Chapter 18

PARTNERSHIPS

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 Taxable Entities In Canada

• Income Tax Act

– Individuals
– Corporations

– Trusts
• Partnership income taxed in hands of partners (in general)
– Individuals
– Corporations

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 Partnerships Defined

• Who Cares?
– If partnership:
a separate calculation of income is required
– If joint venture, or co-ownership:
• No separate calculation
• Greater flexibility

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 Partnerships Defined

• Partnership Elements
– Two or more persons (taxable entities)
– Carrying on a business

– Carried on to make a profit

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 Partnership Agreement Provisions

• Partner contributions
• The rights and duties of the partners
• The allocation of profits and losses
• The location of partnership bank accounts and signing authority for
these accounts
• Procedures for bringing in new partners
• Procedures for dealing with withdrawal of a partner, death of a
partner, or sale of the partnership business

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 Types Of Partnerships
General 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.

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 Types Of Partnerships
Limited 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.

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 Types Of Partnerships
Limited 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.

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 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.

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 Joint Ventures

• Incorporated:
A taxable entity
• Unincorporated:
Difficult to distinguish from partnership
• More flexibility
(e.g., venturers can use different CCA amounts)

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 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.

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 Partnership Income
Basic Concepts
• Separate Person Assumption
• Accrual Basis Required

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 Partnership Income
Basic Concepts
• Taxation Year
– Can use non-calendar
– Generally won’t – Very complicated

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 Partnership Income
Basic Concepts
• Income Characteristics Flow Through To Partners
– Dividends
– Capital Gains

– Business and Property

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 Partnership Property

• Legally it belongs to partners

• For income tax purposes, it is deemed to be owned by the
partnership
– Can claim CCA deduction
– Will recognize gains and loss on dispositions

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 Calculating Partnership Business
Income
• A Reconciliation
– Start with accounting income
– Various adjustments

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 Partnership Income Adjustments

• Salaries to partners
– No deduction
– Add back to accounting income

– Treat as return of capital or allocation of income

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 Partnership Income Adjustments

• Interest on partner contributions

– No deduction
– Add back to accounting income

– Treat as return of capital or allocation of income

• Note: Interest on partner loans is deductible – No adjustment

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 Partnership Income Adjustments

• Transactions with partners

– If on regular commercial terms –
will be included or deducted

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 Partnership Income Adjustments

• CCA
– Deducted at partnership level
– Individual partners cannot deduct different amounts of CCA

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 Partnership Income Adjustments

• Drawings
– Cannot be deducted in determining partnership income.
– Must be added back to accounting income – if deducted there.

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 Partnership Income Adjustments

• Dividend income
– Full amount of dividends included in partnership income
(but not gross up)
– Flowed through to partners as dividends
– Partners gross up and claim dividend tax credit
– Deducted from accounting income to get partnership business
income

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 Partnership Income Adjustments

• Taxable capital gains/Allowable capital losses

– Included in partnership income
– Partners can also deduct reserves

– Added to accounting income to get partnership business

income

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 Partnership Income Adjustments

• Political Contributions
– Not available to partnership
– Flowed through to partners
– Added to accounting income to get partnership business
income
• Charitable donations
– Not available to partnership
– Flowed through to partners
– Added to accounting income to get partnership business
income
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 Partnership Income Adjustments

• Expenses of partners
– Partnership may pay personal expenses of partners
– Not deductible to partnership

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

– Added to accounting income to get partnership business
income

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 Allocations To Partners

• Must be made on a source-by-source basis

– Business income
– Dividends
– Capital gains and losses
– Restricted farm losses
– Foreign tax credits
– Charitable donations
– Political contributions

• Each item may be allocated on a different basis

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 Partnership Interest

• New partnership
– Tax value will be cost
– Will generally equal the accounting value

• Admission to existing partnership

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

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 Adjustments To The ACB - Timing

Capital Contributions and Drawings

Added or deducted when contributed or withdrawn

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 Adjustments To The ACB - Timing

Partnership Business
Income or Loss

Added or deducted on the

first day of the following fiscal period

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 Adjustments To The ACB - Timing

Charitable Donations and

Political Contributions

Deducted on the
first day of the following fiscal year

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 Adjustments To The ACB - Timing

Dividends

Added on the
first day of the following fiscal year
(no gross up for this purpose)

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 Adjustments To The ACB - Timing

Capital Gains and Losses

Full amount added

(net amount if losses) on the
first day of the following fiscal year

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 Negative ACB

• If negative adjustments exceed cost plus positive

adjustments:
– In general, negative balances must be taken into income

– Exception for active general partners

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 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.

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 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

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 At-Risk Rules

Example From Text (Paragraph 18-102)

ACB of Partnership Interest $15,000
Share of Partnership Income (But Not Loss)
[(10%)($22,000)] 2,200
Subtotal $17,200
Less:
Amounts Owed To Partnership ($9,000)
Other Risk Reduction Amounts Nil ( 9,000)
At Risk Amount $ 8,200

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 Transfers Of Property
No 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

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 Partner to Partnership
Rollover - ITA 97(2)
• Transfer to Canadian partnership with an election by all
partners
– Disposition at elected value (usually tax value)

– Acquisition at elected value

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 Partnership to Partnership
Rollover - ITA 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

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 Partnership to Proprietorship

Rollover applies automatically if:

1. within 3 months of the end of an old

partnership; and

2. one partner continues to carry on the

business as a sole proprietor.

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 Partnership to a Corporation
Rollovers
• ITA 85(2) allows rollover of partnership property to a corporation
• ITA 85(3) allows rollover of corporate shares to partners for their
interests

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 Partnership to a Corporation
Rollover
• 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

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 THE END
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