2017-0728331I7 Central paymaster - partnership

Principal Issues: Whether a partnership, that is an employer, is a “person” for the purposes of the central paymaster rules provided by subsection 402.1(1) of the Income Tax Regulations (the “Regulations”).

Position: Yes.

Reasons: Subsection 402.1(5) of the Income Tax Regulations provides that a partnership is deemed to be a corporation for the purposes of the central paymaster rules provided by section 402.1. For the purposes of the Income Tax Act, subsection 248(1) provides that the meaning of “person” includes a corporation. Pursuant to section 16 of the Interpretation Act, this definition also applies to the Regulations. Therefore, where the employer is a partnership, the rules in Regulation 402.1 apply such that the salary or wages earned by an employee for the performing of a service in a particular province for the benefit of a corporation that is not the partnership employer are deemed to be salary or wages paid by the corporation to an employee of its permanent establishments in the province if the corporation and the partnership employer do not deal at arm’s length and the corporation has a permanent establishment in the province.

Author: Godson, Gillian
Section: Regulation 402.1

                                                                                                      February 2, 2018

International and Large Business Directorate                               HEADQUARTERS
Large Business Audit Division                                                       Income Tax Rulings
Provincial Income Allocation Section                                             Directorate
                                                                                                       G. Godson
Attention: Dan O’Neil

                                                                                                      2017-072833

Central paymaster rules – partnership

We are writing in reply to your enquiry of October 20, 2017, wherein you asked whether a partnership, that is an employer, is a “person” for the purposes of subsection 402.1(1) of the Income Tax Regulations (the “Regulations”).

In particular, your question concerns the interpretation of subsection 402.1(5) of the Regulations, which deems a partnership to be a corporation for the purposes of that section. In the hypothetical situation outlined in the question, a partnership is the legal employer, with Corp 1 having a 30% partnership interest, and Corp 2 having a 70% partnership interest. The corporation for which the services are performed (the “benefiting corporation”) is not a member of the partnership.

Our comments

The purpose of the central paymaster rules in section 402.1 of the Regulations is to allocate the salaries and wages paid by the employer for services provided to a non-arm’s-length benefiting corporation.

Subsection 402.1(1) of the Regulations applies in a situation where an individual (the “employee”) is employed by a person (the “employer”) and performs a service in a particular province for the benefit of the benefiting corporation.

Subsection 402.1(5) deems a partnership to be a corporation for the purposes of the central paymaster rules. For the purposes of the Income Tax Act, subsection 248(1) defines “person” to include a corporation. Pursuant to section 16 of the Interpretation Act, this definition also applies to the Regulations. Therefore, where the employer is a partnership, the partnership is a person for the purposes of subsection 402.1(1). As a result, the rules in section 402.1 will apply such that the salary or wages earned by an employee of a partnership for the performance of services in a particular province for a benefiting corporation are deemed to be salary or wages paid by the benefiting corporation to an employee of its permanent establishments in the province if the benefiting corporation and the partnership do not deal at arm’s length and the benefiting corporation has a permanent establishment in the province.

In addition, under subsection 402.1(3) of the Regulations, the amount of salaries and wages paid in a taxation year by the partnership employer that is deemed to be paid by the benefiting corporation is deducted from the partnership employer’s salaries and wages paid in the taxation year. In that regard, in a situation such as the one in your inquiry, the amount of the salaries and wages deemed to be paid by the benefiting corporation would not be included in the amount of the salaries and wages paid by the partnership employer. As a result, for the purposes of subsection 402(6), the salaries and wages paid that are allocated to the members of the partnership (Corp 1 and Corp 2) would not include the salaries and wages paid that are deemed by subsection 402.1(3) to be paid by the benefiting corporation.

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, following a 90-day waiting period (unless advised otherwise), 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 version should be e-mailed to: ITRACCESSG@cra-arc.gc.ca.

We trust these comments will be of assistance.

Terry Young, CPA, CA
Manager, Administrative Law Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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