Chapter 20 Partnerships Taxable Entities In Canada Income Tax Act › Individuals › Corporations › Trusts Partnership income taxed in hands of partners 2 © 2008 Clarence Byrd Inc. Partnerships Defined Who Cares? › If partnership: a separate calculation of income is required › If joint venture, or co-ownership: No separate calculation Greater flexibility 3 © 2008 Clarence Byrd Inc. Partnerships Defined Partnership Elements › Two or more persons (taxable entities) › Carrying on a business › Carried on to make a profit 4 © 2008 Clarence Byrd Inc. 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. 5 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. 6 © 2008 Clarence Byrd Inc. 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. 7 © 2008 Clarence Byrd Inc. 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. 8 © 2008 Clarence Byrd Inc. 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 9 © 2008 Clarence Byrd Inc. Joint Ventures Incorporated: A taxable entity Unincorporated: Difficult to distinguish from partnership 10 © 2008 Clarence Byrd Inc. 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 11 © 2008 Clarence Byrd Inc. Partnership Income Basic Concepts Separate Person Assumption Accrual Basis Required 12 © 2008 Clarence Byrd Inc. Partnership Income Basic Concepts Taxation Year › Can use non-calendar › Generally won’t 13 © 2008 Clarence Byrd Inc. Partnership Income Basic Concepts Income Characteristics Flow Through › Dividends › Capital Gains › Business and Property 14 © 2008 Clarence Byrd Inc. Calculating Partnership Income A Reconciliation › Start with accounting income › Various adjustments 15 © 2008 Clarence Byrd Inc. Partnership Income Adjustments Salaries to partners › No deduction › Add back to accounting income › Treat as return of capital or allocation of income 16 © 2008 Clarence Byrd Inc. Partnership Income Adjustments Interest on partner contributions › No deduction › Add back to accounting income › Treat as return of capital or allocation of income 17 © 2008 Clarence Byrd Inc. Partnership Income Adjustments Transactions with partners › If on regular commercial terms › Will be included or deducted 18 © 2008 Clarence Byrd Inc. Partnership Income Adjustments CCA › No deduction › Add back to accounting income › Treat as return of capital or allocation of income 19 © 2008 Clarence Byrd Inc. Partnership Income Adjustments Dividend income › No deduction › Add back to accounting income › Treat as return of capital or allocation of income 20 © 2008 Clarence Byrd Inc. Partnership Income Adjustments Taxable capital gains/Allowable capital losses › Included in partnership income › Partners can also deduct reserves 21 © 2008 Clarence Byrd Inc. Partnership Income Adjustments Political Contributions › Not available to partnership › Flowed through to partners Charitable donations › Not available to partnership › Flowed through to partners 22 © 2008 Clarence Byrd Inc. 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 23 © 2008 Clarence Byrd Inc. 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 24 © 2008 Clarence Byrd Inc. 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 25 © 2008 Clarence Byrd Inc. Adjustments To The ACB Timing Capital Contributions and Drawings Added or deducted when contributed or withdrawn 26 © 2008 Clarence Byrd Inc. Adjustments To The ACB Timing Partnership Income or Loss Added or deducted on the first day of the following fiscal period 27 © 2008 Clarence Byrd Inc. Adjustments To The ACB Timing Charitable Donations and Political Contributions Deducted on the first day of the following fiscal year 28 © 2008 Clarence Byrd Inc. Adjustments To The ACB Timing Dividends Added on the first day of the following fiscal year (no gross up for this purpose) 29 © 2008 Clarence Byrd Inc. 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 30 © 2008 Clarence Byrd Inc. Negative ACB If negative adjustments exceed cost plus positive adjustments: › In general, must be taken into income › Exception for active general partners 31 © 2008 Clarence Byrd Inc. 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. 32 © 2008 Clarence Byrd Inc. 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 33 © 2008 Clarence Byrd Inc. 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 34 © 2008 Clarence Byrd Inc. 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 35 © 2008 Clarence Byrd Inc. 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 36 © 2008 Clarence Byrd Inc. 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. 37 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. 38 © 2008 Clarence Byrd Inc. 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. 39 © 2008 Clarence Byrd Inc. 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 40 © 2008 Clarence Byrd Inc. 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 41 © 2008 Clarence Byrd Inc. 42 © 2008 Clarence Byrd Inc.