The 2011 federal budget eliminated the popular tax deferral for companies carrying on business through partnerships with different year-ends than their corporate partners (see Collins Barrow Tax Flash, October 2011). Up to that point, the Canada Revenue Agency (CRA) had a long-standing policy allowing joint venture (JV) participants to include income at the end of a joint venture fiscal period, similar to a partnership, as opposed to inclusion of revenues and expenses up to the participant's own taxation year-end. The policy generally allowed JVs to prepare accounting and tax information for all participants based on a single year-end, even where that period did not coincide with the tax year of one or more participants.
In June 2011, the CRA announced that the previous policy for JV fiscal periods was no longer applicable, and for taxation years ending after March 22, 2011, revenues and expenses arising from JV activities could no longer be reported using a separate JV fiscal year. However, the CRA also announced that it would permit administrative transitional relief similar to that provided for partnerships, namely that the additional JV income required to be included in the first affected taxation year of a participant could be deferred over the following five years. This transitional relief is available only to JV participants that relied on the former administrative policy.
For example, assume company Opco has a September year-end and, prior to 2011, reported income from a JV based on the JV's December year-end, in accordance with the previous CRA policy. Opco would include in its September 30, 2011, taxable income JV profits or losses for the JV year ended December 31, 2010, as well as profits and losses for the nine-month period ending September 30, 2011. Opco could then deduct a reserve in respect of the full amount of income earned from January to September 2011, and include that income in its 2012 to 2016 tax years (15% in 2012, 20% in each of 2013, 2014 and 2015, and 25% in 2016).
One convenience denied to JV participants, as compared to members of partnerships, is the ability to compute income or loss for stub periods based on a proration of income or loss for the previous fiscal period. In the example above, had the JV been a partnership, Opco could have computed January to September 2011 income as 9/12 of the preceding calendar 2010 income (subject to the option to compute actual income for that period), allowing the partnership to continue to prepare its tax information for a single fiscal year-end. But for JVs, no such shortcut is permitted and each participant will need to acquire details of JV revenues and expenses consistent with that participant's tax year. Accordingly, JVs whose participants have varying tax years may find themselves having to provide monthly tax information, if they are not doing so already. In the oil and gas industry, JVs are common, but they typically involve monthly reporting to participants so the impact in most cases is negligible. Real estate projects also frequently are conducted through JVs, often with fiscal-year reporting, so many of those JVs will have increased reporting requirements to participants.
To obtain the transitional relief in respect of income from a JV, a taxpayer must attach to the tax return for the first year ending after March 22, 2011, a letter indicating the election to benefit from the policy. If the tax return has been filed without indicating the election, the taxpayer may still make the election by sending a letter to the local tax office no later than September 22, 2012.
Dean Woodward, CA, is a tax partner in the Calgary office of Collins Barrow.
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