PowerPoint Slides - Chapter 20

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Chapter 20
Partnerships
Taxable Entities In Canada

Income Tax Act
› Individuals
› Corporations
› Trusts

Partnership income taxed in hands of
partners
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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

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
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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

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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
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Partnership Income
Basic Concepts

Income Characteristics Flow Through
› Dividends
› Capital Gains
› Business and Property
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Calculating Partnership
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
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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
› No deduction
› Add back to accounting
income
› Treat as return of capital
or allocation of income
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Partnership Income
Adjustments

Dividend income
› No deduction
› Add back to accounting
income
› Treat as return of capital
or allocation of income
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Partnership Income
Adjustments

Taxable capital gains/Allowable
capital losses
› Included in partnership income
› Partners can also deduct reserves
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Partnership Income
Adjustments

Political Contributions
› Not available to partnership
› Flowed through to partners

Charitable donations
› Not available to partnership
› Flowed through to partners
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Partnership Income
Adjustments

Expenses of partners
› Partnership may pay
personal expenses of
partners
› Not deductible to
partnership
› Included in the income
of the recipient partner
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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
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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
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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 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, 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 20-102)
ACB of Partnership Interest
$15,000
Share of Partnership Income
2,200
Subtotal
$17,200
Less:
Amounts Owed To Partnership
($9,000)
Other Risk Reduction Amounts
Nil
At Risk Amount
( 9,000)
$ 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
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
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,
within 3 months of the end of an old
partnership, one partner continues to carry
on the business as a sole proprietor.
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Partnership to a Corporation

ITA 85(2) allows rollover of
property to a corporation

ITA 85(3) allows rollover of
partnership interest to
shares in the new
corporation.
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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
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Partnerships and GST

Partnerships must register for GST purposes

Partnership interest is a financial instrument and
exempt from GST on dispositions

No rollover provisions for transfer of property
between partners and the partnership

Admission of new or retirement of old partners
does not require a new registration for GST
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