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Will the New Partnership Filing Requirements Affect My Partnership?

01/03/2011


Starting January 1, 2011, the Canada Revenue Agency (CRA) implemented new filing criteria for partnership information returns (T5013). The changes affect partnerships with a fiscal period that ends on or after January 1, 2011. The Income Tax Act requires all partnerships to file a partnership information return but administratively, the CRA has always allowed certain partnerships not to file. The change now requires more partnerships to file a T5013.

A partnership is now required to file if they meet any one of the following criteria:

  • In a fiscal year, the partnership has an absolute value of revenues plus expenses of more than $2 million, or has more than $5 million of assets.
  • The partnership is a tiered partnership (i.e. a partnership that owns another 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
  • The Minister of National Revenue has requested the partnership to file.

The main changes to the criteria are the revenue/expenditure and cost of asset criteria. The key issue with the revenue and expenditure criteria is that it requires the partnership to look to the absolute value of the partnership revenues and expenditures to determine if it exceeds the $2 million threshold. Therefore, if the partnership reports $500,000 of revenue and $1,700,000 of expenses in the period, the absolute value is $2,200,000, and therefore the partnership would be required to file. The second criterion that needs to be examined by the partnership each fiscal period is whether the cost of the partnership’s assets exceeds $5 million. The CRA has defined cost to exclude depreciation and will include both tangible and intangible assets. These criteria are not necessarily intuitive that taxpayers and advisors have not had to think about in the past.

How does this revised CRA policy affect you?

If you are currently operating your business through a partnership and you were never previously required to file, beginning in 2011, you may need to file. The most significant issue for new filers will be compiling the required information for the T5013 information return. The return requires a balance sheet to be prepared for a partnership. Unless required for other reasons such as debt financing, many partnerships (particularly those among family members) may not have an accurate accounting of the partnership balance sheet. To compile the balance sheet, historical costs of each partnership asset and liability need to be determined and reported. Additionally, the partner capital account needs to be calculated at the end of the fiscal period in question. The partner capital account accounts for capital contributions to the partnership, allocation of partnership income each fiscal period, as well as a summary of all withdrawals taken from the partnership. For partnerships that have been in existence for years or even decades, this information may not be readily available. Therefore, if you think your partnership may be required to file a T5013 under the new rules, you may want to start gathering this information as soon as possible.

Reporting of the partnership income on a partner’s personal tax return will also change for partnerships now required to file T5013 information returns. In the past, most partners would have reported gross revenues and expenses of the partnership on a statement of business, partnership, or farming activities on their personal Income Tax return. These schedules will no longer be completed and each partner would now report their net income allocation as reported on their T5013 slip received from the partnership (similar to reporting T5 income, etc.).

Filing a T5013 Information Return for your partnership, regardless of whether it’s required by the CRA policy is a prudent business practice. For partnerships who do file the information return, the income reported by the partnership is officially assessed and subject to statute barring rules. In general, once a partnership’s income is assessed, after three years, the taxation year cannot be reassessed by the CRA. Therefore, without this protection the CRA may, for an indefinite period, come back and reassess the partnership. As such, it is good practice to file the T5013 regardless of whether the partnership is administratively exempt in order to start the statue barred clock for the current year’s partnership income.