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.
Principal Issues: Is the full allocation of income earned from a husband / wife farming partnership to one spouse acceptable during a period in which the other spouse takes maternity leave from the business operations of the partnership and contributes no labour?
Position: Any allocation should be governed by the partnership agreement. However, a full allocation to the spouse providing all the labour to generate the income earned by the partnership would not normally be considered unreasonable.
Reasons: The law. Previous positions.
XXXXXXXXXX
2010-036958
James Atkinson CGA
(519) 457-4832
June 23, 2010
Dear XXXXXXXXXX :
Re: Allocation of Partnership Income from Farming
This is in response to your email dated June 3, 2010, concerning the allocation of partnership income from a farming business.
In your correspondence, you advise that you and your husband are joint partners in a farming business and have, in prior years, each reported 50% of the farming income earned by the business as you both contribute equally to the labour involved in the day to day operations of the business. You indicate that you will be taking a "maternity leave", during which time you will not be involved in the day to day operations of the business.
You question whether, during the period of your maternity leave, it would be permissible to allocate all income from the farming business to your husband.
Our Comments:
The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.
A partnership is the relationship that exists between two or more persons who join to carry on a trade or business to make a profit.
Paragraph 12(1)(l) of the Income Tax Act ("Act") provides that a taxpayer that is a member of a partnership must include in income its share of the partnership income, calculated under subdivision j (i.e., sections 96 through 103 of the Act) for the year. A partner's share of the partnership income for the year is normally allocated to the members of the partnership with reference to the partnership agreement governing the relationship. Such an agreement may be written or verbal.
Partnership agreements can provide special allocations of income for any number of reasons. For instance, the capital contribution of a partner may significantly differ, one partner may work in the business full-time and others only part-time, or one partner may have unique skills or generate more income.
In the situation described, you indicate that one partner will be taking a leave, during which time, the other partner will be the sole person working the business. In such circumstances, we would not normally consider an allocation of the partnership income to the partner actually providing the labour which gives rise to the partnership income earned, attributable to that period, to be unreasonable.
However, where two or more partners not dealing with each other at arm's length have agreed to share any income or loss from any activity of the partnership in unreasonable proportions, the CRA reserves the right to adjust each partner's share to an amount which is considered reasonable in the circumstances pursuant to subsection 103(1.1) of the Act. The basis for the sharing of income from partnerships by partners who do not deal at arm's length is ultimately a question of fact that can only be ascertained from an examination of all the facts of a particular situation. Further information relevant to this matter may be found in Interpretation Bulletin IT-231R2, Partnerships - Partners not Dealing at Arm's Length, which is available on the CRA website at www.cra-arc.gc.ca.
We trust that these comments will be of assistance.
Yours truly,
G. Moore
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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