Like a sole proprietorship, partnerships are not seen as a separate entity and therefore do not file a separate tax return. Instead, the partners include their share of the partnership income/losses for the year on their personal, corporate or trust income tax returns.
Each partner also has to file financial statements or a Statement of Activities (i.e. Form T2125 - Statement of Business or Professional Activities).
The share of income/losses attributed to each partners return should have been determined in the partnership agreement and includes their share of the income/loss whether or not the money remains in the partnership or is withdrawn (i.e. leaving the money in the partnership will not stop you from having to include it in your income and pay taxes where applicable).
Example – If “Charley” and “Sammy” have a 60/40 share in a partnership with $100,000 in income, Charley would claim partnership income $60,000 ($100,000 x 60%) on his return and Sammy claim $40,000 ($100,000 x 40%).
The income earned by each partner would also be added to the adjusted cost base of their interest in the partnership. If a withdrawal is made, this amount would be subtracted from that partner's adjusted cost base.
Example – Continue to assume that Charley and Sammy have a 60/40 partnership with partnership income of $100,000. Charley left all $60,000 in the business and Sammy withdrew $20,000, leaving $20,000 in the partnership.
The following year, they again have a partnership income of $100,000. Sammy withdraws $10,000 and Charley withdraws $70,000.
In year one, Charley would claim partnership income of $60,000 ($100,000 x 60%) on his income tax return and Sammy would claim $40,000 ($100,000 x 40%), even though neither received the full amount. The adjusted cost base of Sammy would increase by $20,000 ($40,000 in partnership income less $20,000 withdrawal. The adjusted cost base of Charley would increase by $60,000 ($60,000 in partnership income with no withdrawals).
In year one, Charley would again claim partnership income of $60,000 ($100,000 x 60%) on his income tax return and Sammy would claim $40,000 ($100,000 x 40%). The adjusted cost base of Sammy would increase by $30,000 ($40,000 in partnership income less $10,000 withdrawal. The adjusted cost base of Charley would decrease by $10,000 ($60,000 in partnership income less $70,000 withdrawal).
At the end of year two, Charley would have accumulated an adjusted cost base of $50,000 ($60,000 in year one less $10,000 in year two) and Sammy would have accumulated an adjusted cost base of $50,000 as well ($20,000 in year one and $30,000 in year two).
Like income, when there is a tax credit to be received by the partnership, such as that resulting from a charitable donation made by the partnership to a registered charity, the credit would flow through to the partners, their share is determined by the partnership agreement or the partners themselves. In addition, the adjusted cost base of their interests in the partnership would be reduced by their share of the credit.
Example – In year two, Charley and Sammy’s Partnership makes a $2,000 donation to a registered charity.
Charley would claim a tax credit of $1,200 ($2,000 x 60%) and Sammy would receive a tax credit of $800 ($2,000 x 40%). Charley’s adjusted cost base at the end of year two would now be $48,800 ($50,000 less $1,200) and Sammy’s would be $49,200 ($50,000 less $800).
It is important to note that there are exceptions to these procedures as they relate to limited partners.
For more information of filing a tax return for a partnership, or limited partnership, contact us today.