What is a Partnership?

By Nizam Shajani, CPA, CA, MBA
November 2, 2020

A partnership is a relationship between two or more persons. From a tax perspective, this includes a business that is carried on with a view to profit. However, a partnership is not taxable, rather it is a flow through instrument that calculates income and capital gains where those tax attributes are allocated and taxed to the partners.

Canadian partnership is defined in subsection 102(1) of the Income Tax Act specifically as “a partnership all of the members of which were, at any time in respect of which the expression is relevant, resident in Canada.” However, the word partnership itself is not defined in the Act. And with the benefits of tax planning opportunities, there has been much litigation around what constitutes a partnership.
The courts have provided direction on determining if a partnership exists and thereby an insight into the definition of a partnership for tax purposes. In the case of Continental Bank Leasing Corporation (CBLC),The Federal Court of Appeal indicates a partnership includes “the contribution by the parties of money, property, effort, knowledge skills or other assets to a common undertaking, a joint property interest in the subject-matter of the adventure, the sharing of profits and losses, a mutual right of control or management of the enterprise, the filing of income tax returns as a partnership and joint bank accounts.”

In that ruling, which was supported by the Supreme Court of Canada, the following questions are asked:
1. Was there a business?
2. Was the business carried on in common?
3. Was there a view to profit?

Additional considerations include:
• Contributions by the parties (money, property, effort, knowledge, skills or other assets).
• Joint property interest.
• Sharing of profits and losses.
• Mutual control or management.
• Joint bank accounts.
• Correspondence with third parties.

Was there a business?
The courts have illustrates three elements of a business for commercial law to include:
1) The occupation of time, attention, and labour,
2) The incurring of liability to third parties, and
3) A profit earning purpose.

However, the various provincial Partnerships Acts use a broader definition of a business. For example, the Partnership Act of Alberta notes “business includes every trade, occupation and profession.” The courts have reverted to the provincial partnership acts to determine if a partnership was in existence for tax purposes.
Was the business carried on in common?

It is the course of conduct of the partners that supports the stated intentions of the parties that is relevant in determining if a business was carried on in common as a partnership. The Partnership Act of Alberta notes a “partnership means the relationship that subsists between persons carrying on a business in common with a view to profit.” As such, this relationship is evidence of the partnership. This could include the relationship being detailed in a partnership agreement.
Was there a view to profit?

The requirement of a view to profit should not be understated as this seems the be an issue of the most contention brought forth to the courts by the Minister. The courts will consider the relationship between the partners to determine if there was a view to profit.

Membership to a partnership
In general terms a member to a partnership would be a person who carried on business in common with another person or persons. This is evidenced by the conduct of the persons involved and often supported by a partnership agreement.

General Partnership vs. Limited Partnership
The distinction between a general partnership (GP) and a limited partnership (LP) have legal and tax consequences. Members of a GP are jointly and severally liable for the obligations of the partnership, allowing each GP to bind the firm to contractual obligations. However, an LP allows for one or more persons to be the general partner, with the remaining group being limited partners. The LP allows for the limited partners to limit their liability to the money and other property contributed to the LP unless the limited partner takes part in the management or control of the business.

Limited liability partnerships (LLP) is a type of partnership formed in response to professionals seeking to operate a business together without incurring the professional liability of their partners. The LLP limits the exposure of risk to a limited partner’s own negligence or negligence when supervising another professional or staff member.

The liabilities and related risk taken by the member of the partnership has an impact on the taxation of the member partner. The type of partnership should therefore be considered in tax planning and to gain an understanding on how the partners of partnerships are taxed.
Partnerships can be used effectively as a tax planning tool within a corporate organization. If you are a member f a partnership or contemplating setting one up, talk to our tax experts on how to effectively use your partnership.

This information is for discussion purposes only and should not be considered professional advice. There is no guarantee or warrant of information on this site and it should be noted that rules and laws change regularly. You should consult a professional before considering implementing or taking any action based on information on this site. Call our team for a consultation before taking any action. © 2020 Shajani LLP