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Taxpayers who enter into joint venture arrangements will no longer be eligible to compute income as though the joint venture had a separate fiscal period |
In the 2011 federal budget, one of the key proposals was a tax change designed to eliminate the tax deferral that can arise when a partnership has a different year-end from that of the partner. Shortly after this change was announced, the Canada Revenue Agency (CRA) announced that a similar advantage available to joint venture participants would be eliminated.
According to the CRA “a joint venture is an arrangement where two or more persons (participants) work together in a limited and defined business undertaking.” Joint ventures are limited in scope as they do not result in an ongoing business relationship. Income tax legislation does not deal specifically with joint ventures — generally the rules applicable to the taxation of the participants are relevant. However, the CRA has administratively allowed joint ventures to establish a fiscal period that differs from the fiscal periods of the joint venture participants where the participants have different fiscal periods and if there is a valid business reason for a separate fiscal period for the joint venture. By allowing a different fiscal period for the joint venture, it has been possible to defer the taxation of income in the hands of the participants.
As discussed in the article titled Income Deferral Limited for Corporate Partners in our Tax Factor 2011-02 publication, the government announced the end of the income deferral for corporations holding significant partnership interests. Before the changes, it was possible to defer the taxation of partnership earnings by up to one year if a corporation carried on a business through a partnership that had a fiscal period that ended after the end of the corporation’s taxation year. Under the budget proposals, corporations impacted by the change are required to accrue partnership income for the portion of the partnership’s fiscal period that falls within the corporation’s taxation year (the “stub period”), effective for taxation years of a corporation that end after March 22, 2011.
With this change in tax policy to eliminate the income deferral for certain corporate partners, the CRA has announced their intention to withdraw their policy of allowing a joint venture a separate fiscal period (assuming the rules for corporate partners are enacted). This will ensure consistency in tax policy between partnerships and joint ventures. As a result, taxpayers who enter into joint venture arrangements will no longer be eligible to compute income as though the joint venture had a separate fiscal period.
For joint venture participants who have followed the CRA’s administrative policy, the CRA has stated that they will offer transitional relief that is consistent with the transitional relief available to members of a partnership. Under the budget proposals for corporate partners, where certain conditions are met, transitional relief has been provided by way of a transitional reserve. For a corporate partner’s first year-end under these rules, a 100% reserve will be allowed. The incremental income amount to be taxed will then be gradually taxed over the five taxation years that follow. For joint venture participants, the CRA has indicated that they will be consulting with affected taxpayers and their advisors on the change after which time they will be providing detailed guidance in writing. It is expected this will include specific details on transitional rules.
If you have any questions on the change for joint ventures, contact your BDO advisor.
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