Principal Issues: [TaxInterpretations translation] a) Can A Inc. and B Inc., being corporate members of a partnership, elect under ITR subsection 1101(5b.1) in respect of capital property acquired by the partnership in the filing of their tax returns (in the event that the partnership has not made the election)? b) If so, does each member corporation have to make a distinct election?
Reasons: When a partnership files a T5013 for its fiscal year, it must attach a letter indicating the election under ITR subsection 1101(5b.1). Where all the conditions of ITR paragraph 1101(5b.1) are respected, we confirm that the election made by a partner of a partnership is deemed to have been made by each partner of that partnership.
FEDERAL TAX ROUNDTABLE 7 OCTOBER 2011
APFF CONFERENCE 2011
Question 1
Election under subsection 1101(5b.1) of the Income Tax Regulations
A partnership ("Partnership") acquired an eligible non-residential building that could benefit from the 6% higher depreciation rate.
Corporations A Inc. and B Inc. each held a 50% interest in Partnership.
The chronological sequence of events was as follows:
1. December 31, 2010, fiscal period-end of A Inc. and B Inc.
2. January 31, 2011, fiscal period-end of Partnership in which Partnership acquired an eligible non-residential building.
3. On June 30, 2011, filing of Form T5013, Statement of Partnership Income ("T5013"), of Partnership without the election under subsection 1101(5b.1) of the Income Tax Regulations (the "ITR") for its year ended January 31, 2011.
4. On December 31, 2011, fiscal period-end of A Inc. and B Inc. and inclusion of Partnership income to January 31, 2011.
5. June 29, 2012, filing of the income returns of A Inc. and B Inc.
ITR subsection 1101(5b.1) states that the taxpayer must elect by letter attached to the return of income filed in accordance with section 150 of the Income Tax Act (the “Act”), that is, if the taxpayer is a corporation, the election must be made within six months of the end of the taxation year. The election cannot be made late.
In 2010, the Canada Revenue Agency ("CRA") issued Technical Interpretation 2010-0379751E5 in which it stated that it would accept an election under ITR subsection 1101(5b.1) being filed by a partnership directly.
Under the ITA, the term "taxpayer" does not generally include partnerships. Although some exceptions exist for that purpose, they are clearly identified in the relevant sections of the Act.
Thus, in the case presented in the interpretation, we understand that the CRA would have accepted an election made by the Partnership directly, even though in reading the ITR, that election does not seem possible to us. A Inc. and B Inc., both taxpayers within the meaning of the Act, could make the election and include it with their December 31, 2011 income tax returns in which the Partnership's income to January 31, 2011 is included. Therefore, assuming that the tax returns of A Inc. and B Inc. are filed in time, the election would be considered valid.
Question to the CRA:
a) Can A Inc. and B Inc., being members of Partnership, elect under ITR subsection 1101(5b.1) in respect of capital property acquired by the partnership in the filing of their tax returns (in the event that Partnership has not made the election)?
b) If so, does each member corporation have to make a separate election?
CRA Response
ITR subsection 1101(5b.1) provides that a taxpayer may elect to include in a separate class any building that is an "eligible non-residential building" within the meaning of ITR subsection 1104(2). A taxpayer who avails itself of the election must do so in respect of each eligible non-residential building in a letter attached to the return of income that it submits to the Minister in accordance with section 150 for the taxation year in which the building is acquired.
However, where a partnership acquires an eligible non-residential building, the additional capital cost allowance provided for in ITR paragraphs 1100(1)(a.1) and (a.2) must be claimed at the partnership level. Indeed, under subsection 96(1), the income of a partnership is computed as if it were a person and its income or loss is then allocated to its partners for the purposes of the Act. Thus, the CRA considers that it is not possible to permit a member of a partnership to directly claim capital cost allowance for an eligible non-residential building, as this would be contrary to the rules respecting the computation of a partnership's income for purposes of the Act.
Once the net income has been computed by the partnership, taking capital cost allowance into account, the net income or loss is allocated to the partners according to the shares set out in the agreement entered into by the partners and governing the operation of the partnership. However, subsection 103(1) may apply if the CRA considers the allocation of the income or loss to be unreasonable (despite the respective shares that may be stipulated in the partnership agreement).
Based on the foregoing, when a partnership files a T5013 for its fiscal year, it must attach a letter indicating the election under ITR subsection 1101(5b.1). Where all the conditions of ITR subsection 1101(5b.1) are satisfied, we confirm that an election made by a partner of a partnership is deemed to have been made by each partner of that partnership.
Anne Dagenais
(613) 957-2121
2011-041181