Chap 18 - Taxation of Partnerships

Question 1

Does a partnership pay taxes?

Answer 1

No, it does not pay taxes on a partnership level. However, it will earn income and the partners of the partnership will pay taxes on it.

All income earned by the partnership will be split according to the agreement made by the partners and they will only have to pay taxes on their respective parts

Question 2

How to determine whether a partnership exists?

Answer 2

• There must be at least 2 or more parties involved
• The partners must be carrying a business in common (must be argued to be working together)
• Their intent must be to carry on the business with an expectation of profit (can’t do a business just to generate losses)

Additional factors:
- Contributions (money, skills, etc.), joint property interst, sharing profits/losses, etc.

Question 3

What are the different types of partnerships?

Answer 3

General partnership (default): all partners are general partners, personal debts/obligations of the partnership are not limited

Limited partnership: at least one partner is a limited partner, where their debts/obligations are to the extent of their actual or promised contributions -> limited partner cannot be involved in management of partnership
must register as limited partnership, otherwise it will be a general partnership

Limited liability partnership: only used for professionals (lawyers, accountants, etc.), dependant on gov regulations

Question 4

How to calculate partnership income?

Answer 4

1- Determine total business income, property income, capital gains/losses

2- Allocate income to partners based on agreement

Question 5

Net business income for tax purposes: what do we do with these items?

Salaries/wages to partners
Interest payments on partner capital contributions
Drawings (withdrawals)
Dividend income
Personal expenses
Donations
CCA
CG/CL

Answer 5

Salaries/wages to partners - add back (salaries do not exist, partners can just take their part of income as salary)
Interest payments on partner capital contributions - add back
Drawings (withdrawals) - add back if they were deducted for accounting purposes
Dividend income - deducted (removed from business income, then taxed as dividend income); partners are taxed as if they got it directly: individual partners have to gross up + receive tax credit, corporate partners have no gross up and deduct when calculating taxable income
Personal expenses - add back
Donations - add back
CCA: discretionary (do not HAVE to take max deduction, amount must be decided as partnership before taken)
CG/CL: separate from business income because does not result in business activity. Recaptures/terminal losses are included in business income while CG/CL are separate income; taxed at 50%, individuals can use their lifetime capital gains exemption whereas corps can include that amount in their capital dividend account

Question 6

How to determine the ACB of partnerships?

Answer 6

Simplest situation: when a new partnership is found, ACB is FMV of initial contribution

When partnership interest is acquired:

• taxpayer purchases directly from one partner, ACB is equal to purchase price
• taxpayer purchases from more than 1 partner, each partner will have a disposition on a portion of their interest

Question 7

What happens to the ACB over time?

Answer 7

it will increase/decrease

Beginning: ACB at time partnership interest is acquired (for subsequent yrs, it will be opening ACB balance)
+ capital contributions
- withdrawals
(the 2 items above impact ACB on date of transaction)
+/- net business income
+/- capital gains/losses (the full amount)
+ dividends (include capital dividends, do not include gross up)
- charitable donations/political contributions
(the 4 items above impact the ACB on first day of following fiscal period)

Question 8

What does it mean when the ACB is negative? General partners

Answer 8

Negative ACB can be carried forward until partner disposes of their interest, DEFERRAL IS ONLY AVAILABLE TO GENERAL PARTNERS

Question 9

What is the at-risk amount?

Answer 9

It’s only available to limited partners, and it limits what they can deduct (unlike general partners, limited partners do not automatically deduct their portion of business loss)

Question 10

How to obtain the at-risk amount?

Answer 10

ACB of partnership interest: XXX
+ share of partnership income (not losses) for current period XXX
—————————————————————————————————————————-
Subtotal XXX
- amounts owed to partnership (XXX)
- other amounts intended to reduce investment risk (XXX)
——————————————————————————————————————————-
At-risk amount XXX

Question 11

What to do when the amount of business loss is higher than the at-risk amount?

Answer 11

The business loss will be deductible up until the at-risk amount, the remainder will be a non-deductible limited partnership loss that can be used in the future if at-risk amount increases

How to increase? If partner makes additional contributions or the partner is allocated additional income in the future

The non-deductible limited partnership loss cannot be carried back