Principal Issues: Whether taxable dividends received by a partnership in respect of shares of a class listed on a designated stock exchange and taxable capital gains realized on disposition of those shares and attributed by the partnership to an individual are subject to tax on split income.
Position: No.
Reasons: Wording of the Act, definition of split income provided in subsection 120.4(1).
FEDERAL TAX ROUNDTABLE 5 OCTOBER 2018
2018 APFF CONFERENCE
Question 12
Section 120.4 – partnership
A partnership is owned by five family members, the parents, Mr. X and Mrs. X, and their Children, X, Y, and Z. Children X, Y, and Z are 15, 22 and 25 years old.
The partnership holds stock market investments and generates passive income in this regard. The resulting passive income is allocated and distributed among the five partners in equal shares.
Mr. X and Mrs. X are involved in the activities of the partnership in that they communicate, several times a year, with the broker responsible for investment management.
Children X, Y and Z did not contribute anything to the partnership and they are not involved in its management.
Question to the CRA
Is the income generated by the stock market shares held by the partnership and allocated and distributed by the partnership to each of Mr. X, Mrs. X and Children X, Y and Z subject to the tax on split income?
CRA Response
First, for the purpose of this question, we have assumed that the only income that the partnership derives from its stock market investments is dividend income in respect of shares of a class listed on a designated stock exchange referred to in subsection 248(1), as well as capital gains or losses from the disposition of such shares.
In addition, we have assumed that the partnership was validly created within the meaning of Article 2186 of the Civil Code of Quebec or the common law, as the case may be, and that all partners of the partnership are resident in Canada at all relevant times.
Subsection 120.4(2) provides that there is to be added to a specified individual’s tax payable under Part I for a taxation year the highest individual percentage for the year multiplied by the individual’s split income for the year.
In this case, Mr. X, Mrs. X and Children X, Y and Z are specified individuals for purposes of section 120.4. In particular, to the extent that Mr. X, Mrs. X, Children Y and Z are resident in Canada at the end of the year, or immediately before the time of their death, they are all specified individuals within the meaning of the definition of that term in subsection 120.4(1). With respect to Child X, that child is a specified individual for the additional reason that the child’s father or mother is resident in Canada at a time in the year.
The definition of "split income" in subsection 120.4(1) describes the types of income that are subject to the split income tax under subsection 120.4(2).
Paragraph (a) of the definition of "split income" in subsection 120.4(1) defines the split income of a specified individual for a taxation year as not including dividends received by the individual in respect of shares of a class listed on a designated stock exchange or shares of the capital stock of a mutual fund corporation.
Under paragraph (e) of the same definition, the taxable capital gain realized on the disposition of shares of a class listed on a designated stock exchange or a share of the capital stock of a mutual fund corporation is not subject to the income tax rules respecting split income.
Furthermore, by virtue of paragraph 96(1)(f), 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 a partner from that source or from sources in that particular place, as the case may be, for the taxation year of the partner in which the partnership’s taxation year ends, to the extent of the partner’s share thereof. This income will generally maintain its nature and characteristics to the partner.
Consequently, dividend income received by any of the partners of the partnership in respect of shares of a class listed on a designated stock exchange or shares of the capital stock of a mutual fund corporation, as well as the taxable capital gain realized on the disposition of such shares, would be excluded from the definition of split income.
Thus, the partners of the partnership described in this question who were allocated such income by the partnership would not be subject to the rules on split income under subsection 120.4(2).
That being said, the facts of the statement in this question, in particular the fact that Children X, Y and Z contributed nothing to the partnership and that they are not involved in the operations of the partnership, could lead the CRA to examine the potential application of other provisions of the Income Tax Act.
Without an exhaustive analysis or enumeration of the provisions that may be applicable in an actual particular situation, subsection 103(1) or subsection 103(1.1), inter alia, could be applied if, after an analysis of all the facts relating to a particular situation, it turned out that the division of the partnership's income among the partners was not reasonable in the circumstances. In addition, depending on the facts of a particular situation, certain attribution rules, inter alia, those provided in section 74.1 as well as section 96(1.8), could apply if the conditions for the application of one or other of those legislative provisions were satisfied.
Yvon Beaudoin
(514) 283-8653
5 October 2018
2018-076883