Canadian Tax Adviser
February 14, 2012

Corporate Partnership Tax Deferral Rules — Joint Venture Deadline Extended

Lorne Shillinger
Toronto, Canadian Corporate Tax

Tonia Jones
Kingston, Canadian Corporate Tax

The CRA has officially announced the extension of the deadline for joint venture participants to make the election to file for transitional relief, under the new corporate partnership tax deferral rules and the CRA's new joint venture administrative policy, to September 22, 2012. Previously, the filing deadline for joint venture participants was presumed to be the same as for partnerships (i.e., the later of January 31, 2012 or six months after their first post-March 22, 2011 year-end). The announcement was made in a technical interpretation letter illustrating the corporate partnership deferral rules in a hypothetical scenario where corporations in a joint venture have different fiscal periods.

Background
Previously, the CRA noted that its administrative position on the tax treatment of joint ventures will no longer be consistent with tax policy. On November 29, 2011, the CRA announced that joint ventures will no longer be entitled to have a separate fiscal period. Taxpayers who enter into joint venture arrangements will no longer be eligible to compute income as if the joint venture had a separate fiscal period. For tax years ending after March 22, 2011, income from a joint venture must be calculated for each joint venture participant based on the fiscal period of the particular joint venture participant.

The CRA commented that joint venture participants who relied on its previous administrative position will administratively be allowed transitional relief. This relief is consistent with the transitional relief for "qualifying transitional income" available to members of a partnership in section 34.2. The CRA will allow a 100% reserve for 2011, with the transitional income subject to tax over the 2012 to 2016 taxation years of the joint venture participant. Finance extended the transitional relief filing deadline for partnerships to January 31, 2012.

In January, the CRA verbally informed KPMG that it would allow a joint venture participant to make an election for transitional relief if it is filed no later than September 22, 2012.

Facts
Two corporations are participants in a joint venture. The corporations had established a fiscal period end of December 31 for the joint venture and computed their income based on the fiscal period of the joint venture under the CRA' s previous administrative policy. The first corporate participant (Corporation A), has a taxation year-end of November 30 and the second corporation (Corporation B) has a taxation year-end of January 31.

CRA comments — Deferred income
The CRA notes that the first taxation year-end of Corporation A that is after March 22, 2011 is November 30, 2011. Corporation A would be required to include in its income for that taxation year, the income earned through the joint venture for the twelve-month period of January 1,2010 to December 31, 2010. In addition, due to the change in CRA's administrative policy, Corporation A would also be required to include the additional income from the joint venture for the eleven-month period of January 1, 2011 to November 30, 2011.

Corporation B's first taxation year-end after March 22, 2011 is January 31, 2012. Corporation B would be required to include in its income for that taxation year, the income from the joint venture for the twelve-month period of January 1, 2011 to December 31, 2011, as well as for the one-month period of January 1, 2012 to January 31, 2012.

CRA comments — Transitional relief available
The CRA notes that, in the example provided, the incremental income that may qualify for transitional relief for Corporation A would be the income from the joint venture for the eleven month period from January 1, 2011 to November 30, 2011. Similarly, the incremental income that may qualify for transitional relief to Corporation B would be its income from the joint venture for the one-month period of January 1, 2012 to January 31, 2012.

To receive joint venture transitional relief for the first taxation year ending after March 22, 2011, a joint venture participant must file an election in writing on or before September 22, 2012.

CRA comments — Transitional relief and reserve mechanisms
The CRA stated that, unless the reserve is otherwise limited or restricted, Corporation A would be allowed to deduct 100% of the incremental income for its taxation year-end for November 30, 2011. For the taxation year-end of November 30, 2012, Corporation A would also be required to include the prior year reserve in its income and would be allowed a deduction of 85% of the incremental income. This mechanism could continue to apply until its taxation year-end of November 30, 2016, at which time the full amount of the incremental income will have been included in the income of Corporation A.

The CRA said that the same mechanism will also apply for Corporation B, except that its first taxation year ending after March 22, 2011 is its taxation year-end of January 31, 2012.

For more information, contact your KPMG adviser.

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