Dear Sirs:
This is in reply to your letter dated February 5, 1991, wherein you requested our opinion concerning the calculation of a corporation's capital pursuant to subsection 181.2(3) of the Income Tax Act (the "Act") when it has an interest in a partnership. You have asked, more specifically, whether undistributed earnings of such a partnership are to be included in the retained earnings of the corporation for the purpose of paragraph 181.2(3) of the Act.
You have indicated that our previous reply, dated June 5, 1991, was not received. Should you eventually receive this letter, please be advised that the views expressed therein no longer reflect the views of this Department. Our current views with respect to the inclusion of the earnings from a partnership in the retained earnings of a corporate partner are as outlined below.
As you pointed out, paragraph 181.2(3)(g) of the Act requires the corporation to include its proportionate share of all the reserves, loans and advances, and other indebtedness of a partnership in which it holds an interest but is silent with respect to the earnings of the same partnership. It is our view that a corporation would be required to include its share of the earnings of a partnership in the calculation of the capital of the corporate partner on the same basis that the corporation would report its share of the partnership earnings for the purposes of Part I of the Act. Accordingly, no adjustment would be required to the retained earnings of the corporate partner with respect to taxes on its share of the earnings of the partnership.
While we hope our comments are of assistance to you they do not constitute an advance income tax ruling and therefore are not binding on the Department in respect of a specific situation.
Yours truly,
for DirectorFinancial Industries DivisionRulings Directorate