August 2012


Partnership Year-Ends – Tax Changes

W hat are the tax implications of a member of a corporate partnership having a fiscal yearend different from that of the partnership? The latest federal budget provides a new answer to that question. Previously, partnerships owned by corporations could defer taxes on their income. They did this by setting the year-end of the partnership on a date after the year-end of the corporate partners. For example, if a corporate partner had a March 31 year-end, the partnership could have an April 30 year-end in order to defer the partners’ income taxes on 11 months of income from the partnership. The budget proposals of March 22, 2011 will do away with this deferral opportunity.

Henceforth, each corporate partner will be required to include in its current fiscal year its share of the partnership income calculated on the deferred portion of the partnership’s fiscal year. This period is referred to as the “stub period.”

There will surely be some fine-tuning of the calculations but generally this new rule applies to all corporate partners, other than professional corporations,
that have year-ends of March 23, 2011, or later. “Some clients were concerned about the additional tax burden of having to include additional income in
their fiscal years ended March 31,” says Tax Partner Sunita Arora.

“The government has made a transitional reserve available to permit the stub-period income to be brought into income over five years, using a graduated formula.”

Furthermore, the Canada Revenue Agency has stated that they will also apply similar rules to members of joint ventures and co-tenancies. At this point, these
details have not been released.


Donations of Flow-Through Shares

Registered charities may receive fewer donations when proposed changes introduced in the March 22, 2011 federal budget come into effect. These proposals, which are now in draft legislation, aim to reduce the tax benefits of donating publicly traded flow-through shares to registered charities. “The budget proposes that only the capital gain in excess of the original cost of the flow-through share will be exempt from tax,” explains Senior Tax Partner Jeff Nightingale. “This is a significant change since an added benefit of donating flow-through shares will no longer be available to taxpayers. When this draft legislation becomes law, the change will take effect for any shares purchased after March 11, 2011.

“Under the existing rules, the tax cost of the shares is reduced to nil by virtue of the flow-through of deductions and credits. If the shares are donated, the resulting capital gain, which is equal to the value of the shares, is not taxed. The proposed change will tax the portion of the share cost that was written off when purchased, thereby significantly increasing the after-tax cost of the donation.” If you need further information, please contact your Lipton adviser.