Principal Issues: Does income that is attributed or allocated to another taxpayer, under certain specified provisions of the Act, need to be reimbursed to the taxpayer?
Position: No.
Reasons: These provisions neither require such a reimbursement nor do they provide rules that specify the treatment of such a reimbursement.
9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE
Question 13
Income Allocation Rules and Income Payment
The Income Tax Act provides for a number of circumstances in which the income of one taxpayer will be attributed to another taxpayer, including under the provisions 15(1), 51(2), 69(1), 74.1(1) and (2), 74.2, 74.3, 74.4(2), 75(2), 85 (1)(e.2), 86(2), 103 and 103(1.1).
Furthermore, none of these provisions requires payment or reimbursement by the taxpayer receiving the income, of the income attributed to the other taxpayer (to the extent that any price adjustment clause is not applicable.)
For example, suppose that a partnership (SENC) whose two partners are a personal trust and a corporation, allocates and distributes for the year 2012 (in accordance with the partnership agreement) 90% of its taxable income to the trust and 10% to the corporation. In 2014, the CRA reallocates essentially all of the income of the trust to the corporation under section 103. The corporation would be subject to corporate taxation on the income reallocated to it even though the trust received the payment of the income on the initial distribution.
In these circumstances, we are of the view that if the taxable income allocated and paid to the trust is attributed to the corporation by the CRA under section 103 of the Act, the corporation would be subject to tax on that income at its own rate (being 19% or 26.9% for business income earned in Québec) and the Trust, having received the full payment of that income, will not be subject to any obligation to reimburse that income to the corporation.
Question to CRA
Can the CRA confirm that income attributed to another taxpayer under provisions 15(1), 51(2), 69(1), 74.1(1) and (2), 74.2, 74(2), 75(2), 85(1)(e.2), 86 (2), 103 or 103(1.1), as the case may be, does not have to be reimbursed by the taxpayer, having received the payment of the income, to the other taxpayer, to the extent that the application of any price adjustment clause is not required?
CRA Response
The Income Tax Act is an accessory law which applies to the effects arising from the rights, obligations and contracts among the parties. Thus, the question as to whether a person legally has the obligation to reimburse another person is a question of civil or common law. However, the parties can decide to include a price adjustment clause in their contract (see Folio S4-F3-C1 Price Adjustment Clauses) or can undertake rectification (see Income Tax Technical News No. 22 for more details on this procedure), for the purpose of altering the transactions and such alterations can thereby have an effect on the tax treatment of such transactions.
However, in the absence of a valid price adjustment clause or a rectification process accepted by a court, the reimbursement, after the fact, of an advantage conferred on, deemed income of, or allocated income of, a taxpayer (such three terms, an “Advantage”) will not ensure that subsections 15(1), 51(2), 69(1), 74.1(1) and (2), subsections 74.4(2) and 75(2), paragraph 85(1)(e.2), subsection 86(2) and section 103 will not apply.
Contrary to other provisions of the Income Tax Act - such as paragraph 20(1)(j) and subsections 90(14), 227(6.1) and 247(13) – the above-mentioned provisions do not specifically provide for the tax consequences of a reimbursement of an Advantage. By themselves, these provisions do not obligate the taxpayer to reimburse the Advantage. Furthermore, although paragraph 20(1)(j) and subsections 90(14), 227(6.1) and 247(13) provide for the tax consequences of a reimbursement, these provisions in contrast do not require a reimbursement.
If a party nonetheless determines to reimburse, after the fact, another party for the Advantage which it conferred, the related tax consequences of such reimbursement must be considered, accordingly to their legal character. Furthermore, it is possible, in a situation similar to that presented by you involving a partnership, that the above-mentioned rules for the attribution of deemed income referred to above would apply, as well as the rules for the re-allocation of income of a partnership provided in section 103.
Yves Grondin
2015-059578