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Unformatted text preview: 3520-10: Last updated on 9/18/091-71Lecture 10: Basic rules for Partners and Partnerships, for Trusts and Beneficiaries and International Taxation1.1Recommended Exercises and Self-study Problems PartnershipsExercises 18-1 to 18-6Self-study Problems 18-2 and 18-3TrustsExercise 19-2, 19-3International TaxationExercises 20-21Self-study Problem 20-7, parts A, B and C2Partnerships and Trusts: Flow-through EntitiesPartnerships and Trusts are often referred to as flow through entities because the income earned by the partnership or trust can be flowed through to investors who have an interest in the partnership or trustSee 18-4The mechanics of the flow-through in each case is slightly different3Partners and PartnershipsA partnership is an automatic flow throughFor example, if a partnership earns $100,000 and there are 10 partners (10% each), each partner earns and must pay tax on $10,000. Note: partners can decide to share income/losses in any manner that they wish (i.e., they do not have to equally share in the income/losses of the partnership) Further, each type of income flowed through maintains its character (e.g., business income, interest income, etc.)See 18-1 to 18-5There are basically three types of partnerships:general partnerships (which have no limited liability protection)limited partnerships (used for investments in tax shelters, oil & gas and real estate) andlimited liability partnerships (referred to as LLPs and used by accounting and law firms)The last two types of partnerships are formed under provincial legislation and provide some limited liability protection for partnersThe limited liability protection is different in each case and has tax consequencesSee 18-17 to 18-22A partnership information return must be filed if the partnership has > 5 partners3520-10: Last updated on 9/18/092-7This is not a tax returnThis is an information return similar to one filed for T4sEach partner then gets a slip which sets out his or her share of the partnership income3.1Allocations to Partners and Partner Expenses [ITA 96]Each partner is allocated a % of this Division B income of the partnership and must pay tax on this income whether or not they receive itThe income is added to the ACB of the partner’s “partnership interest”. The partnership interest is a capital property and it represents the partner’s ownership interest in the partnershipWhen partners actually take money out of the partnership it is called a “draw” or “drawing” (because it is generally a withdrawal of cash)Draws are not taxed because the income is taxed as it is earnedInstead, the draw reduces the ACB of the partner’s partnership interestMost deductions are claimed at the partnership levelThis includes discretionary deductions (such as CCA and reserves)The partnership must decide on the amount and will usually claim the maximum amount of CCAThere are a few items computed at the “partner” level rather than by the entire...
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- Spring '09
- Corporation, Types of business entity, Taxation in the United States, partner