Partnership: Tax

A partnership is not a taxpayer for Canadian income tax purposes and does not file an income tax return or pay income tax. Under section 96 of the Income Tax Act, partnership income is computed at the partnership level as if the partnership were a separate person resident in Canada, and the income or loss so computed is allocated to the partners, who report their shares on their own returns. A partnership is, however, a person for GST/HST purposes and registers, collects, and remits GST/HST in its own name. This page sets out the computation and allocation of partnership income, the partnership information return, the special rules affecting partners, and provincial considerations.

COMPUTATION OF PARTNERSHIP INCOME

• Income is computed separately for each source (business, property, taxable capital gains) using the ordinary rules, including deductions for reasonable expenses and capital cost allowance, which is claimed at the partnership level.

• Fiscal period: a partnership of which any member is an individual, a professional corporation, or another partnership with such a member must generally use a December 31 year-end. An individual partner may elect an off-calendar fiscal period under section 249.1, subject to the alternative method of reporting additional business income.

• Character is preserved: taxable capital gains, dividends, foreign income, foreign taxes paid, charitable donations, investment tax credits, and political contributions retain their character in the hands of the partners.

• Reserves, non-deductible expenses, and the 50% limitation on meals and entertainment apply at the partnership level.

ALLOCATION TO PARTNERS

• Income and losses are allocated in accordance with the partnership agreement in effect for the fiscal period.

• Under subsection 103(1), where the principal reason for an allocation may reasonably be considered to be the reduction or postponement of tax, the CRA may reallocate income on a reasonable basis.

• Under subsection 103(1.1), an allocation between non-arm's-length partners that is not reasonable having regard to capital invested, work performed, and other relevant factors may be reallocated.

• Each partner is taxed on the allocated share in the taxation year in which the partnership's fiscal period ends, regardless of whether cash is distributed.

REPORTING BY PARTNERS

• Individual partners: report business income on Form T2125, together with the amounts shown on any T5013 slip received; pay self-employed CPP or QPP contributions on Schedule 8; and pay income tax by instalments where required. Filing deadline June 15, with payment due April 30.

• Corporate partners: include their share in net income on the T2; the corporate partner's share of the partnership's active business income is eligible for the small business deduction only within the specified partnership income limits under subsection 125(1).

• Trust partners: include their share in trust income on the T3 return.

PARTNERSHIP INFORMATION RETURN (FORM T5013)

A partnership that carries on business in Canada, or is a Canadian partnership with Canadian or foreign operations, must file the T5013 Partnership Information Return (Form T5013 FIN, schedules, and T5013 slips) for a fiscal period where:

• at the end of the fiscal period, the absolute value of its revenues plus the absolute value of its expenses exceeds $2,000,000, or it has more than $5,000,000 in assets; or

• at any time during the fiscal period, it is a tiered partnership (it has another partnership as a partner or is itself a partner in another partnership), it has a corporation or a trust as a partner, it invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership, or the CRA has requested a return in writing.

Filing deadline

• Where all members throughout the fiscal period were individuals (including trusts): March 31 of the year following the calendar year in which the fiscal period ended.

• Where all members were corporations: five months after the end of the fiscal period.

• In all other cases: the earlier of March 31 of the following calendar year and the day five months after the end of the fiscal period.

• T5013 slips must be issued to each partner by the filing deadline. Partnerships with more than five slips must file electronically.

• Late-filing penalty: $100 multiplied by the number of members, for each month or part month the return is late, to a maximum of five months, with higher penalties for repeated failure or failure to comply with a demand.

• Partnerships with Quebec members or operations also file the TP-600 return and RL-15 slips with Revenu Québec.

ADJUSTED COST BASE OF A PARTNERSHIP INTEREST

• A partnership interest is capital property. Its adjusted cost base (ACB) is increased by capital contributions and the partner's share of income (including the full amount of capital gains), and decreased by drawings and the partner's share of losses.

• A negative ACB of a limited partner or a non-active general partner is deemed to be a capital gain at the end of the fiscal period (subsection 40(3.1)).

• The disposition of a partnership interest gives rise to a capital gain or loss equal to proceeds less ACB.

LIMITED PARTNERSHIP AND AT-RISK RULES

• A limited partner may deduct partnership losses only to the extent of the partner's at-risk amount (subsection 96(2.1)): generally, the ACB of the interest plus the share of current-year income, less amounts owed to the partnership and any guarantees or protective arrangements.

• Losses denied under the at-risk rules become limited partnership losses, which may be carried forward indefinitely and deducted against future at-risk amounts.

• Limited partnership investments are subject to the tax shelter identification and reporting rules where applicable.

TRANSFERS AND REORGANISATIONS

• Transfer of property to a Canadian partnership: subsection 97(2) permits a tax-deferred rollover at an elected amount, by filing Form T2059 jointly with all partners.

• Transfer of partnership property to a corporation: subsection 85(2) permits a rollover where property is transferred in exchange for shares and the partnership is wound up within 60 days (subsection 85(3)).

• Dissolution: subsection 98(3) permits a rollover where partnership property is distributed to partners in undivided interests; subsection 98(5) applies where one partner continues the business as a sole proprietorship.

• Retirement: a retiring partner who retains a right to receive partnership property is treated as a partner in respect of that residual interest until the right is satisfied (section 98.1). Income-sharing payments to a retired partner are taxable under section 96(1.1).

GST/HST AND PROVINCIAL SALES TAXES

• The partnership, not its partners, registers for GST/HST where its taxable supplies exceed the $30,000 small supplier threshold in a single calendar quarter or over four consecutive quarters.

• Partners are jointly and severally liable with the partnership for its GST/HST obligations.

• Partner expenses incurred personally in respect of partnership activities may qualify for a GST/HST rebate to the partner (Form GST370) where the partnership is a registrant.

• Provincial sales tax registration with the province is required in British Columbia, Saskatchewan, and Manitoba, and QST registration with Revenu Québec in Quebec.

PROVINCIAL AND TERRITORIAL CONSIDERATIONS

• Individual partners pay provincial or territorial tax according to their province of residence on December 31, at the rates set out on the Individual: Tax page.

• Corporate partners allocate their share of partnership income among provinces according to the permanent establishments of the partnership, and apply the provincial corporate rates set out on the Corporation: Tax page.

• Quebec: TP-600 and RL-15 slips; Quebec partners file the TP-1 and pay Quebec tax and QPP and QPIP contributions on their partnership income.

• Alberta: corporate partners with a permanent establishment in Alberta through the partnership file the AT1 return.

• Some provinces impose capital or premium taxes on specific industries (such as financial institutions) that extend to partnerships; these are confirmed by industry.

SOURCES

• Income Tax Act, ss. 40(3.1), 53, 85(2), 96, 97, 98, 98.1, 103, 125(1), 229, 233.3 and Regulation 229.

• Canada Revenue Agency, Guide T4068 Guide for the Partnership Information Return (T5013 Forms).

• Canada Revenue Agency, Income Tax Folio S4-F16-C1 What is a Partnership?

• Revenu Québec, Partnership Information Return (TP-600).