Chapter 18 Partnerships

© 2008 Clarence Byrd Inc. 2 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)

© 2008 Clarence Byrd Inc. 3 Partnerships Defined  Who Cares? › If partnership: a separate calculation of income is required › If joint venture, or co-ownership:  No separate calculation  Greater flexibility

© 2008 Clarence Byrd Inc. 4 Partnerships Defined  Partnership Elements › Two or more persons (taxable entities) › Carrying on a business › Carried on to make a profit

© 2008 Clarence Byrd Inc. 5 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

© 2008 Clarence Byrd Inc. 6 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.

© 2008 Clarence Byrd Inc. 7 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.

© 2008 Clarence Byrd Inc. 8 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.

© 2008 Clarence Byrd Inc. 9 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.

© 2008 Clarence Byrd Inc. 10 Joint Ventures  Incorporated: A taxable entity  Unincorporated: Difficult to distinguish from partnership  More flexibility (e.g., venturers can use different CCA amounts)

© 2008 Clarence Byrd Inc. 11 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.

© 2008 Clarence Byrd Inc. 12 Partnership Income Basic Concepts  Separate Person Assumption  Accrual Basis Required

© 2008 Clarence Byrd Inc. 13 Partnership Income Basic Concepts  Taxation Year › Can use non-calendar › Generally won’t

© 2008 Clarence Byrd Inc. 14 Partnership Income Basic Concepts  Income Characteristics Flow Through › Dividends › Capital Gains › Business and Property

© 2008 Clarence Byrd Inc. 15 Calculating Partnership Income  A Reconciliation › Start with accounting income › Various adjustments

© 2008 Clarence Byrd Inc. 16 Partnership Income Adjustments  Salaries to partners › No deduction › Add back to accounting income › Treat as return of capital or allocation of income

© 2008 Clarence Byrd Inc. 17 Partnership Income Adjustments IInterest on partner contributions ›N›No deduction ›A›Add back to accounting income ›T›Treat as return of capital or allocation of income

© 2008 Clarence Byrd Inc. 18 Partnership Income Adjustments TTransactions with partners ›I›If on regular commercial terms – will be included or deducted

© 2008 Clarence Byrd Inc. 19 Partnership Income Adjustments  CCA › Deducted at partnership level › Individual partners cannot deduct different amounts of CCA

© 2008 Clarence Byrd Inc. 20 Partnership Income Adjustments DDividend income ›F›Full amount of dividends included in partnership income ›F›Flowed through to partners as dividends ›P›Partners gross up and claim dividend tax credit

© 2008 Clarence Byrd Inc. 21 Partnership Income Adjustments TTaxable capital gains/ Allowable capital losses ›I›Included in partnership income ›P›Partners can also deduct reserves

© 2008 Clarence Byrd Inc. 22 Partnership Income Adjustments  Political Contributions › Not available to partnership › Flowed through to partners  Charitable donations › Not available to partnership › Flowed through to partners

© 2008 Clarence Byrd Inc. 23 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

© 2008 Clarence Byrd Inc. 24 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

© 2008 Clarence Byrd Inc. 25 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 value

© 2008 Clarence Byrd Inc. 26 Adjustments To The ACB - Timing Capital Contributions and Drawings Added or deducted when contributed or withdrawn

© 2008 Clarence Byrd Inc. 27 Adjustments To The ACB - Timing Partnership Income or Loss Added or deducted on the first day of the following fiscal period

© 2008 Clarence Byrd Inc. 28 Adjustments To The ACB - Timing Charitable Donations and Political Contributions Deducted on the first day of the following fiscal year

© 2008 Clarence Byrd Inc. 29 Adjustments To The ACB - Timing Dividends Added on the first day of the following fiscal year (no gross up for this purpose)

© 2008 Clarence Byrd Inc. 30 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

© 2008 Clarence Byrd Inc. 31 Negative ACB  If negative adjustments exceed cost plus positive adjustments: › In general, must be taken into income › Exception for active general partners

© 2008 Clarence Byrd Inc. 32 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.

© 2008 Clarence Byrd Inc. 33 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

© 2008 Clarence Byrd Inc. 34 At-Risk Rules Example From Text (Paragraph ) ACB of Partnership Interest$15,000 Share of Partnership Income2,200 Subtotal$17,200 Less: Amounts Owed To Partnership($9,000) Other Risk Reduction AmountsNil( 9,000) At Risk Amount$ 8,200

© 2008 Clarence Byrd Inc. 35 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

© 2008 Clarence Byrd Inc. 36 Partner to Partnership ITA 97(2)  Transfer to Canadian partnership with an election by all partners › disposition at elected value (usually tax value) › Acquisition at elected value

© 2008 Clarence Byrd Inc. 37 Partnership to Partnership 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

© 2008 Clarence Byrd Inc. 38 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.

© 2008 Clarence Byrd Inc. 39 Partnership to a Corporation  ITA 85(2) allows rollover of partnership property to a corporation  ITA 85(3) allows rollover of partnership interest to shares in the new corporation

© 2008 Clarence Byrd Inc. 40 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

© 2008 Clarence Byrd Inc. 41 SIFT Partnerships  Specified Investment Flow Through Partnerships  Will be taxed under ITA Part IX.1  Discussed in Chapter 19 with SIFT Trusts

© 2008 Clarence Byrd Inc. 42