Area of Law: Tax Law
Answer # 191
PartnershipsRegion: Ontario Answer # 191
When two or more individuals join to do business for profit but do not incorporate, they have formed a partnership. Partnerships are treated differently from other types of businesses for tax purposes.
There are four main tax implications to owning a partnership interest. They are:
- The business income of a partnership is divided between the partners and included on each partners’ personal income tax form; the partnership does not file a separate tax form.
- If the business has suffered a loss, the partners can deduct the loss from any other employment income they receive. This will lower the overall income of an individual partner and reduce the amount of income tax he or she must pay.
- If the business has made a profit, the profits are taxed at each partners’ personal income tax rate; and
- Because the partnership is not a separate legal entity, the partners cannot take advantage of tax deferral opportunities available with corporations.
As a partner, you may be able to apply to use a fiscal period other than a calendar year for calculating and paying taxes, but you will not usually be able to defer taxes this way. Each partner pays income tax for the calendar year in which the partnership earned it, even if the partner does not receive payment until the next calendar year.
A partnership may also be required to collect and remit other types of tax. The most common are HST and payroll tax.
For general information, contact Canada Revenue Agency.
For legal advice and assistance with tax planning, a CRA tax dispute, or other tax issues, contact Tax Chambers LLP
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