Principal Issues: Does section 103 apply in a situation where no income is allocated to a partner that disposes of their partnership interest before the partnership’s year end?
Position: General comments provided.
Reasons: It is a question of fact whether the sharing of income between partners is reasonable.
9 OCTOBER 2015 FEDERAL TAX ROUNDTABLE
2015 APFF CONFERENCE
Question 18
Departure of a partner and computation of his income
Each of Mr. X and Mr. Y subscribed for 50% of the units of a limited partnership ("SENC") on January 1, 2015 by means of a capital contribution.
On September 1, 2015, Mr. X transfered all his units of SENC to a corporation of which he was the sole shareholder ("Xco"). Mr. X and Xco did not deal at arm's length with each other for purposes of the Income Tax Act.
Consistently with subsection 96(1), on December 31, 2015, SENC allocated the income generated during the fiscal period to Mr. Y and Xco, as the partners of SENC on December 31, 2015, in proportion to the unis held by them. As a result, Xco was allocated 50% of SENC's income for the year 2015.
Question to CRA
In the situation described above, would the CRA apply subsections 96(1.01) and 103(1.1) to reallocate to Mr. X a portion of the income allocated to Xco by SENC on of December 31, 2015?
CRA Response
At the outset, it is important to recall that it is the terms of the partnership agreement which provide the conditions relating to the division among the partners of the income realized by the partnership for a given year, and not subsection 96(1). Note also that subsection 103(1) could apply in factual circumstances in which the partners dealt with each other at arm’s length.
When a taxpayer ceases to be a partner of a partnership in the course of a fiscal period of the partnership, the deeming rule in paragraph 96(1.01)(a) applies so as to deem the taxpayer – for purposes inter alia of subsection 96(1) and section 103 – to be a partner of the partnership at the end of its fiscal period. Therefore, the specific anti-avoidance rules of section 103 could apply to ensure that income was allocated to X for the year of X’s withdrawal from the partnership. However, the application of section 103 and compliance with the conditions specified therein remain a question of fact on which we cannot comment without first having examined all the facts respecting a particular situation.
Sylvain Grégoire
2015-059582