The client
A married couple near High River run a propane-delivery partnership together, splitting the business's net income 50/50 on their T1s for as long as they have filed.
Partnership net income
$140,000/year
Husband's role
45 hrs/week driving and delivery; $8,000 original capital
Wife's role
10 hrs/week bookkeeping and admin; $2,000 original capital
Purchase price
$460,000, High River
The problem
Subsection 103(1.1) of the Income Tax Act applies specifically to partners who do not deal with each other at arm's length -- spouses are the clearest example. Where their agreed income split is not reasonable, having regard to each partner's capital invested and work performed, CRA can simply deem a reasonable split and reassess on that basis, regardless of what the partnership agreement says.
What a straight 50/50 split did not reflect
- ▸The husband drives every route and handles all physical delivery work, roughly 45 hours a week
- ▸The wife handles bookkeeping and administration part-time, roughly 10 hours a week
- ▸Their original capital contributions were similarly lopsided -- $8,000 from him against $2,000 from her -- yet the partnership has always split net income evenly
The purchase itself was a joint application, so the total household income was never actually in question. What was in question was whether the wife's individually-documented 50% share -- built into the file as her own qualifying income -- was a figure CRA could reassign at any time, and whether relying on an indefensible number was worth the risk to a file that did not need it.
The numbers
Reallocating the partnership's income to reflect actual capital and work, rather than an even split, is what put a defensible number on file.
| Reallocating the partnership's income | Amount |
|---|---|
| Original 50/50 split | $70,000 each |
| Husband's reallocated share (70%) | $98,000 |
| Wife's reallocated share (30%) | $42,000 |
| Combined household income, either way | $140,000 |
| Total debt service, combined household income | Figure |
|---|---|
| Payment at the qualifying rate (6.65%), 25 years | $2,499/mo |
| Property tax | $330/mo |
| Heat (lender estimate) | $140/mo |
| Car loan | $280/mo |
| Total debt service | 27.8% |
27.8% on their combined $11,667/month income is identical whichever way the partnership's income is split between them -- the reallocation never changed what the couple could jointly qualify for as co-borrowers. It changed whether the number attributed to each of them individually was one CRA could reassign without warning.
The solution
A mortgage associate licensed under Alberta's Real Estate Act treated the 50/50 split as a documentation risk to correct before closing, even though the joint application meant the total household figure was never actually at stake.
First, asked each spouse to describe their actual role and hours in the business, rather than accepting the partnership agreement's even split as self-evidently reasonable.
Second, had the couple's accountant confirm a defensible allocation based on their real capital and work contributions, landing on a 70/30 split going forward.
Third, used the couple's combined income for the joint application regardless of the internal split, so correcting the allocation cost the file nothing while removing an unnecessary CRA reassessment risk.
The outcome
The purchase funded at 4.65% on the couple's combined income, with total debt service at 27.8%, and the partnership's income allocation re-documented on a 70/30 split the couple's own accountant confirmed was defensible going forward.
Because this is an uninsured purchase, CMHC's ratio maximums do not apply directly; the 27.8% figure is informational.
What to take from this file
- 01Section 103(1.1) lets CRA reassign an unreasonable income split between non-arm's-length partners. Spouses running a partnership together are exactly who this rule targets.
- 02A 50/50 split is not automatically reasonable just because it is common. Reasonableness is measured against actual capital invested and work performed.
- 03A joint application can make an individual partner's exact share moot for qualifying purposes -- but not for documentation risk. Fix an indefensible allocation even when the total number does not change.
- 04Ask each partner what they actually do in the business. It is the fastest way to catch a split the partnership agreement alone will never reveal as a problem.
Sources
Every regulatory figure in this file traces to one of these primary sources. Client details and anything that varies by lender are illustrative, as flagged below.
- ▸OSFI — Minimum qualifying rate for uninsured mortgages — the minimum qualifying rate — greater of contract rate + 2% or 5.25%.
- ▸Provincial/territorial mortgage-broker legislation fetched directly (bclaws.gov.bc.ca, legisquebec.gouv.qc.ca, fcaa.gov.sk.ca, web2.gov.mb.ca, nslegislature.ca, assembly.nl.ca) plus FCNB's own site for NB and CanLII's index for PE — see notes for per-province method — provincial mortgage regulators and licence titles.
Illustrative in this file — lender-specific, not rules:
- ▸4.65% contract rate — rates move daily; not a quote.
- ▸the 70/30 reallocation — this couple's own accountant-confirmed split based on their actual capital and hours; every partnership's reasonable allocation depends on its own facts.
- ▸the 27.8% TDS figure — this is an uninsured purchase, so there is no CMHC ratio ceiling -- the number is informational.
Authority & provenance
How this case file was built
We publish the origin, the verification method and the reviewer for every case file, so you can judge how far to trust it before you rely on it with a client.
Where it comes from
Derived from files handled by Treadstone’s fulfillment desk and from scenarios contributed by partner brokerages. Names, employers, exact amounts and dates are changed so no client or file is identifiable.
Provenance: Composite — a pattern seen repeatedly on fulfilled files, not a single transaction.
What is verified
Every regulatory figure traces to a primary source listed above and was checked against it on the date shown. The arithmetic is recomputed by machine on every rebuild.
Anything that varies by lender is labelled illustrative rather than stated as a rule.
Who reviewed it
Reviewed for Canadian regulatory accuracy before publication, and re-checked whenever a cited rule changes.
Reviewed by: Nicholas Parson, Treadstone Associates — reviews every case file before publication.
This case file is professional reference material for licensed mortgage professionals. It is not advice to a borrower, and it is not a lender commitment. Insurer rules, qualifying rates and provincial taxes change — confirm the current position with the insurer, regulator or lender before you rely on any figure here in a live file.