Chapter 18

PARTNERSHIPS

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 Taxable Entities In Canada

• Income Tax Act

– Individuals File T1 returns
– Corporations File T2 returns
– Trusts File T3 returns

• Partnership income is taxed in the hands of the partners

Partnerships do not file tax returns
The partners report the partnership’s income.

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 Partnerships Defined

• Partnership Elements
– Two or more persons
– Carrying on a business
– Carried on to make a profit

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 Calculating Partnership Income

• A reconciliation is done to arrive at partnership income for tax

purposes. Once that is done, the income is allocated to each
partner pro rata based on their interest in the partnership.
– Start with accounting income
– Various adjustments are done similar to corporations

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 Partnership Income Adjustments

• Salaries to partners
– No deduction allowed to calculate income for tax purposes
– Add back to accounting income
– Treated as return of capital or allocation of income

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 Partnership Income Adjustments

• CCA
– Deducted at partnership level

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 Partnership Income Adjustments

• Drawings
– Cannot be deducted in determining partnership income.
– Must be added back to accounting income – if deducted there.

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 Partnership Income Adjustments

• Dividend income
– Full amount of dividends included in partnership income
(but not gross up)
– Flowed through to partners as dividends
– Partners gross up and claim dividend tax credit

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 Partnership Income Adjustments

• Taxable capital gains/Allowable capital losses

– Included in partnership income

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 Partnership Income Adjustments

• Political Contributions
– Not deductible to partnership
– Flowed through to partners
– Added to accounting income to get partnership income
• Charitable donations
– Not deductible to partnership
– Flowed through to partners
– Added to accounting income to get partnership income

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 Allocations To Partners

• Must be made on a source-by-source basis, retains its

character
– Business income
– Dividends
– Capital gains and losses
– Restricted farm losses
– Foreign tax credits
– Charitable donations
– Political contributions

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 Partnership TZ has 2 partners T and Z. Each partner has a 50% interest in the
Partnership

Assume income as reported per financial statements (Note 1) 114,000

ADD: Items the accountant deducted for accounting purposes that aren’t deductible for tax purposes
and items included in income for tax purposes and not for accounting

Charitable donations 1,000

Political contributions 2,000
Depreciation 50,000
Club dues 4,000
50% ENT. expenses 10,000
Salaries to partners 90,000
Taxable Capital Gains 20,000
177,000

DEDUCT: Items the accountant included in income for accounting purposes that are not included for
tax purposes and tax deductible items

CCA 46,000
Gain on sale of investments 40,000
Dividends from CDA 30,000
(116,000)

PARTNERSHIP INCOME
175,000

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Note 1: Includes $40,000 of NED Received. 12
 Partnersip Income for Partner Z’s 50% ownership

Partnership Income 175,000 x 50% $87,500

Dividends Gross Up 40,000 x .15 x 50% $ 3,000

Income for Partner Z $90,500

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 Template to Calculate the ACB of a Partnership Interest for a Partner.

This calculation is a cumulative amount and the ending balance is essential when the Partner sells his
Partnership Interest. This calculation is done on a yearly basis.

Calculate ACB Ending Balance

ACB opening XXXX

His Contribution of capital XXXX

His Withdrawals (XXXX)

His Income 50% XXXX

His Gross up (XXXX)
½ of His CG XXXX

CDA XXXX

Charitable donations (XXXX)

Political contributions (XXXX)

ACB ending XXXX

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 IN ADDITION TO THE PREVIOUS EXAMPLE ASSUME THE FOLLOWING OCCURRED DURING
THE YEAR FOR PARTNER Z

WITHDRAWALS (Salaries taken) $ 45,000

CONTRIBUTIONS $ 20,000
ACB OPENING $ 40,000

Calculate ACB Ending Balance

ACB opening 40,000

Contribution of capital 20,000
Withdrawals (45,000)

Income 50% 90,500

Gross up (3,000)
½ CG 10,000

CDA 15,000

Charitable donations ( 500)

Political contributions ( 1,000)

ACB ending 126,000

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 Mike and Dave formed a partnership on January 1, 2019 to carry on their accounting business. Each partner
contributed $15,000 to the partnership to start up the business. The partnership agreement provides that they
will share equally in the profits from the partnership.

Mike & Dave, Accountants

Income Statement
For the year ended December 31, 2019

Gross revenue $650,000

Expenses:
Office supplies $30,000
Drafting materials 20,000
Rent 40,000
Heat and electricity 10,000
Office salaries 60,000
Charitable donations 6,000
Depreciation 34,000
Meals and entertainment 16,000
Partner salaries 200,000
(416,000)
Other income:
Gain on the sale of investments 40,000
NED Received 18,000
Capital dividends Received 20,000
78,000
Net Income $312,000

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 Additional Information:

1. CCA for 2019 has been determined to be $48,000.

2. In 2019, each partner drew $20,000, in addition to each receiving a salary of $100,000.

3. The capital gain for tax purposes is the same as the accounting gain.

Required:

Assume that Mike sold his partnership interest to Mary for $350,000 on January 2, 2020. Compute Mike’s
taxable income for 2019 and 2020 relating to the partnership and the sale. Show all calculations.

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 Partnership Income: (8 marks)
Net income 312,000
Donations 6,000 1
Depreciation 34,000 1
CCA (48,000) 1
Meals & Ent 50% 8,000 1
Salaries 200,000 1
Book Gain (40,000) 1
TCG 20,000 1
Capital dividends (20,000) 1
Partnership Income $472,000

ACB: (6 marks)
Total Mike
Capital contributions 15,000 1
Partnership income 472,000 236,000 1
Untaxed Capital gain 20,000 10,000 1
Capital dividends 20,000 10,000 1
Donations (6,000) (3,000) 1
Draws (120,000) 1
ACB $148,000

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 Taxable income: 2019 (2 marks)

Dividend gross-up 1 1,350 (18,000 *.15 X 50%)

P/ship income 1 236,000 (472,000 X 50%)
237,350

Taxable income: 2020 (2 marks)

Sale of partnership interest

POD $350,000
ACB 148,000 1

CG 202,000
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TCG $101,000 1
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 THE END
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