Similar to limitations on accessing the SBD on payments amongst certain corporations, the 2016 Federal Budget also proposed changes when payments are made from a partnership. The measures will apply to taxation years that begin on or after March 22, 2016.

Currently, a corporation which is a member of a partnership may claim the SBD on active business income it receives from the partnership up to its pro-rata share of a notional $500,000 business limit determined at the partnership level (its specified partnership income limit, or “SPI”).  For example, if $500,000 or more of ABI is earned by a partnership with 10 equal partners, the SPI of each partner would be $50,000.

A corporation’s SPI is added to its active business income from other sources, if any, and the corporation can claim the SBD on the total (subject to its annual business limit).

Some business structures circumvent the application of the SPI rules. In one structure, a shareholder of a corporation is a partner and the partnership pays the corporation as an independent contractor under a contract for services separate from the Partnership Agreement. As a result, the corporation claims a full SBD in respect of its active business income earned in respect of the partnership because the corporation itself is not a partner. A number of professional services firms, such as those of lawyers and medical professionals, use a structure like this.

To address this, and other similar strategies, the 2016 Federal Budget proposed to extend the SPI rules. Basically, the amount paid to a corporation available for the SBD will be restricted if the corporation has a shareholder who is a partner, or, if it does not deal at arm’s length with a partner.

Action Item: Consider whether your current partnership structure achieves your goals. Be prepared to pay a higher corporate tax rate if affected by these changes.



This publication is produced by Andrews & Co. as an information service to clients and friends of the firm, and is not intended to substitute for competent professional advice. No action should be initiated without consulting your professional advisors.

No Comments

Sorry, the comment form is closed at this time.