Principal Issues: If a partnership has both capital gains otherwise eligible for CGE for members of the partnership and capital losses in a taxation year, does it allocate separately the gain on the one it had and the loss on the other hand to its partners or does it allocate the gain/loss?
Position: Partnership allocates the gain and the loss separately.
Reasons: Net capital gains/losses eligible for CGE are determined at partner level.
APFF Federal Tax Roundtable 7 October 2013
APFF Conference 2013
Question 21
Computation of capital gains of a partner of a partnership
The taxable income earned by a partnership is first computed as if it were a separate person, and then allocated among the partners of that partnership (footnote 1). Under paragraphs 96(1)(c) to 96(1)(e.1), the income of the partnership retains its nature once in the hands of the partners, whether as a dividend, business income, taxable capital gain, etc.
For a given taxation year, a partnership may generate a number of separate capital gains and losses on the sale of different properties, some of which qualify for the capital gains deduction ("CGD"), while others may come from the disposition of capital properties not eligible for the CGD. When it comes time to allocate taxable capital gains and allowable capital losses to the partners of the partnership, subsection 96(1) does not indicate whether the amount to be allocated to the partners must be based on each of the taxable capital gains and allowable capital losses taken individually (option 1) or on the basis of net amount thereof (option 2). Thus, choosing one or the other of these options may lead partners to use a different amount of their available CGD balance.
For example, consider a partnership that generated only $150,000 in eligible capital gains for a given year and $200,000 in capital losses. In addition, this partnership has two equal partners. One of these partners, Mr. A, personally realized $200,000 in capital gains that were not eligible for the CGD.
If the partnership's income is allocated under option 1, the partner, Mr. A, would have to include in his income a capital gain of $150,000 against which he could rely on his available CGD balance and a capital loss of $200,000. In addition, taking into account the capital gain of $200,000 personally realized by the partner, the net result would be a capital gain of $150,000 eligible for the CGD.
If the partnership's income is instead allocated under option 2, the partner would have to include in his income a net capital loss of $50,000 ($150,000 - $200,000) from the partnership. Thus, the partner would be taxed on a capital gain amount of $150,000 ($200,000 - $50,000) and he would not be able to claim his CGD balance.
Question to the CRA
Could the CRA indicate its position on how to allocate different types of taxable capital gains generated by a partnership to its partners?
CRA response
Section 3 provides the computations to be made by a taxpayer in determining the taxpayer’s income for a particular taxation year. Under paragraph (b) of this section, the taxpayer must determine the excess of the taxpayer’s taxable capital gains on the disposition of property over the taxpayer’s allowable capital losses.
By virtue of paragraph 96(1)(c), where a taxpayer is a member of a partnership, the taxpayer’s income, inter alia, is computed as if each partnership activity (including the ownership of property) were carried on by the partnership as a separate person and as if, inter alia, the amount of each taxable capital gain and allowable capital loss of the partnership were from the disposition of property
For the purposes of section 3, the amount of a partnership's income from each source is the taxpayer's income from that source by virtue of paragraph 96(1)(f).
Thus, the amount of the taxable capital gain or allowable capital loss resulting from the disposition of each property by the partnership would, in its turn, constitute the taxable capital gain or allowable capital loss of the member for the purposes of paragraph 3(b), and would be taken into account in computing the deductible amount in computing taxable income by virtue of section 110.6.
Hugo Gravel
957-8981
2013-049589
FOOTNOTES
Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:
1 Paragraph 96(1)(f)