3/21/08
TX 2
Advanced Personal and
Corporate Taxation
Module 7
Partnerships
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Module 7
Part 1: Topics 7.1 Definition, 7.2 Computation of Income,
7.3 Computation of ACB of Partnership Interest,
7.9 Information Return
Part 2: Topic 7.4 Transfer of Property to Partnership and
Admission of New Partner
Part 3: Topics 7.5 Withdrawal of a Partner, 7.6 Dissolution
of a Partnership
Part 4: Topic 7.8 Transfer of Property by a Partnership to a
Corporation
Part 5: Topic 7.7 Limited Partnerships
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What is a Partnership?
 Legal
definition: a relationship that exists
between persons carrying on business in
common with a view to profit
 Partner may be an individual, corporation or
another partnership
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Computation of Income
• • • • S. 96(1): partnership computes its income as if it
were a person
Requires computation of income at the
partnership level – CCA
Allocation to partners according to the
partnership agreement
Income or loss retains its source
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Year-end
 s.
249.1(1)(b) a partnership with an individual or
professional corporation as a member must have
a December 31 year-end, unless alternate
method elected
 Where no members are individuals or
professional corporations: can have noncalendar year-end
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Year-end
 Partners
include in their income their share of
the partnership income or loss earned during the
fiscal period of the partnership ending in the
fiscal period of the partner
 Can achieve tax deferral through selection of
year-ends in non-individual/professional
corporation situations
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Tax Deferral Example
 corporate
partnership year-end October 31
partner year-end September 30
 October 31, 2005 partnership income included in
partner’s taxable income for year-ended
September 30, 2006
 11 month tax deferral
 corporate
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Partnership Returns
 Partners
file tax returns and pay tax on
partnership income – not partnership
 Partnerships of more than 5 partners must file
information returns
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Specified Partnership Income
• Special rules in s. 125 limit the small business
deduction available to corporations on their
partnership income
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Computation of the ACB of a
Partnership Interest
 Partnership
interest is a capital property
for determining tax consequences of
dissolution of a partnership, withdrawal of
partner, disposition of a partnership interest, or
death of a partner
 Important
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Partnership Interest ACB
 Almost
all the partner’s transactions with the
partnership will involve ACB adjustments
 ACB adjustments: s. 53(1)(e) and 53(2)(c)
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Partnership Interest ACB
Add: Capital contributions
Less: Capital withdrawals (draws)
Add: Net income for tax purposes, i.e. after adjustments
for book amortization / CCA, non-deductible expenses,
plus 100% of capital gains and other adjustments under
s. 53
Less: Net loss for tax purposes (s. 53 adj)
Equals: Partnership Interest ACB
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Negative ACB
• • • Usually because partner’s draws have exceeded
income allocation or allocation of partnership
losses in excess of capital contributions
Treated as a capital gain but usually only
realized on disposition of the partnership
interest, except:
Limited partnerships – immediate capital gain
recognized
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Part 2 – Transfer of Property to the Partnership
and Admission of New Partner
• • • May be done on formation of partnership or at
any time
Rollover available – s. 97(2)
Conditions for s. 97(2) rollover: Canadian
partnership (all partners resident in Canada),
transferor must be a partner of the partnership
receiving the assets immediately after the
transaction
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s. 97(2) Rollover
• • • Consideration taken back may include a
partnership interest (doesn’t have to, unlike S.
85 which required at least 1 share must be taken
back)
If agreed amount > consideration received,
excluding partnership interest, difference is
added to the ACB of the partner’s interest
Form T2059 (similar to T2057 for S. 85)
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Superficial Loss s. 40(2)(g)(i)
• • Partner and partnership are affiliated persons (s.
251.1(1)(f)) if partner holds majority interest
When majority interest partner transfers property
to partnership and incurs capital loss, stop loss
added to ACB of property acquired by
partnership
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Admission of New Partner
 A partnership
dissolves if there is any change in
the partners, unless the partnership agreement
provides for the continuation of the partnership
 New partner could enter partnership by acquiring
partnership interest from one or more partners,
contribute capital, or combination
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Admission of New Partner
• • If through acquisition of partnership interest,
existing partners dispose of portion of interest
with resulting capital gain or loss
No deemed disposition of partnership interest for
existing partners if capital contribution and no
ACB adjustment
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Part 3: Withdrawal of Partner
 Many
different ways for partner to withdraw:
sale of partnership interest, buy-back of interest
by partnership (redemption), retention of residual
or income interest, or combination
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Consequences to Partnership:
   S. 98(6): full rollover if a Canadian partnership ceases to
exist and all of its property is transferred to another
Canadian partnership whose partners were all partners
in the old partnership
The new partnership is deemed to be a continuation of
the old partnership
Applies only if all of the property of the old partnership is
transferred to the new partnership
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Consequences to Withdrawing Partner:
• • Sale of interest- capital gain/loss on disposition
Buy-back of Interest by partnership - Where the
partner withdraws but retains for a period of time
a right to receive property of the partnership in
satisfaction of his interest (residual interest)
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Buy-back
 S.
98.1(1)(a) the withdrawing partner is deemed
not to have disposed of his interest in the
partnership
 Withdrawing partner may recover amounts taxfree up to his partnership interest ACB
 Further recoveries are capital gain as negative
ACB taxed as capital gain in year it goes
negative (not deferred until interest paid-out in
full)
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Income Interest in Partnership:
• • Common in professional partnerships.
Arrangement to allocate future partner income to
retired or deceased partner pursuant to
partnership agreement (retirement income)
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Income Interest in Partnership:
 S.
96(1.1) provides that this type of payment is
to be treated as a distribution of partnership
profits
 Retired partner deemed to continue to be
member of partnership
 Income retains its source, i.e. business income
 Certain conditions must be met
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Dissolution of Partnership:
S. 98(2) - property transferred to partner deemed
disposed of by partnership at fmv
 Tax implications: recapture of CCA, capital gains on
the disposition of partnership assets to the partners,
ACB adjustments
 S. 98(3) Rollover: election to permit a tax-free
rollover of partnership property to the partners in
certain circumstances
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s. 98(3) Roll-up
• • • • Conditions: Canadian partnership ceased to exist, all
property distributed to partners, each person has
undivided interest in each property
Joint election - form T2060
Partnership property deemed disposed of at cost amount
– no gain or loss on dissolution
Partner deemed to dispose of partnership interest at
greater of ACB of partnership interest or cash and % cost
amount of property distributed. Usually no gain or loss.
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Business Continued by One Partner:
   S. 98(5): tax-free rollover of assets from a discontinued
partnership to a proprietorship
Applies where, within three months of the termination of
a Canadian partnership, one of the former partners
commences to carry on the business of the previous
partnership as a sole proprietor
Partnership property is received as POD of partnership
interest
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Business Continued by One Partner:
 Deems
the member of the partnership who
becomes the proprietor to have acquired
partnership interests and not to have acquired
partnership property
 S. 98(5) - not an elective provision - operates
automatically when conditions are met
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Part 4: Transfer of Property by
Partnership to a Corporation
 Rollover
for incorporation of partnership – s.
85(2) and s. 85(3)
 Election form - T2058
 2 step process: s. 85(2) rollover of partnership
property followed by s. 85(3) rollover of shares to
partners
 Partnership must be wound up within 60 days of
the s. 85(2) transfer
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Incorporation of Partnership
 Partnership
may receive cash and shares from
the corporation as consideration for the s. 85(2)
asset transfer
 S. 85(3) - rollover treatment for the transfer of
the consideration received from the corporation
to the partners on the winding-up of the
partnership
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Part 5: Limited Partnerships (LP)
 Common
in real estate, tax shelter investments
used to limit legal liability and limit risk to
amount invested (capital contribution), i.e. not
jointly and severally liable for partnership’s acts,
nor are they liable to compensate for losses
incurred by LP
 Limited Partner – S. 96(2.4) definition
 Usually
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At-risk Rules
 S.
96(2.1) to 96(2.7) limit the amount of losses
which can be deducted by a limited partner for
tax purposes
 Write-off limited to the “at-risk” amount
 S. 96(2.2) - calculation of the at-risk amount
 Running total of capital contributions (ACB of
initial investment) less write-offs allocated
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Negative ACB of LP
 Partner
realizes capital gain at end of fiscal
period of partnership in which ACB went
negative
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