Banka: Navigating Canada’s tax code for business partnerships
Partnerships are much like sole proprietorships with some slightly different reporting rules.
The Canada Revenue Agency defines a partnership as the relationship between persons who carry on a business in common with the belief that they will make a profit.
A partnership is a way of doing business without needing to incorporate.
Both partnerships and sole proprietorships need to be registered with the Registrar of Companies.
The process is simple and can be carried out by Community Futures here in Kelowna, or via regular mail to the Registrar of Companies in Victoria.
Partnerships will automatically be assigned a partnership number by CRA when they file their first T5013 return.
A partnership pays taxes similar to a sole proprietorship whereby each person of the partnership would pay tax on their share of the income of the partnership that year at their own personal tax rates. The income tax needs to be paid whether or not the actual income was received in cash or kept in the partnership.
A partnership is formed by each party investing funds into the partnership and this investment is called their capital account.
A partner may withdraw or add funds to his/her capital account at any time during the year without incurring any tax consequences.
A partnership needs to have a legal document called a partnership agreement drawn up between the parties.
This document would need to address the conduct of the partners, such as how much capital each partner needs to keep in their capital account, what happens with the addition of a partner and what would cause the partnership to be wound up and how that would be accomplished.
A partnership is not recognized as a separate legal entity so any debts and liabilities incurred by the partnership are the responsibility of the partners. This has the effect of putting all your personal assets at risk, including your house and personal savings.
Partners are also fully liable, jointly and individually, for debts incurred by each other while acting in the course of the business regardless of their share of the partnership.
There is also the danger of being considered involved in a partnership even though there has not been a formal partnership agreement drawn up.
A sample of the tests that would need to be satisfied are if there is any property owned jointly, if both names are on any documentation and if there are sharing of profits and losses.
A partnership must also keep complete records that will allow CRA to verify income or losses and other amounts allocated to the partners much the same way that a sole proprietorship is required to keep records.
These records need to be kept for six years plus the current year before they can be destroyed.
There are a number of calculations required in a partnership that are not required for a sole proprietor or a corporation. One example would be the calculation of a partner’s at risk amount.
This amount would be different from the original investment into the partnership and needs to be calculated and reported each year. There has always been a legislative requirement for a partnership to file an information return called a T5013.
This became a great burden on operating partnerships, so CRA developed an administrative policy that stated that this report was not required if you had five or fewer partners, none of which was another partnership.
What is not evident on the CRA webpage when a search on partnerships is done is that this T5013 return filing is mandatory if one of the partners is a corporation. The requirements are explained in detail on page 11 of the T4068 Guide for the R5013 Partnership Information Return.
This guide has not been rewritten since 2006, however, there is also a 2010 supplement to the guide for additional reference.
Compiling the T5013 return includes the generation of the T5013 slips for the partners so that they can claim the partnership income in their personal tax returns at their personal rates of tax.
In 2011, CRA is changing the filing requirements. The change will affect the partnerships that have a 2011 year end after Jan. 1, 2011. The change will be to base the filing of the partnership information return on financial thresholds and types of partners rather than the number of partners.
The requirements are to file the return if the partnership has an absolute value of more than $2 million (revenues plus expenses) or more than $5 million in assets or if the partnership is a tiered partnership, or if one of the partners is a corporation, or if the partnership has invested in flow through shares, or if the Minister of National Revenue has requested that a return be filed.
Gabriele Banka is a Certified General Accountant and the owner of Banka & Company Inc.