Partnerships – Limiting deferral of corporation tax
Under section 34.2, a corporation may have to accrue additional income in respect of a partnership (other than dividends for which a deduction is available under section 112 or 113), when the fiscal period of the partnership begins in the corporation's tax year and ends in a following tax year.
The corporation is then required to accrue income under the adjusted stub period accrual (ASPA) regime for the portion of the partnership’s fiscal period that falls in the corporation’s tax year (the stub period). These rules do not affect a corporation’s capital dividend account which is to be determined without reference to section 34.2.
Since the ASPA income inclusion in a tax year is an estimate of the stub period income, the corporation is entitled to claim that same amount in the immediately following tax year.
Both the ASPA income inclusion and the treatment of that same amount in the following year are subject to the characterization rules under subsection 34.2(5). They are deemed to have the same character and be in the same proportions as the partnership income that they relate to. As such, the claim in the immediately following tax year may be a deduction or a deemed allowable capital loss, whichever applies. A corporation may have ASPA in respect of more than one partnership and, in such cases, the ASPA rules apply to the corporation on a partnership-by-partnership basis.
In general, a corporation (other than a professional corporation) has to include in its income for a tax year its ASPA in respect of a partnership if all the following apply:
- the corporation has a significant interest in the partnership at the end of the last fiscal period of the partnership that ends in the tax year
- another fiscal period of the partnership begins in the tax year and ends after the tax year of the corporation
- at the end of the tax year, the corporation is entitled to a share of an income, loss, taxable capital gain, or allowable capital loss of the partnership for the fiscal period referred to in the preceding bullet
A corporation has a significant interest in a partnership if the corporation, or the corporation together with affiliated or related parties, is entitled to more than 10% of the partnership’s income or loss (or assets, net of liabilities, if the partnership were to cease to exist).
These rules apply to any corporation (described above) that is a member of a partnership, even if the partnership has a member that is an individual or a professional corporation that is subject to the 1995 rules limiting deferral for unincorporated businesses.
The definition of adjusted stub period accrual in subsection 34.2(1) gives the formulas for calculating a corporation’s ASPA in respect of a partnership. The ASPA formula allows the corporation to designate two reductions:
- the first designation concerns qualified resource expenses incurred by the partnership during the corporation’s stub period
- the second allows a corporate partner to make a discretionary designation to reduce its ASPA to reflect its knowledge of the actual partnership income for the stub period
Once filed, the designations cannot be amended or revoked. If the amount of the discretionary designation is too high, creating an income shortfall, the corporation may be subject to an additional income inclusion. The additional income inclusion may increase if the shortfall is above a 25% threshold.
Under certain conditions, a corporation (other than a professional corporation) that becomes a member of a partnership in a tax year may make a designation to apportion its income from the partnership between two tax years – the tax year in which the fiscal period of the partnership began and the tax year in which the fiscal period of the partnership ends.
Reporting requirements for corporations
To calculate the income inclusion under section 34.2 and, if applicable, the income shortfall adjustment and additional amount under section 34.3, use Schedule 71, Income Inclusion for Corporations that are Members of Single-Tier Partnerships, or Schedule 72, Income Inclusion for Corporations that are Members of Multi-Tier Partnerships. These are worksheets and you do not have to file them with your return.
To report the amounts, file a completed Schedule 73, Income Inclusion Summary for Corporations that are Members of Partnerships, with your return.
Joint ventures – Elimination of fiscal period
Joint ventures no longer have a fiscal period. Therefore, participant taxpayers who entered into joint venture arrangements cannot compute income as if the joint venture had a separate fiscal period.
Forms and publications
Report a problem or mistake on this page
- Date modified: