Principal Issues: Can a person, that is a member of a partnership, assign, in accordance with subsection 125(8), part or all of his/her specified partnership business limit to a corporation that provides services to the partnership but in which the individual is not a shareholder?
Position: No. In this particular situation, the individual will not be able to make such an assignment in accordance to subsection 125(8) of the Act.
Reasons: The person must be a shareholder of the corporation that provides the service to the partnership and, at the same time, must hold directly an interest in that partnership.
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 5. Assignment of the small business deduction under subsection 125(8)
ABCD, a limited partnership, carries on a professional services business. The partners directly or indirectly hold Serviceco. It renders administrative services exclusively to ABCD LL. The partners deal at arm's length with each other.
Here are the details of the current structure:
Subsection 125(8) allows a person who is a member of a partnership to assign to a designated member of a partnership all or any portion of the person’s specified partnership business limit. Since Serviceco renders services exclusively to ABCD LLP and that one of the partners is directly or indirectly a shareholder of the partnership, the partnership is a designated member of the partnership. That person must be described in paragraph (b) of the definition of "designated member" in order to be able to make that assignment. Subparagraph (i) of that definition applies to a shareholder who holds a direct or indirect interest in the partnership. It appears that partner Mr. D’s shares in Serviceco are held through Holdco D. [See diagram in summary adapted from the slide presented at the Conference.] ] He is therefore not a shareholder of Serviceco. As a result, he cannot assign his share of the business limit to Serviceco. On the other hand, the other three partners are able to assign their share of the business limit.
Questions to the CRA:
Does CRA agree that Mr. D cannot assign his portion of the business limit of the partnership to Serviceco whereas this is permitted for the other three partners?
CRA Response:
These comments are based on the following assumptions:
- the corporations and the partnership have the same fiscal period end;
- Serviceco is a Canadian-controlled private corporation ("CCPC") dealing at arm's length with a given person having a direct or indirect interest in ABCD LLP
The Income Tax Act contains, in subsection 125(7), the "specified partnership income" rules that limit the multiplication of the small business deduction ("SBD") in certain situations where inter alia partners of a partnership are CCPCs that are not associated (as provided in section 256) with each other.
Generally speaking, only one business limit is available with respect to the rules for the allocation of "specified partnership income" to the partners. Absent these rules, each CCPC that was a partner in a partnership could claim a separate SBD in respect of its share of the income from an active business carried on by the partnership.
In March 2016, changes were made to the Income Tax Act to tighten these rules. Among other things, the concept of "designated member" (footnote 1) (subsection 125(7)) as well as subsection 125(8) have been added. The concept of "designated member" is relevant in the context where a CCPC, which is not a partner in a partnership but has a contract with it for the supply of goods or services, could be deemed to be a partner in this partnership and, where applicable, be required to share the partnership's business limit with the other "actual" partners. As for subsection 125(8), it sets out the conditions for the assignment by an "actual" partner “to a designated member" of “all or a portion of portion of the person’s specified partnership business limit”.
In the current situation, given that Serviceco exclusively provides services to ABCD LLP, Serviceco is not a partner of ABCD LLP, and at least one of Serviceco's shareholders has a direct or indirect interest in that partnership (Mr. A and Mr. C have an indirect interest, while Mr. B has a direct interest, in ABCD LLP), Serviceco is a "designated member" of ABCD LLP
These are the conditions of application listed in subsection 125(8) for determining whether ABCD's partners are in a position to assign to Serviceco all or any portion of their share of the business limit allocated to them by the partnership.
The CRA has applied the facts of this situation to the conditions set out in subsection 125(8) as explained in the Explanatory Notes of the Department of Finance (footnote 2):
“In general terms, under new subsection 125(8), a person can assign an amount to the CCPC [Serviceco] only if the person is an actual member [Holdco A, Mr. B, Holdco C et Mr. D] of the partnership [ABCD LLP] in a taxation year and is […] a shareholder of the CCPC who holds a direct interest [Mr. A, Mr. B, Mr. C and Holdco D] in the partnership […]. Such a person may assign to the CCPC (for a taxation year of the CCPC) all or any portion of the person's specified partnership business limit in respect of the partnership for the person's taxation year." (Our emphasis)
Given that Mr. B is a partner of ABCD LLP and that he is also a shareholder of Serviceco, he will be able to assign all or any portion of the business limit which has been allocated to him by ABCD LLP if he makes an election as provided in subsection 125(8).
In the case of Mr. D, he is also a partner of ABCD LLP, but given that he is not a shareholder of Serviceco, he does not satisfy the condition provided in paragraph 125(8)(a). Mr. D will therefore not be able to assign to the "designated member", Serviceco, his share of the partnership's business limit determined by the partnership ABCD LLP.
With respect to Holdco A and Holdco C, they are partners of ABCD LLP, but they are not shareholders of Serviceco and, therefore, they will not be able to assign all or any portion of their share of the "specified partnership business limit" allocated to them by the partnership.
In summation, the CRA agrees that Mr. D cannot assign his share of the specified partnership limit to Serviceco. However, of the other three shareholders, only Mr. B could make an assignment by virtue of subsection 125(8), if he meets the other conditions.
Michel Ostiguy
(514) 283-6111
Martine Filiatrault
(613) 670-9129
5 October 2018
2018-076876
FOOTNOTES
Due to our system requirements, footnotes contained in the original document are reproduced below:
1 By s. 125(7).
2 CANADA, Department of Finance, Explanatory Notes Relating to the Income Tax Act, the Excise Act, 2001 and Other Related Texts, July 29, 2016.
3 Id., s. 13.