In prior years, the Canada Revenue Agency (CRA) permitted joint venturers to establish fiscal periods for their joint ventures differing from the fiscal periods of the joint venturers themselves (where the stipulated conditions were met, as further discussed below). This allowed joint venture participants to benefit from a tax deferral similar to the deferral then available to members of a partnership. The 2011 Budget Proposals seek to severely limit the tax deferral available in respect of partnerships. Predictably, the CRA has now indicated that its administrative position permitting joint ventures to establish separate fiscal periods will no longer apply. In this post, we review the administrative position that previously permitted joint ventures to establish separate fiscal periods and examine the implications of the recent revocation of this administrative position by the CRA.
The terms “joint venture” and “partnership” are not defined in the Income Tax Act (the Act). Whether a given arrangement will constitute a joint venture or, instead, a partnership will be a question of fact. In the SR&ED Claims for Partnership Policy (Draft), the CRA notes that “[g]enerally, a joint venture is a relationship that exists between two or more persons pursuing a single endeavour or finite project while a partnership is the relationship that exists between two or more persons carrying on a business in common with a view to making a profit.” As indicated in Interpretation Bulletin IT-90, no single criterion will be determinative in assessing whether a particular arrangement is a partnership (as opposed to a joint venture). A more detailed review of the difference between partnerships and joint ventures is beyond the scope of this post. Readers are referred to GST/HST Policy Statement P-171R, which contains a very useful discussion of this issue.
A partnership may, generally speaking, select any date for the end of its fiscal period, subject to certain limitations applicable to partnerships of which individuals and professional corporations are members. Whereas a tax deferral was previously available in respect of income earned by corporations through a partnership with a fiscal period differing from the taxation year of the corporate members, Budget 2011 introduced measures to limit this deferral. While a detailed review of the new rules affecting partnerships is beyond the scope of our post, we refer readers to an excellent article published in CA Magazine available here.
In CRA Document 9335915, Income Tax Treatment – Joint Venture, April 28, 1994, the CRA indicated that, on an administrative basis, joint ventures in which participants had different taxation year ends would be allowed to establish their own fiscal period, provided all participants in the joint venture were in agreement. The CRA further noted that, “[w]here the participants have the same taxation year end the joint venture would be expected to have the same fiscal period as that of the participants. However, where it can be shown that valid business reasons exist the Department may permit the joint venture to have a fiscal period different from the taxation year of its participants. When the joint venture has its own fiscal year end, each participant would include in its income for a given taxation year its share of the income of the joint venture for the fiscal period of the joint venture ending in or coincident with the participant’s taxation year.” The CRA’s administrative position gave rise to a deferral similar to that available to corporate members of a partnership.
In CRA Document 2011-0403081C6, Joint Venture Administrative Policy, June 6, 2011, the CRA indicated that, assuming that the 2011 Budget proposals (limiting the tax deferral opportunities for corporations with significant interests in partnerships) are enacted, its administrative position permitting joint ventures to establish fiscal periods differing from the fiscal periods of the participants would no longer be consistent with tax policy and would no longer apply. Consequently, participants in joint ventures will no longer be able to compute their income as if their joint ventures had a separate fiscal period. The CRA indicated that transitional relief consistent with that offered to members of a partnership would be available to joint venture participants that had relied on its administrative position. It expressed an intention to consult with affected taxpayers and their advisors prior to providing detailed guidance in writing.
The deferral previously available in respect of joint ventures is, therefore, no longer available. This is a predictable result, given the desire of the Department of Finance to limit the deferral previously available to partnerships. By revoking its administrative position in respect of joint ventures, the CRA has reduced the incentive that taxpayers may otherwise have to switch from a partnership structure to a joint venture structure in order to continue to access the deferral. Unfortunately, while taxpayers are told that transitional relief consistent with that offered to members of a partnership will be available to them, they still do not appear to have been given the promised written guidance. It is hard to imagine that joint venturers are in a position to apply the transitional rules proposed for partnerships (which involve taking a transitional reserve) without clear guidance to this effect.
We await written guidance with great interest, as do many joint venture participants that have been filing in reliance on the CRA’s administrative position.