Important News For Partnerships

Reproduced from CCH Tax Topics Newsletter:

The Canada Revenue Agency has revised the returns, forms, and schedules that make up the partnership information return for 2011. The changes reflect the new requirements for filing a partnership information return starting for fiscal periods ending in 2011. As set out in T4068, Guide for the Partnership Information Return, four new forms have been added to the T5013, three previous forms are no longer in use, and several other forms have been changed. The 2011 version of T5013, Schedule 50 has been completely redesigned from the 2010 version. It is now called Partner’s Ownership and Account Activity. Schedule 50 requires information on each partner’s adjusted cost base (“ACB”) of the partnership interest and the at-risk amount (“ARA”). On February 29, 2012, the CRA announced that it recognizes that preparers of the information return may have a difficult time supplying the information required in Schedule 50 and that a transition period is required. The CRA stated the following:

To ease concerns about providing updated ACB and ARA information, we will accept returns filed by the due date if they contain either the 2010 or 2011 version of schedule 50 with complete information on partner identification and the annual transactions between partners and the partnerships.

The CRA will not impose penalties on T5013 returns for 2011 fiscal periods as a result of incomplete ACB and ARA information on the schedule 50. We want to assure partnerships and tax preparers that penalties for incomplete returns are not intended to be applied on T5013 returns filed for 2011 fiscal periods that have been completed, to the best knowledge and abilities of the partnerships and preparers, by the filing deadline.

CRA Weighs In On J.V.’s

 

Last week I attended the Canadian Tax Foundation’s annual conference in Montreal. It’s a 3-day event where accountants, lawyers and government officials get together, sing Irish drinking songs, try on each others’ bow ties, and get into all sorts of wild shenanigans.

My favourite time is CRA round table day. That’s when representatives from the government let us tax practitioners know that they’re on our side, they’re here to help and taxpayers have rights. Then they answer a series of pre-determined questions on tax policy confirming that they are not on our side, help is a four-letter word, and whatever rights we have are readily accessible – in a court of law. Anyway, we forgive them because they’re usually the ones who spike the punch every year at the Arthur Anderson reception.

This year, the CRA was asked about the new partnership year-end rules and joint ventures. As we reported in an earlier post, new rules were introduced in the 2011 budget that will essentially eliminate any tax deferral to a corporation whose year-end does not coincide with that of any partnership in which it holds a significant interest.

A joint venture is not a partnership; however, they are often accounted for on a similar basis, with a year-end being established and each participant picking up its share of income annually. This has always been tolerated by the CRA.

With the new rules in place, the CRA stated that joint ventures will now be treated similar to partnerships. Administratively, they will also allow companies with joint venture interests to take advantage of the same transitional relief afforded to partnerships under the new rules. That is, they will be allowed to include 15% of additional stub-period income in 2012, 20% in 2013, 2014 and 2015, and 25% in 2016.

In a technical bulletin released on the same day, the CRA also stated that, going forward, for taxation years ending after March 22, 2011, income from a joint venture will have to be reported for each participant based on that participant’s fiscal period. For participants with different year-ends that don’t coincide with the joint venture, this will likely create some onerous compliance issues.

Those guys at the CRA always keep us on our toes!

What’s Your Tax Issue: “So-called” Partnership Income

The Tax Issue:

As a technical salesperson, I was part of a so-called partnership and I received distributions that I was told were not taxable because the partnership was operating at a loss. After a few months, I left the company because the so-called distributions were way below the so-called commissions I was supposed to be getting. In fact they barely covered my sales costs. The fast line is that I was assessed by CRA for unreported income which included penalties and interest. I had no idea of how the accounting was done and I have no history of not reporting my earnings. I am willing to pay the taxes on income but is there anyway to have penalties reduced.

The Answer:

This question raises a number of interesting issues. First, the taxation of partnerships. Without going into a 12-page dissertation, if you were, in truth, a member of a partnership, you would be taxed based on the partnership’s income, not on the distributions made to you.

When you add the words “so-called” to the partnership, it leads me to my next point. Documentation. If you enter into any business relationship, it must be properly documented and accounted for.  If the intention was to enter into a partnership, you should have signed an agreement, and you should have received annual statements indicating your share of the partnership income or loss for tax purposes.

If no partnership existed, then your earnings probably should should have been included in income based on what you received. If the CRA is including these amounts, and you have sales costs that you haven’t claimed, then you should indicate to the CRA that expenses should be deductible to reduce your income.

Finally, let’s talk about these so-called penalties. Unreported income in many cases indicates some level of negligence on the part of the taxpayer. However, in order to apply penalties, the CRA has the burden of proof to show than you were “grossly negligent”. Gross negligence involves intentional acting or an indifference as to whether the law followed. Your story seems to indicate a degree of naiveté, perhaps some negligence, but not necessarily gross negligence. You will have to show that you are credible, and if possible, some evidence that you at least had some reasonable cause to believe that this so-called partnership actually existed.

I would have a discussion with the CRA official and go over these issues, show your side of the story, indicating that you have expenses to claim against the income and show that you were not negligent in believing that you were a member of a partnership.