Taxing partnership income

As a member of a partnership, you must report your share of the partnership’s profit or loss for its fiscal period ending in 2016.1 While you can normally claim your share of partnership losses against your other sources of income, this may not always be the case if you’re a member of a limited partnership (see topic 153).

Certain expenses incurred outside the partnership may also be deductible. For example, if you borrowed money to invest in the partnership, the interest on that loan is generally deductible (see topic 150). Any expenses that you personally incur in the course of carrying on the partnership business (e.g., promotional and automobile expenses) are also deductible. However, meal and entertainment expenses are only partially deductible (see topic 11), and some automobile expenses may be limited (see topic 35).

Although the Act requires that all Canadian partnerships file an information return (Form T5013), the CRA administratively excepts certain partnerships from this requirement.

The CRA’s current position is that a partnership is required to file an information return if, at the end of its fiscal period, it has an absolute value of gross revenues plus an absolute value of expenses of more than $2 million, or has more than $5 million in assets. A return also has to be filed if, at any time during the fiscal period, the partnership is a tiered partnership; the partnership has a corporation or a trust as a partner; the partnership invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership; or if the CRA requests that a return be filed.

As a result, although it’s still a good idea to file the return, partnerships that have simple structures and modest financial activity are not required to file a partnership return.

1 Special rules for corporate partners are discussed below.

Rules for corporate partners

In some cases, a partnership can be held by corporate partners. This type of structure used to allow for the deferral of tax where the partnership had a year-end that ended after the year-end of the corporation. Recent rules have eliminated this tax-deferral strategy in a manner that will spread the one-time tax cost from the collapse of the deferral over a five-year period (15% in 2012, 20% in each of 2013, 2014 and 2015, and 25% in 2016). These rules apply where the corporate partner is entitled to more than a 10% income allocation from the partnership and are applicable to a corporation’s first taxation year ending after March 22, 2011.

These rules are extremely complex. If you have an interest in a corporation that is caught by these rules, you should consult with your tax advisor.

The 2016 federal budget proposed new rules which will apply to certain partnership structures that have been set up to multiply a corporate partner’s access to the small business income tax rate (see topic 24). If your corporation has an interest in a partnership, you should consult with your tax advisor to determine if the proposed rules affect you.