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Topics for Discussion
• Why use a Partnership?
• What is a Partnership?
• Tax Fictions of Partnerships
• Income, Loss and Gains
• Basis Calculations
• Partnership Reorganizations
• Limited Partnerships
• Tax Shelters
• Tax Shelter Opinions
• Estate Planning using partnerships
May 18, 2011 2011 Tax Law For Lawyers 2
May 18, 2011 2011 Tax Law For Lawyers 3
Predictions
• CCRA will continue to challenge taxpayers who use partnerships as a business vehicle
• CCRA will focus on whether a “business” exists and whether the partners carry it on “in common”
• More taxpayers will realize the advantages of the partnership structure and will increasingly use them
May 18, 2011 2011 Tax Law For Lawyers 4
Thought for the Day
• Anything you can do with a
corporation, I can do better with a
partnership!
May 18, 2011 2011 Tax Law For Lawyers 5
Why Use a Partnership?
• It’s not a corporation!!
• No statutory rules
• No statutory protections
• Flexibility – in governance and changing
member rights and interests
• Conduit for tax purposes
May 18, 2011 2011 Tax Law For Lawyers 6
Advantages to a Partnership
• Rollovers:
• Real estate
• Allocate inherent tax liability to contributing partner
• Governance:
• No statutory minority protection
• Matter of contract
• Anonymity – minimal filing and disclosure requirement
May 18, 2011 2011 Tax Law For Lawyers 7
Advantages
• Compensation:
• Avoids employment issues
• Allows “self correction” based on
performance
May 18, 2011 2011 Tax Law For Lawyers 8
Advantages
• Flexibility:
• Easier to trace performance of
business units
• No solvency tests
• Allows “self correction” of relative
ownership to protect the business
May 18, 2011 2011 Tax Law For Lawyers 9
Disadvantages
• CRA skeptical of partnerships – perception of
tax avoidance vehicle
• Skepticism based on application of section
103
• Notwithstanding, increasing use of
partnerships and conduit vehicles
May 18, 2011 2011 Tax Law For Lawyers 10
What is a Partnership?
• Common law test
• Two or more persons
• Carrying on business
• In common
• With a view to profit
• Codified in provincial Partnership Act
• Artificial statutory creatures – limited
partnership, limited liability partnership
May 18, 2011 2011 Tax Law For Lawyers 11
The Concept of Business
• “Adventure in the nature of trade” is a
business for tax purposes
• Does mere common ownership suffice?
• What commercial activity is required to
meet the business threshold?
• McKeown 2001 DTC 511
• Banner Pharmacaps NRO Ltd. 2003 FCA
367; 2003 DTC 5642
• Hudon 2001 FCA 320; [2002] 1 CTC 25
May 18, 2011 2011 Tax Law For Lawyers 12
Common Law Tests
• “in common” – requires intention of the
parties to create a partnership
• Critical difference between partnership
and other vehicles
May 18, 2011 2011 Tax Law For Lawyers 13
Common Law Tests
• Note that tax motivation is not a common law
test – but query whether it could demonstrate
intention?
• Tax motivation does not expressly disqualify
a partnership under either partnership or tax
rules
May 18, 2011 2011 Tax Law For Lawyers 14
Common Law Tests
• No requirement that partnership agreement be in
writing or be registered
• Consequently, many unwritten commercial
arrangements may constitute a partnership under
common law
• Note that a limited partnership does not exist until
notice is registered
May 18, 2011 2011 Tax Law For Lawyers 16
Common Law Tests• Conflict of law issue – is a partnership
recognized under the law of one jurisdiction
automatically recognized if it carries on business
in another?
• Classification issue presents problems and
opportunities
May 18, 2011 2011 Tax Law For Lawyers 17
What is Not a Partnership?
• Why do we care?
• Co-ownership
• Syndicate
• Joint Venture
• Agency
• Tenancy in common
• Joint tenancy
• Participating debt instruments
May 18, 2011 2011 Tax Law For Lawyers 18
Why do we care?
• Tax consequences:
• Who recognizes income/gain/loss?
• Who is entitled to what deductions?
• Who is restricted in ability to claim
deductions?
• What deductions/expenses are pooled?
May 18, 2011 2011 Tax Law For Lawyers 19
Co-Ownership
• May not have the intention to carry on business – eg. Succession on death
• Interest transferable
• No agency between co-owners
• Ability to force partition of ownership
• No lien on property for liabilities incurred on behalf of the venture
• Differences in liquidation/partition
May 18, 2011 2011 Tax Law For Lawyers 20
Syndicates and Joint Ventures
• No clear legal distinction from partnerships
• No definitions for tax purposes
• General commercial difference is scope of
activity – single purpose/transaction or
business?
• Governing agreement may disclaim
intention to create a partnership – but how
do the parties really act?
May 18, 2011 2011 Tax Law For Lawyers 21
Joint Tenancy and Tenancy-in-
Common• Clearly defined legal relationships
• Legal consequences different from
partnership, including:
• Ability to dispose of property
• Ability to demand partition
• Succession to ownership
May 18, 2011 2011 Tax Law For Lawyers 22
Participating Debt Instruments
• Lender may be entitled to participate in the
cash flow of borrower’s project or in the
appreciation in value of the assets
• If participation payments are not interest,
are they a distribution of partnership
revenues/profits?
May 18, 2011 2011 Tax Law For Lawyers 23
Differences between tax and
commercial law
• Allocation of profit and loss
• Status of partners
May 18, 2011 2011 Tax Law For Lawyers 25
Tax Fictions of a Partnership
• Paragraph 96(1)(a) – partnership a separate
person
• (b) – separate fiscal year
• (c ) - each partnership activity is a separate
source carried on by a separate person
• (d) – deductions claimable by partnership
• (f) – nature of the source of income flows
through to partners
May 18, 2011 2011 Tax Law For Lawyers 26
More Tax Fictions
• Ss. 96(1.1) – deemed continuing partners
• Ss. 102(1) – definition of “Canadian
partnership”
• Ss. 212(13.1) – withholding tax obligations
May 18, 2011 2011 Tax Law For Lawyers 27
Computation and Allocation of Income
• Income computed as if partnership were a
separate person from partners
• Income/gain/loss computed by source
• Income allocation generally set out in
partnership agreement
• Partners recognize income for their tax year
in which partnership tax year ends
• Note 249.1 for partnership fiscal year
May 18, 2011 2011 Tax Law For Lawyers 28
Calculation of ACB
• Bumps and grinds – paragraphs 53(1)(e)
and 53(2)(c)
• ITAR 26 for pre-72 partnership interests
• Timing of calculation is critical
May 18, 2011 2011 Tax Law For Lawyers 29
Timing Issues
• Amounts added to ACB during the fiscal
period:
• Capital dividends received by
partnership
• insurance proceeds received
• additional capital contributions
• rights or things income – 70(2)
May 18, 2011 2011 Tax Law For Lawyers 30
Timing Issues
• Amounts added after the year end:
• Income allocated for the year
• Partner’s share of the non-taxable
portion of any capital gains realized in
the year
May 18, 2011 2011 Tax Law For Lawyers 31
Timing Issues
• Deductions during the fiscal year:
• Partnership drawings and capital
distributions
• Non-recourse debt used to acquire
the partnership interest
• ITC’s claimed by partner during the
year
May 18, 2011 2011 Tax Law For Lawyers 32
Timing Issues
• Deductions after the fiscal year:
• Allocated losses (but “limited partnership losses” only reduce ACB when they are claimed by the partner)
• Allocated share of the non-deductible portion of capital losses
• Allocated resource expenditures
• Allocated charitable and political tax credits
May 18, 2011 2011 Tax Law For Lawyers 33
Consequences of Timing
• Ss. 40(3) – deemed gain on negative ACB
not applicable to general partnership
interest
• Ss. 40(3.1) – (3.14) – negative basis of
limited partnership interest included in
income in year in which it arises
May 18, 2011 2011 Tax Law For Lawyers 34
Dispositions of Partnership
Interests Mid-Year
• Proposed ss. 96(1.01) addresses mid-year
dispositions
• Fiscal period deemed to end immediately
before taxpayer ceased to be a member –
96(1.01)(b)(ii)
• Result is that income or loss for stub period
is included in ACB calculation