PARTNERSHIPS - · PDF file•Why use a Partnership? •What is a Partnership? •Tax...

PARTNERSHIPS

Robin MacKnight

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


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


Thought for the Day

• Anything you can do with a

corporation, I can do better with a

partnership!


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


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


Advantages

• Compensation:

• Avoids employment issues

• Allows “self correction” based on

performance


Advantages

• Flexibility:

• Easier to trace performance of

business units

• No solvency tests

• Allows “self correction” of relative

ownership to protect the business


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


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


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


Common Law Tests

• “in common” – requires intention of the

parties to create a partnership

• Critical difference between partnership

and other vehicles


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


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

Common Law Tests (cont’d)



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


What is Not a Partnership?

• Why do we care?

• Co-ownership

• Syndicate

• Joint Venture

• Agency

• Tenancy in common

• Joint tenancy

• Participating debt instruments


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?


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


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?


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


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?


Differences between tax and

commercial law

• Allocation of profit and loss

• Status of partners


Tax Fictions of

Partnerships


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


More Tax Fictions

• Ss. 96(1.1) – deemed continuing partners

• Ss. 102(1) – definition of “Canadian

partnership”

• Ss. 212(13.1) – withholding tax obligations


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


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


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)


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


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


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


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


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

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