Partnership Tax

Partnership Laws and Rules (Ontario):

It is defined by law in the Ontario Partnership Act under section 2, that a partnership is defined as the relationship between individuals that own a business among themselves and have the same goal of making a profit from it. On the other hand, section 3 of the Partnership Act of Ontario, sets the regulations that determine whether a partnership is authentic or not. Those rules are if:

• There is a joint tenancy or property, tenancy or property in common, or even part ownership, that doesn’t clear out that these renovations or properties are an example of partnership. In fact, it doesn’t matter if the owners of the property, or tenants, share profit, that is made from these properties or not, it doesn’t intend that this be a partnership.
• There are any gross returns recognized from the common joint tenants or property, then that doesn’t also prove as a legal partnership.
• There is a loan raised to a person who is entitled or in the progress of a business that is legalized under a contract, it doesn’t prove that the partnership is legalized between the lender and the person getting the loan. Even if the lender is entitled to receive part of the profit, as an interest to the loan given by him, it still remains as an illegal partnership.
• There is a person from the firm, or business, receiving a portion of payments for his goodwill and outstanding performance in sales, it still isn’t considered a reason for the legalized partnership.
• There isn’t any evidence or clear facts to prove the legal partnership between these individuals, then a simple receipt containing the share of profit can be enough to prove that a person is a partner in this business. Although in some cases, this receipt isn’t considered evidence of this person being part of the partnership. For example:
• The receipt the person holds is a debt receipt payment from the business’s profit isn’t considered clear proof that the person is in a legal partnership for that business.
• A person holding a contract that states he/she receives profit from the service they are providing for the business, or have already provided, doesn’t mean that the person is in a legal partnership with that business.
• Finally, a person, agent, or servant of the business that is receiving an annual payment from the company for his/her services, doesn’t make that person a legal partner for the same business. Regardless of the person was:
• Married to the deceased partner of the business immediately before he/she died.
• Living with the deceased person under a legal marriage before he/she died.
• A sibling of the deceased partner.

Partnership Liability:

According to the partnership act and rules, in terms of liability in a partnership, it is indicated in section 10 that the individuals that are considered legal business partners are liable for all debts and obligations that occur to the business. Furthermore, in the case where one of the partners dies, his/her’s estate is liable for the debts and obligations.

Moreover, for income tax circumstances, the following are the different types of partnerships:

• Limited Partnership.
• Canadian Partnership.
• Professional Partnership.
• Specified Investment Flow-Through Partnership.

Nevertheless, it’s clearly stated according to Ontario’s Limited Partnership act under section 9, that no partner is required or legally entitled to the obligations and debt of the business in a limited partnership. Unless, if there’s an agreement between the partners for contributing to the company, of course, according to the limited partnership rules. This means that the person in a limited partnership is liable for the debt and other obligations according to the capital contribution made. Furthermore, in accordance with subsection 2(2) of the Limited Partnership Act, one or more individuals need to be considered as general partners and need to hold responsibility for debts and obligations. Also, one or more individuals of the partnership need to be limited partners and limited to the debt and obligations.

For a Canadian partnership, it is required that all the members of the partnership need to be Canadian residents in accordance with Subsection 102 (1) of the Income Tax Act. It states that the disposition of the property from or to a partnership to its partners is enabled to a tax-free rollover basis.

Moreover, the Ontario Partnership Act allows professionals to join in limited liability partnerships according to:

• Providing the partnership that is registered in the legal name which is under the business’s name
• The profession is allowed for the professionals to practice their expertise according to the limited liability partnership structure.
• The amount of the liability, that is supposed to be maintained under the minimum amount by the professionals.

According to the Law Society of Ontario, lawyers that are practicing their profession in law, they are allowed to form a multi-disciplined partnership with other professionals.

Following subsection 197 (1) of the Income Tax Act, a specified investment flow-through partnership (SIFT):

• Is a partnership based on Canadian residents.
• It holds non-portfolio property
• On the stock exchange, the investments in the partnership are listed for trade even in public markets.

In general, what needs to be made clear is that the specified investment flow-through partnership’s rules are used for determining the tax on income trusts. Meaning, it defines the amount of tax on partnerships and trust entities as a corporation.

Pros and Cons of Partnerships:

Advantages:

• The partner’s income is the only taxed amount.
• Losses from a partnership can be deducted by a partner, against income made from outside the partnership.
• It doesn’t cost a lot to start-up a partnership
• When transferring a property from one partner to another, it is considered a tax-free rollover.
• Income and losses from a flow-through partnership are a huge benefit at a partnership level.
• Ownership of the business is controlled and maintained by the partners.
• A capital increase in the business can be reached when increasing the number of partners.

Disadvantages:

• A low tax rate is unreachable and unavailable for the income of active businesses, as partnerships aren’t entitled to this benefit.
• Tax advantages and limited liability aren’t available for partnerships as corporations cannot benefit from this advantage.

Income Tax Act

The term “partnership” in the Income Tax Act isn’t clearly defined. For income tax purposes and other related reasons, a partnership isn’t considered a person rather the income made is considered as if it’s a person (According to section 96 of the Income Tax Act). Relatively, the individuals in a partnership recognize and report their income or losses of the business on their personal income tax returns.

On the other hand, annual income tax returns aren’t necessarily filed for partnerships. However, information returns need to be filed by partnerships if the business is based in Canada, or it has Canadian or foreign investments according to subsection 229 (1) of the Income Tax Regulations.

Subsection 96(1) of The Income Tax Act

This part of the Income Tax Act states the rules and regulations worked upon to determine and compute the follow-through partnership’s incomes and losses. According to subsection 96(1), at the partnership level, income and losses are calculated and determined then allocated and distributed between individuals of the partnership. The allocation is based on each individual’s share of the partnership.

Moreover, any individual of a partnership that is obligated to pay taxes on his/her income shall be determined the tax amount of his/her income/losses as if:

• A separate person is a resident of Canada from this partnership.
• It’s determined as the fiscal period of the partnership’s tax year.
• The activities of the partnership were carried on by the individuals as separates and determination, were established, of the amount of the:

o Taxable capital gains and losses from the disposition of the partnership property

o Losses and income from sources of a specific place of the partnership.

On the other hand, for each year of taxation for a partnership determination will be computed based on:

• The income amount of the partnership for the year of taxation in which the partnership’s taxation year ends, to the extent of that taxpayer’s share.
• The loss amount of the partnership for the year of taxation in which the partnership’s taxation year ends, to the extent of that taxpayer’s share.

Thanks to the Partnership Act (Ontario), section 96 of the Income Tax Act indicates a hypothetical calculation and determination of the losses or income of a separate legal entity partnership, even though that partnership isn’t recognized or indicated as a separate legal entity under the Partnership Act (Ontario). Furthermore, the occurrence of the shares of the partnership is what determines the amount of the income and losses of a flow-through partnership.

Our Tip

As you may have recognized from this article, establishing a partnership isn’t a walk in the park. For when it comes to issuing and starting up a partnership business, many complex areas in the law require a thorough plan and efficient execution to benefit from its advantages. Indeed, a partnership can be a very important tool for achieving a successful business and having your taxes planned out easily. However, if you’re considering and fully determined to establish a partnership business or corporation, then you should consult a Canadian Tax Lawyer or a professional Tax Accountant. He/She can easily draw out a plan and effective steps to take for building your effective business partnership. Leave it to the professionals so that you don’t make any unwise and reckless decisions that won’t get your company to the standards you wish for.