17 January 1996 Internal T.I. 9527946 - RETIRED PARTNER CPP

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

						January 17, 1996

	Headquarters			Merchandising, Manufacturing
	CPP\UI Eligibility and	  and Partnerships Section
	Systems Division		Cal Brown
	Pierre Paquette		(613) 957-8980

	Attention:  A. D. Isaac
						952794	

CPP Contributions

This is in reply to your memorandum of October 26, 1995, concerning the treatment of a retired partner's income for CPP purposes.

We assume, for the purposes of our reply, that you only require our interpretation of applications of the partnership provisions to situations identified in the XXXXXXXXXX letter dated August 14, 1995. As discussed by telephone January 11, 1996, (Isaac/Brown) we understand that you will reply directly to XXXXXXXXXX and that you will consider whether Revenue Canada should adopt any administrative practices with respect to the requirement to make CPP contributions where a partner is retired.

Generally, when a partner leaves a partnership but still maintains a capital account, the partner has not disposed of the partnership interest. Consequently, when such a partner receives a capital distribution it is considered a return of capital that reduces the adjusted cost base of the partnership interest. This adjustment of the cost base may have certain tax consequences depending on whether the partner is a limited or general partner and whether or not the partnership interest is disposed of. However, such capital distributions are not income and do not require CPP contributions.

Any income allocated from the partnership to a partner which is not subject to the application of subsection 96(1.1) of the Act is income from self employment and should be subject to CPP. If the legislation with respect to the fiscal year end of individual partners is passed self-employed income would include any amount required to be included in income as a result of the reserve for December 31, 1995 income calculation. Under the proposed amendments with respect to fiscal year ends, where a partner is retired at the beginning of a year, had claimed a reserve in a prior year, and is not currently a member of the partnership, any reserve previously claimed will be included in self-employed income subject to CPP contributions (unless the individual is receiving an allocation under subsection 96(1.1) of the Act).

Income allocated pursuant to subsection 96(1.1) of the Act is business income but for the purposes of the CPP provision is not considered to be from a business carried on by the retired partner and consequently such a partner is not required to contribute to CPP solely as result of receiving such income.

In addition, in the Notice of Ways and Means dated December 12, 1995, there is a deeming provision in subsection 96(1.6) of the Act that deems the partner to be carrying on the business of the partnership for the purpose of ensuring that the retired partner is subject to the proposed new rules dealing with fiscal periods (proposed sections 34.1 and 34.2). This limited deeming provision does not change our position with respect to CPP contributions.

With respect to the general issue of timing, income is included by an individual for the year in which the fiscal period of the partnership ends. Regardless of what distributions are made to partners there can not be an allocation of partnership income for the year until the income can be determined (that is at the end of the fiscal period). Assuming that the proposed amendments to the Act are legislated, the income determination of a partner who is an individual will now be subject to the proposed legislation with respect to fiscal periods. This will mean that most individual partners will be required to report partnership income on the calendar year.

It will usually be necessary to refer to the partnership agreements and other documents to determine whether a partner who is no longer active has, or does not have, a partnership interest and whether that partner's entitlement is to an income allocation or a capital distribution on leaving the partnership. Once this is established, we believe that the comments above should cover all the situations under which retiring partners receive funds from the partnership.

In accordance with these comments our responses to the six specific questions and issues set out in the XXXXXXXXXX letter are as follows:

1.Partnership income of an individual is income from self-employment for the calendar year in which the partnership year ends. Under the proposed amendments this will be December 31, for the partners that are subject to these rules. It does not matter when there is an actual payment to the partner since these are "distributions" not income.

2.It is not clear what the "retirement payment" is and this can only be determined on the basis of the facts. In our opinion it must be one of three things, a distribution on capital account, a share of partnership income to a partner (this can only be the case if the partner is still a partner) or an allocation of income to a non-partner under subsection 96(1.1) of the Act. The consequences, as discussed above, are that capital distributions and subsection 96(1.1) allocation are not subject to CPP. Allocation of partnership income to a partner, whether the partner is actively engaged in the day to day business of the partnership or not, is subject to CPP contributions.

3.The "interest allocation" is not interest. It must fall into one of the three categories set out in 2 above and has the same consequences.

4.The self-employment income of a partner who is entitled to a reserve in respect to December 31, 1995 income will determine his or her self-employment income taking into consideration the deduction for the reserve or the income inclusion resulting from the reserve calculation. Such amount is subject to CPP contributions.

5.Allocations of partnership income including those based on work in process are generally allocations of self-employed income, distributions are not. Once it is established whether the "allocation" of work in process is income or a distribution, the remarks under 2 above which indicate the treatment of the three types of allocations to partners or former partners should be applied.

6.Item 6 seems to be an analysis and does not appear to require a response from us. The question in the last paragraph on page 3 appears to ask for a confirmation of what the writer believes is Revenue Canada's administrative position. The schedule of the four year partnership allocations indicates that the non-active individual remains a partner (otherwise reserve would not be available). Assuming this to be the case, the individual's self-employment income for the year would include the reserve add-back, in other words the $10,000 a year shown on the schedule should be added to the self-employment income. Although it is our view that the income is subject to CPP contributions for each of the four years, the letter is suggesting that it is not appropriate to require CPP contributions where the partner is retired and receiving CPP benefits. We leave this matter to your discretion but would appreciate being informed of your administrative decision.

We trust these comments will assist you in replying to the XXXXXXXXXX letter. If you require any additional information please let us know.

Section Chief
Merchandising, Manufacturing and
Partnerships Section
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch