Corporate Partner Stub Period Accrual Calculator
If your corporation is a partner in a partnership with a different year end, section 34.2 makes you accrue income you have not received into a T2 you thought was finished. Work out the stub period, the accrual, the prior year reversal and the tax.
added to the T2
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The Calculation
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What Goes on the T2
| Line | Treatment | Amount |
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Reporting and Penalty Risk
| Item | Requirement | Exposure |
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Points That Decide This
What to Do Next
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Disclaimer: Section 34.2 of the Income Tax Act requires a corporation that is a member of a partnership with a fiscal period ending before the corporation’s tax year end to include an adjusted stub period accrual in computing its income for that tax year. The stub period is the portion of the partnership’s following fiscal period that falls within the corporation’s tax year. The accrual is broadly the corporation’s share of partnership income for the fiscal period ending in the tax year, multiplied by the ratio of stub period days to the days in that fiscal period, less any amount designated by the corporation. An amount included in one year is deducted in computing income for the following year, so the rule operates as a rolling accrual rather than a permanent addition. A designation reduces the current inclusion but exposes the corporation to an income shortfall adjustment, effectively an interest charge, where the designated amount proves excessive against actual stub period results. The rules apply where the corporation, together with related or affiliated persons, holds a significant interest in the partnership, generally more than ten percent of income or assets. Corporate tax is applied at the Ontario combined rates of 12.2% on active business income within the $500,000 small business limit and 26.5% above it. The T5013 partnership information return is due five months after the fiscal period end where all partners are corporations, and the late filing penalty is $25 per day with a minimum of $100 and a maximum of $2,500. This page is general information, not tax advice.
The Rule Exists to Close a Deferral
Before 2011, a corporation with a December year end that was a partner in a partnership with a March year end reported the partnership’s March income in its December return. Nine months of partnership income sat untaxed at the corporate level until the following year, and structures were built specifically to widen that gap.
Section 34.2 removes it by making the corporation accrue an estimate of the stub period income into the current year. The estimate reverses in the following year when the real figure arrives, so nothing is taxed twice, but the deferral is gone.
| Partnership Year End | Corporation Year End | Stub Period |
|---|---|---|
| 31 March | 31 December | 275 days |
| 30 June | 31 December | 184 days |
| 30 September | 31 December | 92 days |
| 31 December | 31 December | None, aligned |
Aligning the year ends removes the problem entirely. Where the partnership year end can be changed to match the corporation’s, section 34.2 has nothing to bite on and the whole calculation disappears. That is worth considering long before it becomes an annual chore, particularly on a new joint venture where nothing is fixed yet.
Where This Catches People
It is a construction and real estate problem more than anything else, because joint ventures and partnerships are how those industries structure projects, and the year ends are almost never aligned.
- A general contractor in a project partnership with a different fiscal period
- A real estate corporation holding through a limited partnership
- Professional groups where a professional corporation is a partner in the practice partnership
- Any joint venture that is a partnership in substance regardless of what the agreement calls it
Whether the arrangement is a partnership is a question of substance, not of what the document is titled. A great many “joint venture agreements” in construction create a partnership at law. If the parties share profits from a common business carried on with a view to profit, the section 34.2 rules apply whether or not anyone has ever called it a partnership.
The Designation Is a Loan You May Regret
The corporation can designate an amount that reduces the accrual, which is useful where the formula produces a figure well above what the stub period actually earned. A partnership with heavily seasonal income is the obvious case.
The catch is the income shortfall adjustment. If the designation turns out to have been too large when the real figures arrive, the corporation is charged an additional amount that functions as interest on the tax deferred. It is not a penalty in name but it costs money, and it is calculated automatically.
| Position | Effect |
|---|---|
| No designation | Formula amount included, no shortfall risk |
| Designation supported by real figures | Lower inclusion, shortfall unlikely |
| Designation based on optimism | Income shortfall adjustment when the numbers land |
It Reverses, Which Is Why It Gets Ignored
The accrual included this year is deducted next year. On a partnership with stable income the addition and the reversal roughly offset, and the net effect on any given return is small.
That is exactly why the adjustment gets left out entirely. It looks like it does not matter. It matters in the first year the rule applies, when there is an addition with no reversal behind it, and it matters in the year the partnership interest is disposed of, when the reversal arrives with no addition to offset it.
The first year is the expensive one, and it is the year most often missed. There is no prior accrual to deduct, so the full stub period amount lands in taxable income with nothing against it. On a $400,000 share with a 275 day stub period that is over $300,000 of income appearing in a return nobody expected it in.
The Significant Interest Test
The rules apply where the corporation, together with related and affiliated persons, holds a significant interest in the partnership. That is generally more than ten percent of the partnership’s income or of its assets on a wind-up.
A small passive interest in a large partnership therefore falls outside the rules. Most corporate partners in owner-managed structures are well above the threshold, so the test rarely helps, but it is worth confirming before doing the work.
The T5013 Runs Alongside
A partnership with a corporate partner generally has to file a T5013 partnership information return, and the deadline is five months after the fiscal period end where all the partners are corporations.
The penalty is twenty-five dollars a day with a minimum of one hundred and a maximum of two thousand five hundred. The larger issue is that the corporate partners cannot properly prepare their own returns without the T5013 allocations, so a late partnership return pushes every partner’s T2 late behind it.
What This Calculator Does Not Cover
- Whether the arrangement is a partnership at law, which is a substance question
- The income shortfall adjustment calculation where a designation proves excessive
- Multi-tier partnership structures, where the rules stack
- Qualifying transitional income from the original transitional period
- Provinces other than Ontario
- The first fiscal period of a newly formed partnership, which has its own timing
Align the year ends if you can, and calculate it properly if you cannot. Our construction accounting service covers the partnership allocations, the T5013 and the corporate partner adjustments.
Frequently Asked Questions
Common questions on the corporate partner stub period rules.
Related Calculators and Guides
More tools for corporations in partnerships and joint ventures.
Get the Partnership Adjustment Right
Send us the partnership financial statements, the allocation schedule and both year ends. We will calculate the accrual, handle the reversal, prepare the T5013 and tell you whether aligning the year ends is worth doing.