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Many individuals and corporations have an investment in a partnership. Although you may see it as simply another type of investment, holding an interest in a partnership is different than holding shares of a corporation. A partnership is a relationship rather than a legal entity, and it is not defined in the Income Tax Act. The common law definition is that a partnership is the “relationship that subsists between persons carrying on business in common with a view to profit”.
Partnerships can be of two different forms. A limited partnership has at least one general partner and one or more limited partners. The general partner‘s personal liability for debts and obligations of the partnership is not limited, whereas a limited partner’s liability is limited under partnership law. Under a general partnership all partners’ shares in the risk and reward of the partnership activities and liabilities of all partners are unlimited.
A partnership is not a legal taxpaying entity. Income or loss is calculated at the partnership level and allocated to the partners. The partners then include this amount in calculating their own taxable income. Partners are then required to report this income or loss, regardless of actual distributions from the partnership.
Income from a partnership retains its character in the hands of the partner. The details of this income and deductions will show up in specific boxes on your slip. Always refer the T5013-Instructions that you receive along with your slip for guidance on how to report the information on your tax return.
Distributions from the partnership are not considered income to the recipient, but rather are an adjustment to the cost base of the partnership interest.
Although it is now mandatory that the partnership calculate your adjusted cost base (“ACB”), it is important for members of a partnership to keep a running annual calculation. This is especially important when you dispose of your partnership units. You will need to calculate the difference between proceeds and ACB in order to determine any capital gain or loss on disposition.
Very basically the adjusted cost base is calculated as follows:
Note that the ACB at the end of the fiscal period does not include the income or loss for the period. This adjustment is done at the commencement of the next fiscal period, with the exception of a limited partnership loss. To the extent that the limited partner deducted the loss, the loss from a limited partnership impacts the ACB in the year that it was incurred.
There are several other adjustments to your ACB that should be included where applicable. It would be prudent to speak with your advisor or refer to the “Guide for the Partnership Information Return (T5013 Forms)” available on the CRA website to ensure that you are capturing all relevant adjustments.
The at-risk rules apply to limited partners. These rules generally limit the amount of loss the limited partners can claim to the amount of actual at-risk capital. This amount is generally shown in box 22-1 of you T5013.
Your at-risk amount (“ARA”) is calculated starting with your ACB and adding in the income allocated in the year it arises. The timing of the inclusion of income is the main difference between your ACB and ARA, although there may be other adjustments required, including deductions for specific types of financing. Calculating your ARA can be very complex and the guide mentioned above or your advisor should be consulted.
If you hold limited partnership units, and the ACB is negative, you will have a deemed capital gain and your ACB will be reset to zero. In the future, if there is a positive ACB, you may elect to recognize a capital loss on the now positive ACB and apply this loss against the deemed capital gain to recover tax paid on that amount. This loss may be generated within 3 years of recognizing a gain from a negative ACB.
New filing criteria were introduced for T5013s for fiscal periods ending on or after January 1, 2011. These rules broadened the net of partnerships that are required to file T5013’s.
If you are a corporation that is a member of a partnership, the 2011 Federal Budget eliminated an opportunity to defer partnership income where the partnership and the corporate partner have staggered year ends. This applies to taxation years of a corporation that end after March 22, 2011, and requires a corporation to accrue income from the partnership for the portion of the partnerships’ fiscal period that falls within the corporation’s taxation year. There is a transitional relief available that essentially brings this accrual into income over a five year period.
In February 2012, Canada Revenue Agency (“CRA”) issued a revised version of the Partnership Information Return (T5013). If you are an investor receiving a T5013 slip, there is no difference from what you have received before. If you are a partnership preparing your tax filing you will be required to provide additional information than in the past.
The “Guide for the Partnership Information Return (T5013 Forms)” has been updated in conjunction with the change in the forms. If you are preparing T5013s you should review this guide in detail to see what changes apply to you. Some significant items to note are discussed below.
New forms issued include “T5013 Schedule 5 Allocation of Salaries and Wages, and Gross Revenue for Multiple Jurisdictions”. This information was previously disclosed within the boxes on the T5013 Summary. Additionally,”T5013 Schedule 9, Affiliated Corporations, Partnerships, Partners or Trusts” is now required to report your relationships.
Of all of the new changes required, the most onerous are adjustments to ”T5013 Schedule 50 “Partner’s Ownership and Account Activity”. This schedule is divided into two parts – one section that provides information for partners who are member of the partnership at the end of the fiscal period, and one section for partners who disposed of all or part of their partnership interest in the fiscal period.
Many general partnerships have not historically tracked the ACB of their partners, leaving it solely to the members of the partnerships to calculate. However, this information is now required on Schedule 50. The CRA has stated that they will not impose penalties on T5013 returns for 2011 or 2012 fiscal periods as a result of incomplete ACB and ARA information on the schedule 50, where it can be demonstrated that the partnership has extended their best knowledge and abilities to meet the filing deadline. However, it is advisable to start accumulating the required information now to ensure that you are able to meet your filing obligations.
Please contact your local MNP Tax advisor if you need assistance with any of these matters.
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