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Corporate Partners Lose Deferral When Partnership's Business Changes - by Steve Hurowitz and Tony Tse 

Canadian Tax Adviser


October 02, 2012


Steve Hurowitz
Toronto, Mergers and Acquisitions Tax


Tony Tse
Toronto, Canadian Corporate Tax


In a recent technical interpretation, the CRA noted that, where a partnership's activity which gave rise to a qualifying transitional income (QTI) reserve for its partners is no longer the partnership's principal activity, it would deny the QTI reserve claimed by the corporate partners. The QTI is important because it allows the partners of a partnership to transition their stub period income into its taxable income over five years under the corporate partnership tax deferral rules introduced in the 2011 federal budget.

Hypothetical situation
A partnership (Partnership) has two corporate members (Corp A and Corp B), one or both of whom have a significant interest in Partnership. Partnership's sole activity is to develop and exploit oil and gas resources. The members of Partnership have QTI in respect of Partnership that qualifies for the reserve under subsection 34.2(11).


At issue is whether the QTI reserve would cease to be available to Corp A and Corp B in various scenarios which presumably result from situations where there are changes in Partnership’s principal business activities. (Editor's Note: the various scenarios are not provided in the TI.)


CRA comments
The CRA stated that, under subparagraph 34.2(13)(c)(i), a QTI reserve is not available if, in computing a corporate partner's income for a taxation year in respect of a partnership, the year ends immediately before another taxation year "at the beginning of which the partnership no longer principally carries on the activities to which the reserve relates".


The CRA notes that the determination of whether a partnership principally carries on the activities to which a QTI reserve relates is a question of fact that involves the consideration of various factors, and has to be considered on a case-by-case basis. For example, the CRA would deny the QTI reserve if a partnership were to dispose of more than 50% of its properties, and this disposition resulted in the partnership's principal activities no longer being the activities to which the QTI reserve related.


For more information, contact your KPMG adviser.





Information is current to October 2, 2012. The information contained in this publication is of a general nature and is not intended to address the circumstances of any particular individual or entity. Although we endeavour to provide accurate and timely information, there can be no guarantee that such information is accurate as of the date it is received or that it will continue to be accurate in the future. No one should act upon such information without appropriate professional advice after a thorough examination of the particular situation. For more information, contact KPMG’s National Tax Centre at 416.777.8500.


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