March 2, 2012

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On January 10, 2012, the Canada Revenue Agency (“CRA”) issued a revised administrative policy, which extends the filing due date for transitional relief elections made by joint venture (“JV”) participants to September 22, 2012.

Prior to the introduction of the new anti-partnership tax deferral rules (enacted in December 2011), the CRA’s previous administrative policy allowed JV participants to establish a fiscal period for the JV that differed from those of the participants. Similar to a partner of a partnership, a JV participant who relied on this previous administrative policy only reported its respective share of JV income for the JV’s fiscal period that ended in the JV participant’s taxation year.

On November 29, 2011, the CRA withdrew its previous administrative position and no longer permitted JV participants to establish a fiscal period for the JV. As a result, JV income will now be required to be calculated for, and included in, the JV participant’s taxation year. This new administrative policy is effective beginning in the JV participant’s first taxation year ending after March 22, 2011 (“Transition Year”).

The first transitional year may result in significant incremental JV income being included in the JV participant’s income. The CRA is allowing, on an administrative basis, transitional relief similar to that applicable to partnerships. That is, a full reserve will generally be permitted for the Transitional Year, with the transitional incremental income being included over the subsequent 5 years at the following percentages: 15%, 20% for the next 3 years and 25%.

In order to claim transitional relief, the following criteria must be met:

  1. Actual JV income must be accrued by the JV participant in its Transition Year for the period after the end of the JV’s fiscal period to the end of the JV participant’s Transition Year. Estimated accruals based on a pro-rata portion of the JV’s prior year income will not be eligible for transitional relief.
  2. The JV participant must have relied on the CRA’s previous administrative policy to calculate income based on a fiscal period established for the JV that differs from that of the JV participant.
  3. A written election must be filed by September 22, 2012.

The CRA previously required a written election to be filed by the filing due date for the Transition Year of the JV participant; however, the due date has now been extended to September 22, 2012.

Are you a JV Participant?

As a JV participant, you will now be required to accrue JV income for your taxation year. Since actual JV income is required to be accrued, and estimates based on the prior year are not permitted, JV participants will need to ensure accounting records for the JV are maintained on a timely basis in order to permit accrual.

Given the untimely release of CRA’s administrative policy (subsequent to the March 22, 2011 effective date), JV participants may have already filed their tax returns for the Transition Year without considering this new policy. As such, JV participants may be required to amend their tax returns in order to claim transitional relief by September 22, 2012.

For more information, please contact your Smythe Ratcliffe advisor.

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