Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1. Confirmation of the TSO's calculation of the new fiscal year-end reserve available to two professional corporations which are members of a partnership.
Position:
1. The TSO's formulas to calculate the reserves were correct.
Reasons:
1. Consistent with sections 249, 249.1, and 34.2 of the Act and Finance's December, 1995 Explanatory Notes.
April 21, 1997
Edmonton Tax Services Office Headquarters
Client Assistance - Business Enquiries Partnerships Section
Allan Nelson
Attention: Barrie Wickware (613) 957-9768
962298
Professional Corporations
Subsection 34.2 of the Act Reserve Calculations
This is in reply to your June 28, 1996, request for assistance in interpreting the application of the reserve calculations provided in subsection 34.2(4) of the Act, for two professional corporations which are members of a partnership. We apologize for the delay in responding.
The facts provided to us and assumptions taken are as follows:
Partnership
- the only partners are Professional Corp.#1 and Professional Corp.#2.
- for its year ended January 31, 1995 (365 days) it had net income of $280,000 of which $140,000 was allocated to each partner.
- by virtue of the new rules in section 249.1 of the Act, the partnership had a new year-end on December 31, 1995. For this period (334 days), it had net income of $260,000 of which $130,000 was allocated to each partner.
Professional Corp.#1
- its only source of income was from the partnership. It had no expenses outside of the partnership.
- for its year ended September 30, 1995 (365 days) its net income was $140,000 which was allocated to it from the partnership.
- by virtue of the new rules in section 249.1 of the Act, Corp.#1 had a new year-end on December 31, 1995. For this period (92 days), it had net income of $130,000 which was allocated to it from the partnership.
Professional Corp.#2
- its only source of income was from the partnership. It had no expenses outside of the partnership.
- for its year ended January 30, 1994 (365 days) its net income was some amount (for the present purposes, it is not necessary to know the actual amount) which was allocated to it from the partnership.
- by virtue of the new rules in section 249.1 of the Act, Corp.#2 had a new year-end on December 31, 1995. For this period (335 days), it had net income of $270,000 (i.e. $140,000 + $130,000) which was allocated to it from the partnership.
Rulings' Opinion
Overview of the Legislation
Subsection 34.2(4) of the Act provides for a deduction in computing a taxpayer's income for the year from carrying on a particular business, as a reserve in respect of December 31, 1995 income (Subsection 34.2(1) defines December 31, 1995 income). The maximum amount of the reserve is limited to the least of three amounts as noted in paragraphs (a) to (c). In your examples, it is the amount in paragraph (a) which will be the lesser amount. Therefore, in accordance with paragraph (a), the maximum reserve available to the professional corporations is computed as 95% (the specified percentage for the particular year, pursuant to subsection 34.2(1)(a)(i)) of the taxpayer's December 31, 1995 income in respect of the business.
December 31, 1995 income in respect of a business carried on by a taxpayer (as defined in subsection 34.2(1)), means the amount determined by the formula
(A - B - C + D) * E
where
'A' is the total of all amounts each of which is the taxpayer's income from the business for a qualifying fiscal period (qualifying fiscal period is defined in subsection 34.2(1)),
'B' has to do with losses from the business (nil in this case),
'C' has to do with capital gains (nil in this case),
'D' deals with certain salary and wages deductible by a professional corporation (nil in this case), and
'E' is, pursuant to paragraph (a) thereof (which is the applicable paragraph in your examples), the amount determined by the formula
F - G
F
where
'F' is the number of days in all qualifying fiscal periods of the business, and
'G' is the number of days in the year
The facts in your examples are such that paragraph (c) of the definition of qualifying fiscal period in subsection 34.2(1) applies. Consequently, a qualifying fiscal period of a business of a taxpayer (i.e. Corp.#1 or Corp.#2) means a fiscal period of the business (i.e. the partnership) that ends in the taxation year that ends at the end of 1995 because of the application of paragraph 249.1(1)(b).
Professional Corp.#1
Qualifying Fiscal Period
Pursuant to paragraph 249.1(1)(b), the partnership and Corp.#1 each have new year-ends on December 31, 1995 (i.e. The partnership's taxation year is the 334 day period from February 1, 1995 to December 31, 1995, and Corp.#1's taxation year is the 92 day period from October 1, 1995 to December 31, 1995).
In determining any qualifying fiscal periods for Corp.#1, it is noted that the partnership only had one fiscal period that ended in Corp.#1's short taxation year that ended at the end of 1995 because of the application of paragraph 249.1(1)(b). The partnership's new fiscal period from February 1, 1995 to December 31, 1995, is the only fiscal period of the partnership's business that ended in Corp.#1's taxation year from October 1, 1995 to December 31, 1995.
Consequently, Corp.#1's only qualifying fiscal period ("qfp") in respect of the business carried on by it as a member of a partnership, is the fiscal period from February 1, 1995 to December 31, 1995.
December 31, 1995 income
In determining Corp.#1's December 31, 1995 income, as defined in subsection 34.2(1) of the Act, we have assumed that the values for 'B', 'C' and 'D' in the formula are all zero. The values for the other variables are
'A' = $130,000 (Corp.#1's share of partnership's income for the qualifying fiscal period, February 1, 1995 to December 31, 1995 (334 days), as discussed above)
'E' = F - G = 334 days in qfp - 92 days in Corp.#1's stub year = .7245508
F 334 days
December 31, 1995 income = 'A' * 'E' = $130,000 * .7245508 = $94,191.60
Maximum available reserve
As discussed above, paragraph 34.2(4)(a) provides that the maximum reserve available to Corp.#1 is computed as 95% (the specified percentage for the particular year, pursuant to subsection 34.2(1)(a)(i)) of Corp.#1's December 31, 1995 income in respect of the business. Therefore, the maximum available reserve to Corp.#1 = $94,191.60 * 95% = $89,482.02
Professional Corp.#2
Qualifying Fiscal Period
Pursuant to paragraph 249.1(1)(b), the partnership and Corp.#2 will each have new year-ends on December 31, 1995 (i.e. The partnership's taxation year is the period from February 1, 1995 to December 31, 1995, and Corp.#2's taxation year is the period from January 31, 1995 to December 31, 1995).
In determining any qualifying fiscal periods for Corp.#2, it is noted that the partnership had two fiscal periods that ended in Corp.#2's short taxation year that ended at the end of 1995 because of the application of paragraph 249.1(1)(b). The partnership's 365 day fiscal period from February 1, 1994 to January 31, 1995 and the partnership's new 334 day fiscal period from February 1, 1995 to December 31, 1995, are both fiscal periods of the partnership's business that ended in Corp.#2's 335 day taxation year from January 31, 1995 to December 31, 1995.
Consequently, Corp.#2 will have two qualifying fiscal periods ("qfp") in respect of the business carried on by it as a member of a partnership, which will be the fiscal period from February 1, 1994 to January 31, 1995 and the fiscal period from February 1, 1995 to December 31, 1995.
December 31, 1995 income
In determining Corp.#2's December 31, 1995 income, as defined in subsection 34.2(1) of the Act, we have assumed that the values for 'B', 'C' and 'D' in the formula are all zero. The values for the other variables are
'A' = $270,000 (Corp.#2's share of partnership's income for the two qualifying fiscal periods -- $140,000 for February 1, 1994 to January 31, 1995 + $130,000 for February 1, 1995 to December 31, 1995, as discussed above)
'E' = F - G = (365 + 334 days in all qfp's) - 335 days in Corp.#2's stub year
F 365 + 334 days
= .5207439
December 31, 1995 income = 'A' * 'E' = $270,000 * .5207439 = $140,600.85
Maximum available reserve
As discussed above, paragraph 34.2(4)(a) provides that the maximum reserve available to Corp.#2 is computed as 95% (the specified percentage for the particular year, pursuant to subsection 34.2(1)(a)(i)) of Corp.#2's December 31, 1995 income in respect of the business. Therefore, the maximum available reserve to Corp.#2 = $140,600.85 * 95% = $133,570.80.
We hope the above comments are of assistance to you.
If you have any further queries on this matter, please contact the writer.
Chief
Partnerships Section
Resources, Partnerships and
Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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