Translation disclaimer
This translation was prepared by Tax Interpretations Inc. The CRA did not issue this document in the language in which it now appears, and is not responsible for any errors in its translation that might impact a reader’s understanding of it or the position(s) taken therein. See also the general Disclaimer below.
Principal Issues: [TaxInterpretations translation] What are the tax consequences of allocating an amount of $XXXXXXXXXX to a partner - identified as "salary" - despite a net loss of the SENC?
Position: This amount of $XXXXXXXXX is a withdrawal of capital.
Reasons: The CRA's position is that a partnership cannot pay a salary to a member of the partnership and that such an expense is not deductible in computing the partnership's income. Consequently, the amount paid is considered to be a withdrawal of capital by the partner, which has the effect of reducing the adjusted cost base of the partner's interest.
September 7, 2010
Estrie-Mauricie Tax Services Office Headquarters
Business and Partnerships Division
Attention: Marc Fontaine A. Dagenais
Advocate, M. Fisc. B.A.A.
2010-037219
Allocation of partnership losses
This is in response to your memorandum of June 18, 2010, in which you requested our opinion regarding the sharing of losses of a general partnership ("SENC").
Unless otherwise indicated, all legislative references herein are to the provisions of the Income Tax Act (the "Act").
Particular Situation
Based on our understanding, the facts of this case can be summarized as follows.
- Mr. X, Mrs. Y and Corporation A have formed an SENC and each holds an equal interest of 33.33%.
- According to the reconciliation to taxable income for the fiscal period ending on XXXXXXXXXX, the net tax loss of the SENC amounts to $XXXXXXXXXX.
- The SENC paid an amount of $XXXXXXXXXX to Mr. X. The amount paid was not deducted as an expense by the partnership in computing the net loss of $XXXXXXXXXX.
- The SENC wishes to allocate the loss, before deducting "salary", as follows:
Partners % Salary Profit Total
X 33.33% XXXXX (XXXXX) (XXXXX)
Y 33.33% (XXXXX) (XXXXX)
Corp. A 33.33% (XXXXX) (XXXXX)
Total XXXXX (XXXXX) (XXXXX)
- A partnership agreement ("Agreement") was signed by Mr. X, Mrs. Y and Corporation A.
- Clause XXXXXXXXXX of the Agreement deals with the Compensation of Partners and reads as follows:
o XXXXXXXX
- Clause XXXXXXXXXX of the Agreement deals with the sharing of profits or net income and contribution to losses and reads as follows:
o XXXXXXXX
Questions
You wish our comments regarding a payment of $XXXXXXXXX made to Mr. X despite a net loss of the SENC. In addition, you wish our comments on the sharing of the SENC loss among the three partners.
For the purposes hereof, we have assumed that the clauses of the partnership agreement described above are legally valid under the Civil Code of Quebec.
Generally, the sharing of a partnership's income or loss by its members depends on the partner's contribution of capital or other services. In addition, a partnership agreement may provide for different formulas to take into account the contributions -- in labour or money, for example -- of certain partners. However, this allocation of income or loss is still subject to the provisions of the Act, such as sections 96 and 103.
Furthermore, the Supreme Court was unanimous in its analysis of the provisions of the Act in Caisse populaire Desjardins de Val-Brillant v. Blouin. [2003] 1 S.C.R. 666, at paragraph 42 of the decision, stated the following:
It is settled law that the legislature may assign tax consequences to a juridical act that are different from the consequences that follow under the rules of the civil law. The specific rules of the private law of each province are not binding on Parliament, and, subject to the requirements of public order and its constitutional constraints, it may attribute the tax consequences of its choice to a juridical act.
Under our policy set out in Income Tax Technical News No. 30 dated May 21, 2004, the Canada Revenue Agency ("CRA") clarified that any remuneration paid to a partner for work performed in the course of partnership business may properly be considered a distribution of income or a withdrawal of capital and is not deductible in computing a partnership's income.
In the circumstances of this case, we are of the view that if an amount of $XXXXXXXXX was actually paid to Mr. X despite the net loss of the SENC, we are of the view that this amount of $XXXXXXXXXX constitutes a withdrawal of capital. This would result in a proportionate decrease in the adjusted cost base of the partner’s interest in the partnership pursuant to subparagraph 53(2)(c)(v).
Furthermore, for tax purposes, this amount of $XXXXXXXXX is not deductible in computing the SENC's income.
Consequently, each partner should be allocated 33.33% of the loss of $XXXXXXXXXX. This would result in a proportionate decrease in the adjusted cost base of their interest in the partnership under subparagraph 53(2)(c)(i).
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should the taxpayer request a copy of this memorandum, they may request a severed copy using the Privacy Act criteria, which does not remove taxpayer identity. Requests for this latter version should be made by you to Ms. Celine Charbonneau at (819) 994-2898. In such cases, a copy will be sent to you for delivery to the taxpayer.
We hope that these comments are of assistance. Should you require additional information regarding the content of this document, please do not hesitate to contact us.
François Bordeleau, Advocate
Manager
Business and Partnerships Division
Income Tax Rulings Directorate.
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