Taxation of Joint Ventures
The March 22, 2011 Federal Budget proposed to limit the tax deferral opportunities for certain corporations with interests in partnerships, where the partnership fiscal period was different from the corporation’s taxation year. Taxpayers have been waiting for the Canada Revenue Agency (CRA) to release their commentary on the tax treatment of corporate owned joint ventures. On November 29, 2011, the CRA announced that joint ventures will no longer have a fiscal period. Therefore, participant taxpayers who entered into joint venture arrangements will no longer be eligible to compute income as if the joint venture had a separate fiscal period. For tax years ending after March 22, 2011, income from a joint venture will be required to be calculated for each participant taxpayer based on the fiscal period of the particular participant taxpayer.
For tax years ending after March 22, 2011, all participant taxpayers of joint ventures will be expected to include in income all amounts that had been deferred as a result of fiscal periods that differed from the tax years of the participant taxpayer, including those structures in which the participant taxpayer has taken the position that income was deferred as a result of tiered structures.
As part of the conversion of joint venture year-ends, there is transitional relief available for the first taxation year ending after March 22, 2011. This transitional relief, if utilized will result in no additional income being included in the first year of the taxpayer and will allow the taxpayer to bring the additional income over a five year period (15% in 2012, 20% in 2012, 2014 and 2015, and 25% in 2016). For this relief, a taxpayer will be required to file an election in writing, on or before the filing due date for that tax year, by attaching a letter to their return of income for that tax year. The letter should indicate that the participant taxpayer is including income from the joint venture for which it is seeking transitional relief. If a return has already been filed or is filed electronically, to be eligible for the transitional relief a participant taxpayer will be required to send a letter to their Tax Centre indicating their election to benefit from this administrative policy in respect of transitional relief.
Failure to report all the accrued income in a participant taxpayer’s first tax year that ends after March 22, 2011 in accordance with this administrative policy will result in the participant taxpayer’s ineligibility for transitional relief.
If you have questions about the new rules, need assistance in assessing the impact on your corporation or filing the election please contact your nearest DJB office.