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18%20Partnerships

18%20Partnerships - Chapter 18 Partnerships Introduction...

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Chapter 18 - Partnerships
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Introduction Only individuals, corporations and trusts are taxable entities in Canada. Individuals and corporations are also separate legal entities Trusts are not considered legal entities Partnerships are not legal entities separate from the individual or corporate partners, and are not taxable (except for a SIFT Partnership, discussed later) Deeming rule: for purposes of determining the income or loss of the members of a partnership, the partnership is considered to be a person resident in Canada. Rule only applies for determining income, the partnership is not taxable Income is determined for the partnership, and flows through to the individual or corporate partners, who then pay their tax
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Partnerships Defined As partnerships have to calculate income as if they were a person, it is important to know if an organization is a partnership or not. – Individual partners do not have flexibility with respect to the calculation of partnership income. Partnerships may be confused with: co- ownership, a syndicate, or a joint venture – For these types of organizations, there is no requirement for a separate calculation of income, and participants may be able to choose as individuals how income is to be determined.
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Partnership Defined There is no definition of partnership in the ITA, however, IT-90 provides some guidance: Three basic elements are required for an organization to be a partnership: Two or more taxable entities are involved The taxable entities are carrying on business The business is carried on to make a profit. The existence of a valid partnership agreement would serve to support the view that a partnership exists. A partnership agreement would address: Sharing of profits Filing of financial statements and tax returns Mutual rights of management control Location of bank accounts Rights and duties of partners Provincial registration of partnership.
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Types of Partnerships General partnership (most partnerships) – Composed of general partners who manage the business and are equally liable for partnership liabilities – Rights, duties and obligations of general partners include: Actions of a partner are binding on partnership Each partner is liable for unpaid partnership liabilities Property of the partnership is held exclusively for use of the partnership Partners are entitled to share equally in profits/ losses unless there is an agreement to the contrary Partners not entitled to interest on capital contributions or remuneration (these are considered withdrawals of capital)
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Types of Partnerships Limited partnerships Has at least one general partner with unrestricted liability, and one or more limited partners who have limited liability Requires registration as a limited partner with the province in which it operates, or is considered a general partnership.
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