Taxation of Business Partnerships

Legally, a partnership is not a legal person but rather a relationship that exists between partners who carry on business in common with the view to profit.

There are two levels for computation of income tax.

First, the income is computed at the level of the partnership itself. For Canadian tax purposes, a partnership is considered a separate person but only for the purpose of determining income or loss of the members of the partnership. The rules in the Income Tax Act that deal the computation of income or loss are used to compute the partnership income or loss.

Secondly, the income or loss of the partnership is allocated to each partner in the proportions determined under the partnership agreement or, where there is no partnership agreement, Provincial law. A partnership is not a legal person and is not a taxpayer. Rather, it is a conduit through which income is earned and allocated to each partner. As such, each partner is considered to have received the partnership’s income with the same tax features and characteristics as if they earned the income directly. For instance, if a Canadian partnership earned interest income from a U.S. bank account and allocated such income to a partner, they will be considered to have received interest from a U.S. source and the partner will be required to include that income in their taxable income for the year.

Although a partnership may be required to annually file a partnership information return with the Canada Revenue Agency, the partnership is not a taxpayer and does not pay income or any other taxes in its own name. Each partner is responsible to include in his income the amount of profits and gains as allocated to him by the partnership. Each partner also should pay income taxes in respect of his share of partnership income and gains, whether or not distributed by the partnership.