Tax Implications Of Joint Ventures And Partnerships In Canada

Taxes can be difficult regardless of location, business type, or income level. This can be especially true of business partnerships in Canada. When two or more business entities are joined in a partnership, it has a significant impact on how each files and prepares for their taxes. These changes will vary between provinces and types of partnerships, so it is important to be aware of the nuances of tax law. 

For instance, in Ontario, the Partnerships Act Ontario and the Limited Partnerships Act Ontario are the determining factors in how taxes are handled, but in another province, these laws might be different. For a deeper understanding of partnerships and business sales tax, and to ensure that your business is protected, consider consulting with an experienced Canadian tax lawyer at Jeremy Scott Law by calling (902) 403-7201.

Three Kinds of Partnership Structures

There are three main types of partnerships and joint ventures in Canada. Each one serves a different purpose in the business landscape, and the differences between these types may impact the way business entities file taxes. 

General Partnerships

General partnerships, as the name suggests, are the primary form of partnerships in Canada. They are a straightforward and flexible model for entities looking to collaborate in the business world. According to the Business Development Bank of Canada, general partnerships are the easiest and most inexpensive to create, as they require no formal documentation aside from a registered trade name, a registered tax number, and a bank account. 

An additional benefit of general partnerships is the ease of filing taxes. There is no separate form to file for the business itself, as each partner will report their income and losses on their T1 income tax and benefit returns, though there are some exceptions in extreme circumstances.

Limited Partnerships

Limited partnerships are very similar to general partnerships, however, they have significant differences in the day-to-day operations of the business. In a general partnership, both partners contribute to the running of the business, but in a limited partnership, one of the parties only invests without involving itself in the running of the business. The financial output is similar, except one of the partners does not have to get involved in company management. Limited partnerships may be restricted to certain business entities. 

Limited Liability Partnerships

Limited liability partnerships (LLPs) are a relatively recent addition to the partnership landscape in Canada. Despite the name, they are not a subset of limited partnerships. This model provides a degree of liability protection from the negligence of other partners. Limited liability partnerships generally cater to professional sectors such as law and accounting, as they allow business entities to collaborate while still maintaining a certain amount of liability protection. 

Understanding Pass-Through Taxation for Canadian Partnerships

Partnerships in Canada are not taxed as a single entity but rather use the method of pass-through taxation. This means that each partner will file their income taxes separately from the partnership, reporting their income and losses from the partnership to the Canada Revenue Agency (CRA) on their personal tax returns. 

However, partnerships are also required to pay business sales tax, though the form of taxation and the rate will vary depending on the type of business and the province said business operates out of. Businesses will either pay the goods and services tax and the provincial sales tax (GST and PST), or they will pay the harmonized sales tax (HST). The GST is a federal tax levied by the government, and the PST is the individual provincial tax. The HST, which provinces such as Ontario, Nova Scotia, and Prince Edward Island all use, is a combination of the GST and PST which makes for greater convenience in filing. 

Joint ventures in Canada should also be aware of the requirements for withholding taxes on payments made to non-resident partners. The Income Tax Act of Canada imposes withholding tax obligations on certain types of payments made to non-residents, including interest, dividends, royalties, and other types of income. To learn more about the various facets of tax collection for businesses in Canada, consider scheduling an appointment with a Canadian tax lawyer at Jeremy Scott Law.

Registering for the Goods and Sales Tax or Harmonized Sales Tax

When a general partnership exceeds a yearly revenue of CAD 30,000, the partnership must register for a GST/HST account with the Canada Revenue Agency. This will enable the partnership to collect, remit, and claim input tax credits in the sale of goods and services. Unlike personal income tax, partners do not file the GST or HST individually. In this case, the partnership is considered a distinct entity and pays business sales tax as itself. Therefore, the partnership will need to register itself to pay sales tax, not as individual partners. 

Joint ventures in Canada with employees may also consider creating a payroll account for deductions of income tax and contributions to the Canada Pension Plan (CPP) and Employment Insurance (EI). This helps to ensure compliance with payroll regulations.

Registering to pay sales tax is an action that the partnership itself takes, not the individual partners. The rates and taxation models vary from province to province. Therefore, monitoring and being aware of the combined sales tax of the venture is important to the success and legal compliance of the business.

Frequently Asked Questions

Some of the most commonly asked questions regarding joint ventures and partnerships in Canada include: 

What is the Partnership Act in Canada?

The Partnership Act provides legal authority for persons to associate in partnerships or joint ventures in Canada for profit purposes, and it also provides authority for said persons to file a trade name. 

Are Partnerships Legal Entities in Canada?

All provinces recognize general partnerships and limited partnerships. However, for income tax purposes, partnerships are not recognized as a distinct entity, allowing the profits and losses to flow through to the partners. In other circumstances, such as business sales tax, they are recognized as business entities. 

What Are the Tax Benefits of Joint Ventures Structured as Partnerships in Canada?

Joint ventures structured as partnerships in Canada offer many tax benefits, including the ability to pool resources, share risks, and optimize tax planning strategies for financial gains.

Contact an Experienced and Dedicated Canadian Tax and Business Lawyer

Partnerships in Canada offer many benefits and opportunities to optimize tax planning and structure operations more efficiently. Maintaining awareness of Goods and Sales Tax, Harmonized Sales Tax, and knowledge of which method your province employs will help business partnerships comply with tax regulations and succeed. Partnering with an experienced Canadian tax lawyer can help provide insight, so consider consulting with a tax lawyer at Jeremy Scott Law by calling (902) 403-7201.