Principal Issues: What is meant by "share of any income in a partnership" used in subsection 249.1(2)?
Position: In subsection 249.1(2), "share of any income in a partnership" would mean the share of income as provided in the partnership agreement (the entitlement) rather than the quantum that would be obtained using the amount of income at the end of the calendar year.
Reasons: Under a purely textual analysis, two different interpretations could arguably be possible. However, considering the context and the purpose of section 249.1 (which may be different from those of other provisions of the Act containing similar language), it was concluded that a person having an entitlement to income of a partnership under the partnership agreement should be considered to "have a share of income" of the partnership for the purpose of subsection 249.1(2).
XXXXXXXXXX 2011-042419 Sylvie Labarre, CA
February 28, 2012
Dear Madam,
Subject: Fiscal period of a partnership
This is in response to your email of October 14, 2011 in which you requested our interpretation of subsection 249.1(2) of the Income Tax Act (the "Act") in a particular situation.
Under the situation you submitted to us, an inter vivos trust was the sole limited partner of a limited partnership while the general partner was a Canadian-controlled private corporation.
Pursuant to the limited partnership agreement, the partnership's sharing of income is effected by first granting the limited partner a preferential right in respect of a certain amount of income earned by the partnership. Then, income in excess of the preferential amount accorded to the limited partner is shared in the proportions of 99% to the limited partner and 1% to the general partner.
You have asked us if the partnership could have a first fiscal period ending later than December 31, 20X0 (for example, in July 20X1) because of an election made pursuant to subsection 249.1(4).
In that regard, you indicated that as of December 31, 20X0, the partnership would not have earned more than the preferential return accorded to the Limited Partner. Consequently, you believe that the general partner would not be considered a member on December 31, 20X0 because of subsection 249.1(2).
Our Comments
In a particular actual situation, one should examine all the facts and circumstances surrounding that situation to determine first whether a partnership would exist in law and, secondly, whether section 103 would apply to that situation to alter the share of income of the partnership allocable to each of the partners. The following comments should not be construed as providing any opinion with respect to such determinations.
For the purpose of commenting on the specific question you have asked us, we will take into account the unverified assumptions that the limited partnership exists and that section 103 does not apply.
Subject to the application of subsection 249.1(4), the fiscal period of a business or property of a partnership may not pursuant to subparagraph 249.1(1)(b)(ii) extend beyond the end of the calendar year in which it began where an individual is a member of that partnership during the fiscal year that would have ended at the end of the calendar year in which the fiscal period began.
Subparagraph 249.1(1)(b)(ii) was part of a package of provisions instigated by the Department of Finance to ensure that the fiscal year of individuals does not extend beyond December 31.
In the situation you submitted to us, one of the partners of the limited partnership is an individual (inter vivos trust). Consequently, subject to the election under subsection 249.1(4), the limited partnership's fiscal period cannot extend beyond December 31, 20X0.
Subsection 249.1(4) provides that an election may be made such that paragraph 249.1(1)(b) does not apply where the partnership is not a member of another partnership and where each member of the partnership is an individual throughout the period that began at the beginning of the fiscal period and ended at the end of the calendar year in which the fiscal period began.
On the other hand, where the election under subsection 249.1(4) has been made, section 34.1 provides for the addition of an amount to the income of individuals to prevent a deferral of income tax from occurring because their fiscal period does not end on December 31.
In this situation, if the general partner (the Canadian-controlled private corporation) was considered to be a member for the purposes of subparagraph 249.1(1)(b)(ii) and subsection 249.1(4), the election under subsection 249.1(4) could not be made and the fiscal period of the partnership is expected to end on December 31, 20X0.
For the purpose of determining who is a partner of the partnership during the partnership's fiscal period, the Department of Finance added subsection 249.1(2). This subsection provides that a person that would not have a share of any income or loss of a partnership for a fiscal period of the partnership, if the period ended at the end of the calendar year in which the period began, is deemed not to be a member of the partnership in that fiscal period.
In determining whether the general partner is a member on December 31, 20X0, the question is therefore what interpretation is to be given to the term "share of any income or loss of a partnership" for the purposes of subsection 249.1(2). It may be argued that the text of the provision would allow for two ways of interpreting that term. The first approach would be to consider that the general partner has a partnership income share as at December 31, 20X0 equal to 1% of the revenues in excess of the amount allocated in a preferential manner to the limited partner (the income share according to the limited partnership agreement), regardless of the quantum. In that regard, so long as the general partner is entitled to a share of the partnership's income or loss, the general partner would be considered to be a member of the partnership for the purposes of subparagraph 249.1(1)(b)(ii) and subsection 249.1(4). The second approach would be to consider the share of the general partner's income to be the amount of income computed on the basis of the partnership's income as at December 31, 20X0 (the quantum). Consequently, if the partnership did not have income in excess of the preferential amount, the amount of income would be nil and the general partner would not have any income from the partnership for the purposes of subsection 249.1(2).
If we analyze the context and purpose of the provisions relating to the fiscal period end of a business or property of individuals, we find that the general rule, where individuals are carrying on business as a partner in a partnership or as an individual, is to not allow a deferral of income due to a fiscal period end different than December 31. Subsection 249.1(4) permits an exclusion from that general rule given the specific rules in section 34.1 respecting individuals. In our view, that exclusion must be interpreted restrictively. Furthermore, we understand that subsection 249.1(2) has been added to allow a person - who leaves a partnership during a fiscal period in a situation where the partnership no longer allows the person, by reason of that departure, to receive a share of the income or loss of the partnership for what would have been the fiscal period of the partnership had it ended at the end of calendar year in which it began - to not be considered as partner.
Taking into account that context and the purpose of the year-end provisions, we are of the view that that first interpretation better reflects the intent of the Department of Finance. Thus, the share of income or loss in the partnership as at December 31, 20X0 would be that provided for in the partnership agreement, i.e., 1% of the income exceeding such allocated amount, regardless of the amount of income which would have actually been allocated to the general partner.
That being said, we are of the view that the second way of interpreting the term "share of any income … of a partnership", stated above, could be the appropriate one where that term is used in other provisions of the Act, because of the different context and purpose of those other provisions.
Consequently, in the situation described above, the general partner that is a corporation would be considered to be a partner of the limited partnership and subsection 249.1(4) could not apply. The partnership's fiscal period would therefore end on December 31, 20X0.
These comments should in no way be interpreted as an acknowledgement by the CRA that we have considered the other tax consequences that may result from the proposed transactions set forth herein.
These comments do not constitute advance income tax rulings and are not binding on the Canada Revenue Agency with respect to a particular situation.
Best regards,
Stéphane Prud'Homme, Notary, M. Fisc.
Manager
Reorganizations Section III
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy
and Regulatory Affairs Branch