Subsection 103(1) of the Income Tax Act (Canada) is an anti-avoidance rule that permits the Minister to reallocate (among other things) income among the partners of a partnership where the “principal reason” for the allocation agreed upon by the partners “may reasonably be considered to be the reduction or postponement of the tax that might otherwise have been or become payable under [the] Act”.
In XCO Investments Ltd. v. The Queen, 2005 TCC 655, the Court ruled against an attempt by taxpayers to use a partnership to access the tax losses of another party. The Minister had applied subsection 103(1) to reallocate the income, which had the effect of nullifying the taxpayers’ planning. The Court upheld the Minister’s application of the subsection and dismissed the taxpayer’s appeal.
