The Canada Revenue Agency (“CRA”) has issued document 2011-0429581E5 and revised its administrative position with respect to joint venture fiscal periods. Since 1989, the CRA has administratively allowed a joint venture to have a fiscal period which differs from each of the respective joint venturers’ (“participants”) fiscal periods when each of the participants has a different fiscal period and there is a valid business reason for the joint venture to have a differing fiscal period.
The revision to this administrative position stems from tax provisions that were introduced in the 2011 Federal Budget which eliminate the tax deferral for certain corporate partners where a partnership’s fiscal period is different from that of the corporate partner. This new legislation requires a calculation and inclusion of stub period partnership income in the corporate partner’s tax return, effectively eliminating any tax deferral that could otherwise arise for the corporate partner's tax years ending after March 22, 2011.
As a result of these changes for corporate partners, the CRA has revised its administrative position and will not allow joint ventures to have separate fiscal periods. Instead, each participant will be required to compute its share of joint venture income based on its own fiscal period for tax years ending after March 22, 2011. In other words, the participant will be required to include in its income, for a particular fiscal period, the income of the joint venture that is earned during that same fiscal period. The accounting for joint venture income will now change and become an accounting exercise for each participant, based on their particular year end.
The additional stub period that will arise in the first year of change could result in more than twelve months of income of the joint venture being included in a participant’s first taxation year ending after March 22, 2011. The CRA is therefore allowing transitional relief on an administrative basis in the form of a staggered reserve which will allow a participant to effectively report the stub period income over a period of five years (generally 2012: 15% of the stub period income; 2013, 2014 and 2015: 20%; 2016: 25%).
This transitional relief is only available to participants who have previously relied on the CRA’s administrative policy with respect to joint venture fiscal periods. There are also specific procedures that must be followed in order for a participant to avail itself of this reserve, including the filing of an election in writing. In document 2011-0429581E5, the CRA stated that an election, in the form of a letter, must be attached to the respective tax return of the participant and filed on or before the filing due date for the first taxation year of the participant ending after March 22, 2011. However, in a recent inquiry response, the Rulings Directorate confirmed that the CRA has extended the filing due date for elections and will accept elections filed on or before September 22, 2012.
If you have any questions regarding these administrative changes, or the relief available to you, please contact your TSG representative.
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