Corporate Partnerships: Deferral Still?
New section 34.2, stemming from the 2011 budget, addresses the issue
of tax deferral, which can arise when a corporation is a member of a
partnership that has a fiscal period that differs from the corporation’s
tax year. For example, if the former ends on January 31 and the latter
ends on December 31, the pre-budget rule was that the tax on 11 months
of income could be deferred for an entire taxation year. Many tax
practitioners expected that deferral would now be completely
unavailable, but the new measure appears to limit the deferral
opportunity rather than eliminate it completely.
Subject to transitional relief not discussed here, the new rules
create an income inclusion to the corporation for the adjusted stub
period accrual (ASPA). The ASPA is an estimate of the corporation’s
share of the income from the partnership that is earned during the
current corporate taxation year but is not taxable until the subsequent
corporate taxation year. More specifically, it is the income from the
partnership’s most recent T5013 slip multiplied by the ratio of A to B, where A
is the number of days in both (1) the fiscal period of the partnership
that begins in the current corporate taxation year and ends in the
subsequent corporate taxation year and (2) the corporation’s current
taxation year, and B is the number of days in the fiscal period
of the partnership that ends in the corporation’s current taxation
year. In the example above, the ratio of A to B is 334/365; thus, the ASPA is approximately 11 months of income.
This ASPA may not completely eliminate the deferral in some situations, such as the following.
Assume that a business conducted through a partnership is in the
early stages of its life cycle and is anticipating income growth on an
annual basis. Because the ASPA calculation does not require an
adjustment for anticipated growth beyond the most recent historical
income allocation, any annual growth in the partnership income may still
be subject to a one-year deferral.
Assume that a business is contemplating an acquisition of the
business assets of a target. The taxpayer might consider structuring the
acquisition through a new or existing partnership. The corporate
partners will have a taxation year that differs from the partnership’s
fiscal period. The ASPA calculation does not require an adjustment for
any acquisition-driven growth; therefore, it may be possible to defer a
portion of the income generated by the acquired assets during the first
fiscal period of the acquiring partnership for one taxation year.
Assume that for business reasons, the corporate partners of an
operating partnership are contemplating the transfer of their
partnership interests to other corporate entities within a controlled
group of companies. The partnership has a January 31 fiscal period-end,
which differs from the December 31 taxation year-end for all of the
corporate entities within the group. The interests in the partnership
are transferred to other corporate entities on December 31. There should
not be an ASPA for the new corporate partners, on the basis that the
new corporate partners were not partners in the previous fiscal period.
Furthermore, there may not be an ASPA for the former partners, provided
that the former partners have no entitlement to a share of income for
the partnership fiscal period that ends on the January 31 immediately
following the reorganization year. Thus, partnership income earned
during the current stub period may be subject to a one-year deferral.