Partnerships Flashcards
(9 cards)
Must each partner in a partnership contribute an amount of capital that is proportionate to its profit-sharing
ratio? Explain.
A partner doesn’t need to contribute capital based on their profit-sharing ratio. Profit can be shared based on capital, effort, or both. A partner may contribute skills or management time instead of money and still receive a fair share of profits, depending on the partnership agreement.
To what extent is each partner liable for the obligations of the partnership? Compare this with the obligations of shareholders in a corporation.
Each partner is fully liable for all partnership debts, even beyond their share or investment. For example, a partner with just 10% ownership could be on the hook for 100% of the debts if others can’t pay. In contrast, corporate shareholders only risk the money they invested in shares — their personal assets are protected.
“The amount of tax paid on partnership profits depends on the nature of the separate partners and not on the nature of the partnership itself.” Explain.
A partnership doesn’t pay tax — its income is split among the partners. Each partner reports their share and is taxed based on who they are. For example, individuals pay personal tax rates, while corporations may get the small business deduction but face another tax when profits are paid to shareholders.
A partnership may be preferable to a corporation when the business venture is new and expects to incur
losses in its early years. Explain why.
A partnership allows early losses to be used right away by the partners to reduce their other income and taxes. This creates extra cash flow that can help fund the business during tough early years. In a corporation, losses stay in the company and can’t be used until it becomes profitable
When net income from business for tax purposes is being determined, the timing of certain expense deductions is discretionary. For example, a taxpayer may claim all of, some of, or none of the available capital cost allowance. Similarly, the deduction of certain reserves is discretionary. In a partnership structure, is the deduction of discretionary items decided by the partnership as a whole, or can each partner make a separate decision on its proportionate share? What conflict can arise as a result?
In a partnership, discretionary items like CCA or reserves must be decided at the partnership level before profits are allocated. Individual partners cannot make separate choices for their share. This can create conflict—some partners may want to maximize income to use up losses, while others may want to reduce income to lower taxes. [ITA 96(1)(c)]
“Partnership profits or losses allocated to the partners retain their source and characteristics.” What does this mean? How does this compare with the manner in which a corporation’s profits or losses affect its shareholders?
A partnership passes income to partners in the same form it was earned—capital gains stay capital gains, business income stays business income. This lets partners use special tax treatments. In a corporation, all income becomes a dividend when paid to shareholders, so the original source is lost.
What is a partnership interest? What type of property is it considered to be for tax purposes?
A partnership interest is a partner’s equity stake, based on the partnership agreement. For tax purposes, it’s considered capital property, so any sale or disposal usually results in a capital gain or loss.
In what circumstances are non-residents subject to Canadian income tax?
Non-residents are taxed in Canada if they:
Work in Canada,
Run a business in Canada, or
Sell taxable Canadian property.
They may also pay a withholding tax on Canadian-source income like dividends, rent, or royalties.
Can a Canadian resident be subject to tax in Canada as well as in a foreign country on the same earned income? If yes, explain how. Also, what mechanism is available to minimize double taxation?
Yes, a Canadian resident is taxed on worldwide income, and the foreign country where the income was earned may also tax it. To prevent double taxation, Section 126 of the Income Tax Act allows Canadians to claim a foreign tax credit for taxes paid to the foreign country on that same income
