Tax Planning Essay

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ARTICLE REPRINT This article was first published in Canadian Tax Journal Corporate Tax Planning Co-Editors: Derek G. Alty,* Brian R. Carr,** Michael R. Smith,*** and Christopher J. Steeves**** Limitation on Deferral of Partnership Income by a Corporation Jeff Oldewening and Brian R. Carr***** © 2012 KPMG LLP a Canadian limited liability partnership and a member firm of the KPMG network of independent , member firms affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved. Recent amendments to the Canadian Income Tax Act limit the opportunity for a corporation to defer income through the use of a partnership with a fiscal period that differs from the taxation year of the corporation. Under the new rules, where the corporation owns a “significant interest” in the partnership, the corporation must include in income an amount in respect of its share of the partnership’s income for the portion of the partnership’s fiscal period that falls within the corporation’s taxation year. On the transition to the new regime, the corporation may be required to include in income an amount that represents more than one year of partnership income. A transitional reserve apportions the incremental income over a five-year period. This article reviews the 2011 amendments in detail. The authors provide an overview of the amendments and the underlying policy rationale; discuss the application of the new rules, using simple examples to illustrate the concepts; and comment on selected policy considerations. They then highlight several interpretive issues arising from the technical language, and suggest a number of planning techniques that taxpayers may use to resolve some of the difficulties presented by the amendments. The authors conclude that the policy of the provisions is sound but that the complexity of

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