Principal Issues: a) [TaxInterpretations translation] Can the CRA confirm that a partnership created under the CCQ can exist even if that partnership does not carry on a business?
b) To the extent that the partnership does not carry on business, can the CRA confirm that the property income earned by the partnership will be taxable only in each partner's province pro rata to each partner’s interest?
Position: For there to be a partnership in Quebec, there is no need for the carrying on of a business. However, it will be necessary to consider all relevant facts and legal documents relating to a particular situation.
Where a partnership derives non-business income during a taxation year, we are of the view that subsection 2601(1) would apply and the income as calculated under subsection 96(1) should be allocated to the partners of the partnership pursuant to the partnership agreement. That income would retain its nature in the hands of the partners and be taxable in the province of residence of each partner of the partnership.
Reasons: Question of fact and law, the Act and Regulations
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
2011 APFF CONFERENCE
Question 25
Does a partnership have to carry on a business?
Article 2186 of the CCQ defines a contract of partnership as "a contract by which the parties, in a spirit of cooperation, agree to carry on an activity, including the operation of an enterprise, to contribute thereto by combining property, knowledge or activities and to share any resulting pecuniary profits.”
The CCQ, contrary to certain legislations of the other Canadian provinces, does not therefore require that a business be carried on in order for a partnership to exist.
Questions to the CRA:
a) Can the CRA confirm that it also considers that a partnership created under the CCQ can exist even if that partnership does not carry on a business?
b) To the extent that the partnership does not carry on business, can the CRA confirm that the property income earned by the partnership will be taxable only in each partner's province of residence pro rata to each partner’s interest?
CRA Response
The Act does not define the term "partnership" which is a private law concept. Consequently, in determining whether a partnership exists for the purposes of the Act, reference must be made to either the civil law or the common law, depending on the applicable jurisdiction. Indeed, section 8.1 of the Interpretation Act provides for the use of the applicable provincial law (either the civil law in Quebec, or the common law elsewhere in Canada) to determine the legal relationships for the purposes of applying a federal law that includes private law aspects.
In fact, for a partnership to exist in Quebec, there is no need for the carrying on of a business. However, since the question of the existence of a partnership is a question of mixed fact and law, it will be necessary to consider all relevant facts and legal documents pertaining to a particular situation.
With respect to your second question, ITR subsection 2601(1) provides that if an individual resides in a particular province on the last day of a taxation year and has no income for the taxation year from a business with a permanent establishment outside the province, the individual’s income earned in the taxation year in the particular province is the individual’s income for the taxation year.
Consequently, where a partnership derives income during a taxation year that is not from a business, we are of the view that ITR subsection 2601(1) would apply and the income as computed under ITA subsection 96(1) should be allocated to the partners of the partnership pursuant to the partnership agreement. That income would retain its nature in the hands of the partners and be taxable in the province of residence of each partner of the partnership.
Anne Dagenais
(613) 957-2121
October 7, 2011
2011-041191