indicated that the partner does not pay any rent to the partnership for the use of the building, but pays all the annual expenses related to the occupation of the principal residence.
The situation you have indicated in your letter appears to relate to an actual situation involving a specific taxpayer. As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, we generally do not provide written opinions on proposed transactions otherwise than by way of advance rulings. Furthermore, the determination of whether a completed transaction has received the appropriate tax treatment is a matter for the Tax Services Offices. We can, however, offer the following general comments which we hope will be helpful.
As discussed at the 1992 Canadian Tax Foundation annual conference, a partner could be deemed to be a limited partner by virtue of paragraph 96(2.4)(b) whose at-risk amount would be reduced by the application of paragraph 96(2.2)(d) if, as a result of the partner's personal use of the partnership property, the partner is entitled to receive an amount or benefit referred to in paragraph 96(2.2)(d) for the purposes described therein.
Also, depending on the circumstances of each situation, where the sharing of profits between partners is not reasonable, the Canada Revenue Agency ("CRA") may, in certain situations, modify the shares under section 103 if the primary purpose of the original division is to reduce taxes or defer the payment of taxes that would be payable under the Act. One of the factors to be considered in an analysis of whether the division of profits between partners is reasonable is the personal use by a partner of partnership property.
All of these issues must be considered in light of the circumstances of each particular case. To the CRA's knowledge, there are no other provisions in the Act that would apply to a partner because of the partner's personal use of a capital property of the partnership.
With respect to the partnership, the partnership would not be permitted to deduct any operating costs or any other costs or portions of costs relating to the partner's personal use of the capital property.
As indicated in paragraph 6 of Interpretation Bulletin IT-353R2, Partnership Interest – Some Adjustments to Cost Base, (archived), any amount received by a taxpayer after 1971 as a distribution of the taxpayer’s share of the profits or capital of the partnership reduces the adjusted cost base ("ACB") of the taxpayer's share of partnership interest pursuant to subparagraph 53(2)(c)(v). In addition, any expenses incurred at the partnership level that were not allowed in computing the partnership income and that were personal expenses of a partner represent payments on behalf of that partner and should be treated as drawings on account of income or capital and therefore subject to the provisions of subparagraph 53(2)(c)(v). On the basis of the facts you have provided, we are of the view that paragraph 53(2)(c)(v) would not be applicable in this case.
These opinions are not advance decisions and, as stated in paragraph 22 of Information Circular 70-6R5 of May 17, 2002, are not binding.
Louise J. Roy, CGA
Interim Manager
Individuals, Business and Partnership Section
Individuals, Business and Partnership Division
Income Tax Rulings Directorate.