The new rules will eliminate the deferral of tax by a corporation that has a significant interest in a partnership having a fiscal period different from the corporation's tax year. Bill C-13, which contains the new rules, was introduced in Parliament on October 3 and has received its second reading.
The new rules will generally apply to tax years of a corporation that end after March 22 2011, when they first unveiled by the government.
“The CRA perceived corporations were using partnerships through which they conducted profitable business in a way that meant they could defer corporation tax,” Jeffrey Trossman, a partner of Blake, Cassels & Graydon.
Before the new proposals, the rules stated that income earned by a corporation as a member of a partnership is included in the corporation’s income for the corporate taxation year in which the fiscal period of the partnership ends. If a corporation carries on a business through a partnership that has a fiscal period that ends after the end of the corporation’s taxation year, taxation of the partnership earnings can be deferred up to a year.
"The new rules limit the deferral by requiring an accrual of the deferred income," said Steve Hurowitz, a partner of KPMG in Toronto. "Transitional relief is generally provided to mitigate the cash flow impact of incremental corporate tax payable on the transition to the new rules."
This additional income will be included in a corporation’s income for a transition period of five years. However, some taxpayers are unhappy that this period is not longer. A letter from Tax Executives International, an international association of business tax professionals, in June urged Jim Flaherty, the Minister for Finance, to provide a 10-year transition period for stub period accrual.
“Moving to a 10-year transition period would ease the tax burden of clawing back the deferred income and afford companies greater flexibility in managing their cash flow,” the letter said.
"The new rules are extremely complex," said Hurowitz. "It appears that Finance’s objective in releasing such complex draft legislation is to ensure fairness amongst taxpayers. That is, it appears added complexity has been introduced with the purpose of preventing certain taxpayers from using complex structures, in particular multi-tier partnership structures, to continue to defer the taxation of income earned through a partnership. However, a number of gaps and anomalies exist in the new rules and it is likely that not all taxpayers will feel that they have been treated fairly by the new rules."
As no prescribed forms are available yet, the CRA advised taxpayers to report a partnership's income in compliance with the proposed rules and the alignment election used to change the partnership's year-end.
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