2014-0547311C6 Q.5 - Streaming partnership income

Principal Issues: Whether the CRA provides favourable rulings for the streaming of certain types of income to particular partners?

Position: Whether the CRA provides favourable rulings for the streaming of certain types of income to particular partners?

Reasons: 96(1), 103 and 245(2).

Author: Ferrari, Rob
Section: 96(1), 103(1), 103(1.1), 245(2), Part XIII

2014 CTF Annual Tax Conference Canadian Tax Foundation
November 30 – December 2, 2014
CRA Round Table

Q.5 Streaming Partnership Income

Question

Does the CRA accept the streaming of certain types of income (e.g., interest income) to a particular partner of a partnership where the partnership agreement provides for such allocation?

Response

Generally, the CRA has not accepted the streaming of certain types of income, such as interest income, to a particular partner of a partnership even if the partnership agreement provides for the allocation.

We have received ruling requests where certain types of income are streamed to a particular partner and we have been asked to provide a favourable subsection 103(1) ruling, which we have declined.  It is our view that the streaming of certain types of income to a particular partner is not acceptable by virtue of subsection 103(1).

Example

Assume a partnership is made up of two corporate members.  One partner (Partner A) expects to incur losses in excess of its income from the partnership.  The second partner (Partner B) expects to earn income from partnership as well as from sources other than the partnership.  Partner A and B agree to amend the partnership agreement so that the interest income of the partnership will be allocated to Partner A and the dividend income will be allocated to the Partner B.  The dividend income is deductible under subsection 112(1).

The additional interest income that is allocated to Partner A will not result in taxable income since it can be offset by Partner A’s losses from other sources.  That interest income, if allocated to Partner B, would have generated additional taxable income to Partner B.  As a result of the amendment to the partnership agreement, Partner B’s tax payable is reduced.

The CRA would seek to apply subsection 103(1) (and may also apply the general anti-avoidance rules in subsection 245(2)) to the allocation of income under the amended partnership agreement.

Rob Ferrari
2014-054731

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