Chapter 18 Partnerships 1 © 2011 Clarence Byrd Inc

Chapter 18Chapter 18Partnerships

Taxable Entities In Canada

Income Tax Act› Individuals› Corporations› Trusts

Partnership income taxed in hands of partners› An exception is SIFT partnerships (see

Chapter 19)

Partnerships Defined

Who Cares?› If partnership:

a separate calculation of income is required

› If joint venture, or co-ownership: No separate calculation Greater flexibility

Partnerships Defined

Partnership Elements

› Two or more persons (taxable entities)

› Carrying on a business

› Carried on to make a profit

Partnership Agreement Provisions

The allocation of profits and losses

The filing of financial statements and income tax returns as a partnership

The mutual right of control for management of the enterprise

The location of partnership bank accounts

The rights and duties of the partners

The registration of the partnership with the appropriate provincial jurisdiction

Types Of PartnershipsGeneral Partnership

A general partnership is composed of partners, called general partners, who manage the business and are equally liable for partnership debt and wrongful or negligent actions of other partners.

Unless specified as a limited partnership or a limited liability partnership, the term partnership usually refers to a general partnership.

Types Of PartnershipsLimited Partnership

A limited partnership is a partnership with at least one general partner (i.e., a partner whose liability is unrestricted) and one or more limited partners.

If a partnership has not registered with the provincial authorities to be legally considered as a limited partnership, it is considered to be a general partnership.

Types Of PartnershipsLimited Liability Partnership

This form of partnership is only available to certain types of professionals as specified in provincial legislation

Members of limited liability partnerships are not personally liable for obligations arising from the wrongful or negligent action of:› their professional partners; or› the employees, agents or representatives of the

partnership who are conducting partnership business.

Co-Ownership

Two or more persons co-own property when they share a right of ownership in the property.

For income tax purposes, profits and losses are typically accounted for individually by joint or co-owners.

Joint Ventures

Incorporated: A taxable entity

Unincorporated: Difficult to distinguish from partnership

More flexibility (e.g., venturers can use different CCA amounts)

Syndicates

A group of persons who have agreed to pool their money or assets for some common purpose.

There are no specific income tax rules that apply to syndicates.

Partnership IncomeBasic Concepts

Separate Person Assumption Accrual Basis Required

Taxation Year› Can use non-calendar› Generally won’t

Income Characteristics Flow Through› Dividends› Capital Gains› Business and Property

Calculating Partnership Income

A Reconciliation› Start with accounting income› Various adjustments

Partnership Income Adjustments

Salaries to partners

› No deduction

› Add back to accounting income

› Treat as return of capital or allocation of income

Interest on partner contributions

› No deduction

› Add back to accounting income

› Treat as return of capital or allocation of income

Transactions with partners› If on regular commercial terms –

will be included or deducted

› Deducted at partnership level

› Individual partners cannot deduct different amounts of CCA

Drawings› Cannot be deducted in

determining partnership income.

› Must be added back to accounting income – if deducted there.

Dividend income

› Full amount of dividends included in partnership income

› Flowed through to partners as dividends

› Partners gross up and claim dividend tax credit

Taxable capital gains/Allowable capital losses

› Included in partnership income

› Partners can also deduct reserves

Political Contributions› Not available to partnership› Flowed through to partners

Charitable donations› Not available to partnership› Flowed through to partners

Expenses of partners› Partnership may pay

personal expenses of partners

› Not deductible to partnership

› Not in partner’s income – treated as a withdrawal

Allocations To Partners

Must be made on a source-by-source basis› Dividends› Capital gains and losses› Restricted farm losses› Foreign tax credits› Charitable donations› Political contributions

Partnership Interest

New partnership› Tax value will be cost› Will generally equal the

accounting value Admission to existing

› Tax value will be cost› May differ from the accounting

Adjustments To The ACB - Timing

Capital Contributions and Drawings

Added or deducted when contributed or withdrawn

Partnership Income or Loss

Added or deducted on the first day of the following fiscal period

Charitable Donations and Political Contributions

Deducted on the first day of the following fiscal year

Dividends

Added on the first day of the following fiscal year

(no gross up for this purpose)

Capital Gains and Losses

Full amount added (net amount if losses) on the

first day of the following fiscal year

Negative ACB

If negative adjustments exceed cost plus positive adjustments:› In general, must be taken

into income› Exception for active

general partners

Limited Partners

Defined

A partner whose liability is limited under partnership law is considered a limited partner for income tax purposes. Members of a limited liability partnership, however, are generally excluded from the definition and are therefore not considered a limited partner since they remain personally liable for most partnership debt.

At-Risk Rules

Limited partnership form used to fund high risk ventures (e.g., mining and exploration)

Limited partner deductions cannot exceed at-risk amount

At-Risk Rules

Example From Text (Paragraph 18-102)ACB of Partnership Interest $15,000

Share of Partnership Income 2,200

Subtotal $17,200

Amounts Owed To Partnership ($9,000)

Other Risk Reduction Amounts Nil ( 9,000)

At Risk Amount $ 8,200

Transfers Of PropertyNo Rollover Provision

From partner to partnership› Partner: disposition at FMV› Partnership: acquisition at FMV

From partnership to partner› Partner: acquisition at FMV› Partnership: disposition at FMV

Partner to PartnershipITA 97(2)

Transfer to Canadian partnership with an election by all partners› disposition at elected value (usually tax

value)› Acquisition at elected value

Partnership to PartnershipITA 98(6)

Automatic (no election required)

Must include all property All partners must have

been in old partnership ITA 98(6) views the old

and new partnerships as the same partnership

Partnership to Proprietorship

Rollover applies automatically if, within 3 months of the end of an old

partnership, one partner continues to carry on the business as a sole proprietor.

Partnership to a Corporation

ITA 85(2) allows rollover of partnership property to a corporation

ITA 85(3) allows rollover of corporate shares to partners for their interests

Partnership to a Corporation

ITA 85(3) rollover is automatic if:› The corporation is a taxable Canadian

corporation› The partnership is wound up within 60

days of the transfer› Immediately prior to the wind up, the

partnership only holds money or assets received from the corporation

SIFT Partnerships Specified Investment

Flow Through Partnerships

Will be taxed under ITA Part IX.1

Discussed in Chapter 19 with SIFT Trusts

Chapter 18 Partnerships 1 © 2011 Clarence Byrd Inc

Documents

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