Principal Issues: In a situation where a partnership disposed of eligible capital property in its taxation year ending on December 31, 2016, would the corporate partners, which have a taxation year ending in March 2017, have to elect pursuant to subparagraph 13(38)(d)(iii) to have that subparagraph apply with respect to the disposition of the eligible capital property by the partnership.
Position: No.
Reasons: With respect to the income of the partnership, its income is computed as if the partnership were a separate person resident in Canada pursuant to paragraph 96(1)(a). The tax consequences of the disposition of eligible capital property is part of the computation of income which will be done at the partnership level. Such income will then be allocated to the partners to the extent of their share pursuant to paragraph 96(1)(f).
APFF FEDERAL TAX ROUNDTABLE 6 OCTOBER 2017
APFF CONFERENCE 2017
Question 11
New Eligible Capital Property Regime - Transitional Rules
On March 22, 2016, Canada's Finance Minister Bill Morneau announced the elimination of the eligible capital property regime (the "Old Regime") and its replacement by a new class of depreciable property for capital cost allowance purposes. (“CCA”) effective from January 1, 2017 (the "New Regime").
The transitional rules put in place to make the transition to the New Regime provided that the balance of a corporation's cumulative eligible capital ("CEC") had to be calculated and then transferred to the new class of depreciable property on January 1, 2017.
A corporation with a December 31 year end and disposing of eligible capital property in 2016 is therefore subject to the Old Regime in respect of this disposition.
Conversely, a corporation with a taxation year end other than December 31, for example, of March 31, and having disposed of eligible capital property in 2016, but in its taxation year ending after January 1, 2017, is subject to the New Regime, unless it makes an election under subparagraph 13(38)(d)(iii) (the "Election") so that the impact of this disposition on the CEC balance is dealt with under the Old Regime.
Although the operation of the Election (having regard to whether it should be made or not) is clear for corporations, there appears to be more ambiguity when dealing with partnerships.
Question to the CRA
In the case of a partnership having a December 31 year-end (the "P") disposing of eligible capital property during the month of November 2016 resulting in a gain in respect of eligible capital property (the "Disposition") and all of whose members are corporations with a taxation year-end of March 31 (the “Partners”), are the Partners required to file an Election for the Disposition to be subject to the Old Regime or is no election to be made as the P has a year-end of December 31st?
CRA response
Paragraph 96(1)(a) provides that a partner’s income, non-capital loss, net capital loss, restricted farm loss and farm loss, if any, for a taxation year, or the taxable income earned in Canada for a taxation year, as the case may be, is computed as if the partnership were a separate person resident in Canada.
Paragraph 96(1)(f) provides that the amount of the income of the partnership for a taxation year from any source or from sources in a particular place constitutes the income of the taxpayer from that source or from sources in that particular place, as the case may be, for the taxation year of the taxpayer in which the partnership’s taxation year ends, to the extent of the taxpayer’s share thereof.
The rules of the Old Regime with respect to the disposition of eligible capital property, as well as of subsection 13(38), which adds transitional provisions because of the introduction of the New Regime, are statutory provisions for the computation of income. Consequently, in accordance with paragraph 96(1)(a), these provisions apply, as appropriate, at the level of the partnership as if it were a separate person resident in Canada. Thus, the Partnership would be considered to be the taxpayer for the purposes of paragraph 13(38)(d). Given that the Partnership’s taxation year would end on December 31, 2016, paragraph 13(38)(d) would not apply and the Partnership would not have to make an election under subparagraph 13(38)(d)(iii).
Since the computation of the Partnership income would not be made at the Partners’ level but at the Partnership level, so that they would be allocated their share thereof by the Partnership under paragraph 96(1)(f), the date of the taxation year end of the Partners would not be relevant for the purposes of paragraph 13(38)(d). Furthermore, a Partner could not make an election under subparagraph 13(38)(d)(iii) in respect of a disposition by the Partnership.
Sylvie Labarre
October 6, 2017
2017-070909