Principal Issues: [TaxInterpretations translation] In order to determine the reasonable share of income or loss attributable to one of the partners of a partnership, does the assessment by the Canada Revenue Agency ("CRA") of the importance of the work performed by a partner depend on the number of employees working for that partnership?
Position: Question of fact. The time and expertise of a partner relative to those of other partners are the factors to be considered for the purposes of subsection 103(1.1).
Reasons: Position issued in our interpretation bulletin IT-231R2.
Federal Tax Roundtable, 5 October 2012
2012 APFF Conference
Question 7
Factor of work performed
ITA subsection 103(1.1) provides that where two or more members of a partnership who are not dealing with each other at arm’s length agree to share any income or loss of the partnership and the share of any such member of that income, loss or other amount is not reasonable in the circumstances having regard to the capital invested in or work performed for the partnership by the members thereof or such other factors as may be relevant, that share shall, notwithstanding any agreement, be deemed to be the amount that is reasonable in the circumstances.
Question to the CRA
In determining the reasonable share of income or loss accruing to one of the partners of a partnership, does the CRA consider that the importance of the work performed by a partner in the exercise the partnership's activity depends on the number of employees in the partnership (the number of employees having the effect of reducing the relative importance of the work performed by the partner)?
CRA Response
By virtue of subsection 103(1.1), where two or more partners not dealing with each other at arm’s length have agreed to share, in unreasonable proportions, any income or loss from an activity of the corporation, the CRA will adjust the share of each partner to an amount considered reasonable in the circumstances. In determining this amount, the CRA will consider the capital invested and the work performed by each partner and any other relevant factors.
According to paragraph 3 of Interpretation Bulletin IT-231R2 - Partnerships - Partners not Dealing at Arm's Length, in determining a commensurate value attributable to work performed by a partner in the activities of the partnership, both the time expended and the expertise provided are taken into consideration. Generally if the function performed by the partner does not require a specialized skill or training, it is expected that the partner's involvement will be on a regular basis and will require that a significant amount of time be spent in the enterprise. On the other hand, if a partner possesses special expertise relevant to the partnership's activities, such partner's involvement could be on an irregular basis with a lesser amount of time being spent.
Determining a reasonable allocation for the purposes of subsection 103(1.1) of income of a partnership among partners not dealing with each other at arm’s length is a question of fact that depends on all the circumstances of each case.
Although the CRA reserves the right to revise the share of income or loss of a partner in a partnership to be an amount that is reasonable under subsection 103(1.1), the number of employees of a partnership is not necessarily a relevant factor in the context of this determination. In particular, we believe that it is preferable to examine the contribution of each partner in the light of the contribution of the other partners in order to determine if the income or loss which is allocated to the partner is reasonable.
Lucie Allaire
613) 957-2046
2012-045400