Potpourri of Partnership Issues
Tax Executives Institute Luncheon
Craig Maurice
October 10, 2012
© 2012 Torys LLP. All rights reserved.
Outline
• What is a partnership?
• Transactions between partners and the partnership
• Sale of Partnership Interests – capital account vs.
income account
• Allocation issues – post-Penn West in the oil patch
• Budget 2012 – closing perceived loopholes
• Partnership Deferral Rules – closing more perceived
loopholes
1
What Is a Partnership?
• Contractual relationship
> statutory clarity under Partnership Act, but
fundamentally a common law relationship
• Carrying on business in common with view to a profit
• Distinct from:
• Joint venture
• Agency
• Ownership of partnership property??
• The “notional construct” of s.96(1)(c)
2
Transactions Between Partners &
Partnerships
• Common law perspective
> Can’t contract with oneself
• CRA views (ITTN No. 30)
> salary & remuneration
> other deductible amounts
> loans? leases?
• Jurisprudence – ABILs, thin-cap, income character
• Workarounds
3
Partnership Interest – Capital or Income?
• A partnership interest is generally a bundle of rights,
similar to a corporate security
• Therefore analysis is similar to that of holding shares
in a corporate entity
• Intent at time of acquisition
• Adventure or concern in the nature of trade
• No equivalent to s.54.2 for partnerships
• Clarifying rule, not code
4
Partnership Interest –
Capital or Income? …cont’d
• Continental Bank decision:
>
Facts: Taxpayers contribute leasing assets to a new partnership on December 24, 1986.
Partnership interest sold to third party on December 29, 1986.
>
FCA: “The leading cases in the area … suggest that a variety of criteria must be looked at to
make the determination. These include the intention of the parties, whether the conduct in
question was similar to that of an ordinary trader, the nature and quantity of the property in
question, whether the transaction was isolated in nature, and the uniqueness of the
transaction when compared to the taxpayer's ordinary activities.”
>
FCA: “At all times, Continental's intention as regards the composite transaction was to
realize a capital asset. The sale giving rise to the gain was therefore not a speculative
endeavor to make profit. The gain was on capital account.”
5
Allocation Issues
• Contractual flexibility with few exceptions
• Resource expenses/proceeds must be allocated at
year-end
• Issues with withdrawing partners or dissolutions
– Timing issues on ACB recognition
• Reasonableness of allocation
• Where primarily tax motivated (s.103(1))
• Where non-arm’s length partners and allocation does
not correspond with capital or activity (s.103(1.1))
• Impact of Penn West, Xco decisions
6
Budget 2012 – Partnerships Bad!
• Two major impacts on the use of partnerships
> Bump limitation
• Proposals would limit bump with respect to partnership
interests to extent partnership holds “income assets”
• What is perceived abuse?
• No step up in depreciable/deductible amounts
• Capital loss crystallization? Is that bad???
7
Budget 2012 – Partnerships Bad!
…cont’d
> Dispositions to non-residents
• Perceived abuse – partnership with fully depreciated
assets; partner sells partnership interest to nonresident; realizes capital gain
• So what??
– If assets attributable to PE in Canada – no step-up
– If assets attributable to PE outside Canada – where is
the leakage?
• Comparison to existing s.100 concerns
8
Partnership Deferral Rules
• Brought in as part of 2011 Federal Budget
• Intended to eliminate the use of deferral partnerships
• Somewhat analogous to professional partnership
rules, but complicated due to the fact that corporations
do not have calendar fiscal periods as a base case
• Stub-accrual concept for each partner
• Alignment election
• Qualifying Transition Income (“QTI”)
> Five years, as compared to 10 years under 1995
rules
9
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