In 2011 and 2012, Parliament enacted section 34.2 and amended section 249.1 of the Income Tax Act (Canada) to address what it ostensibly saw as inappropriate deferral of partnership income by corporate partners with different fiscal periods than that of the partnership itself. In essence, section 34.2 is intended to preclude corporate partners from deferring income by way of strategic timing of a partnership’s fiscal period vis-à-vis a partner’s taxation year.
This article identifies an interesting quirk of these rules that may arise where a corporate partner of a single-tier partnership has chosen a floating year-end; in such a scenario, the rules in section 34.2 may actually operate to create a one-year tax deferral for the partner. This is primarily because paragraph 96(1)(f) requires a partner to include in computing its income its share of the partnership income for its taxation year in which the partnership’s fiscal period ends. For example, in the case of a corporate partner with an October 31 year-end that is a partner in a partnership with a fiscal period ending on November 1, the partner would, prior to the enactment of section 34.2, have been able to defer, for example, the inclusion of its share of the partnership’s income for the 2011 fiscal period of the partnership until the partner’s 2012 taxation year.
To preclude such a deferral, subsection 34.2(2) operates to require the inclusion of an amount, the “adjusted stub period accrual” (“ASPA”) amount, that is effectively the partnership income estimate for the “stub period” based on income allocated for the fiscal period of the partnership that ends in the partner’s taxation year. Generally, the ASPA amount is based on the partnership's income from the previous fiscal period, the partner’s share of partnership income, and the ratio of days in the stub period to days in the previous partnership fiscal period. Subsection 34.2(4) provides for an offsetting deduction of the estimated ASPA amount in the following taxation year; the provisions, taken together, are therefore focused on the timing of corporate partners’ income inclusions.
However, taking the above example slightly further, if the partnership has a fiscal period ending on October 31, and its corporate partner has a taxation year that ends on the last Saturday of October (whatever that date may be), the partner’s year-end would “float” around the partnership’s fiscal period, unless October 31 happens to fall on a Saturday, as was the case in 2010. In 2011, the partner’s taxation year would end on October 29, 2 days prior to the end of the partnership’s fiscal period. For the sake of illustration, suppose that the partnership has $100 of taxable income with respect to each of the 2011 and 2012 fiscal periods, but no losses, taxable capital gains or allowable capital losses. Further imagine that the corporate partner in question is a 99% limited partner.
In this case, the partnership’s 2011 fiscal period would end 2 days into the partner’s 2012 taxation year, with two results: first, because no partnership fiscal period would have ended in the partner’s 2011 taxation year, no portion of the above-noted $100 of taxable income of the partnership would have been allocated to the partner pursuant to paragraph 96(1)(f) in respect of the partner’s 2011 taxation year. Second, because the partnership’s fiscal period would end so close to the beginning of the partner’s 2012 taxation year, the partner’s 2012 stub period would be 361 days long (November 1, 2011 through October 27, 2012, the last Saturday of October, 2012). Accordingly, the partner would be required to include, at the end of its 2012 taxation year, $99 pursuant to paragraph 96(1)(f)—the amount that was not included in respect of the partner’s 2011 taxation year—as well as an ASPA amount of approximately $97.91, determined by the formula
[99 x 361/365] = [99*0.989] = 97.915
for a total income inclusion of approximately $196.91. In essence, the income inclusion deferred by the partner in respect of its 2011 taxation year should be included in computing the partner’s income for the 2012 taxation year. This is the technically correct result, but is nonetheless an example of income deferral that is similar to the type of year-end based deferral that these rules were intended to preclude. Such a deferral appears only to arise in the somewhat quirky context of floating year-ends, but floating year-ends do not necessarily result in such a deferral: the cyclical nature of a floating year-end makes it possible for a partner to be subject to two concurrent income inclusions pursuant to paragraph 96(1)(f), where two partnership fiscal periods end in the same taxation year of the partner.
Given the relative rarity of structures involving partners with floating year-ends, most practitioners likely only grapple with the issues raised in this article infrequently. However, when these issues do arise, the quirky operation of the rules can result in some not-so-minor headaches; practitioners should therefore keep this particular issue in mind so as to keep the potential frustration to a minimum.
About the author
Jonathan C.G. Bright, PwC Law LLP
 R.S.C. 1985, c. 1 (5th Supp.), as amended. All statutory references in this piece are to the Act.
 Paragraph 96(1)(b) provides that the partnership’s taxation year is its fiscal period, and subsection 249.1(1) defines a “fiscal period” of a partnership’s business to be “the period for which the…partnership’s accounts in respect of the business…are made up for purposes of assessment” under the Act.
 There is no magic to the choice of taxation years and fiscal periods for this example; they merely represent a particularly extreme case, which aids in the illustration of the main point of this piece.
 A corporation must include in income an ASPA amount, in respect of a partnership, if the corporation has a “significant interest” in the partnership, within the meaning of subsection 34.2(1), if the fiscal period of the partnership straddles the corporation’s fiscal year end and if, at its fiscal year end, the corporation is entitled to a share of partnership income for the fiscal period in question.
 This formula is set out in the definition of ASPA in subsection 34.2(1).
 It should be noted that where a corporate partner’s floating year-end results in a taxation year that is longer than 365 days, subsection 249(3) may apply to reduce the length of that particular taxation year. A discussion in this piece of the application of the rules in section 34.2 in such a scenario is not possible given space constraints.