In 1989, the Canadian Income Tax Regulations were amended to include a regulation that requires every member of a partnership that carries on business in Canada, or that is a “Canadian partnership”, to file an annual information return with the Canada Revenue Agency (the “CRA”).1 However, in an effort to reduce the compliance burden placed on small businesses and individual taxpayers, the CRA maintained a longstanding administrative policy that provided partial relief from such filing requirements to members of certain partnerships. For example, the CRA has historically exempted members of partnerships with “five partners or less throughout the whole fiscal period; and no partner who is another partnership”2 from the obligation to file an annual partnership information return.
On September 17, 2010, the CRA announced a new administrative policy with respect to the filing of partnership information returns, which will apply to the fiscal periods of partnerships ending on or after January 1, 2011.3
the new administrative policy
As of January 1, 2011, a partnership that carries on business in Canada, or that is a “Canadian partnership” (regardless of whether the “Canadian partnership” has Canadian or foreign operations or investments), will be required to file a partnership information return (Form T5013) for each fiscal period of the partnership if:
- a. at the end of the fiscal period, the partnership has an absolute value of revenues plus an absolute value of expenses of more than $2 million, or has more than $5 million in assets; or
- at anytime during the fiscal period,
- i. the partnership is a tiered partnership (i.e., has another partnership as a partner or is itself a partner in another partnership);
- ii. the partnership has a corporation or a trust as a partner;
- iii. the partnership invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership; or
- iv. the Minister of National Revenue requests a partnership information return in writing.
absolute value of revenues and expenses test
In order to determine “an absolute value of revenues plus an absolute value of expenses”, total expenses must be added to, rather than subtracted from, total revenues. “Revenues” refer to revenues from all sources that have not been netted against any expenses and “expenses” include both current costs and capital costs (e.g., depreciation). For example, a partnership with revenues of $1.5 million and expenses of $1 million will be required to file a partnership information return because $1.5 million plus $1 million is greater than the $2 million filing threshold.
In order to determine whether a partnership has more than $5 million in assets, partners will be required to use the cost figure of all assets, both tangible and intangible, without taking into account any depreciation in respect of such assets.
late-filing and failure to file penalties
Generally, where a member of a partnership fails to file an information return as or when required by the Income Tax Act (Canada) or the Income Tax Regulations, liability for a penalty may arise.
In addition, where no partnership information return is filed in respect of a partnership’s fiscal period, each member of the partnership may be guilty of an offence for which the member may be liable to: (a) a fine of not less than $1,000 and not more than $25,000; or (b) the fine in (a) and imprisonment for a term not exceeding 12 months.4
Also, interest accrues in respect of outstanding penalties and is compounded daily.
starting the limitation period clock
Partnerships that are not required to file an information return under the CRA’s new administrative policy may still wish to do so. Generally, the limitation period on the CRA’s ability to determine any income or loss of a partnership expires three years after an information return is filed.5 Regardless of whether a member of a partnership is exempted from the obligation to file an information return by virtue of the CRA’s administrative policy, if no information return is filed, it is the CRA’s position that the Minister of National Revenue is free to reassess any partnership member, at any time, in respect of income or losses attributable to the relevant partnership.6 Thus, one advantage associated with filing a partnership information return is that it may permit applicable reassessment periods to begin to run.
The CRA is currently in the process of updating Form T5013 for the 2011 taxation year. Additional information with respect to the CRA’s new partnership return policies will be posted by the CRA at www.cra-arc.gc.ca/partnership as it becomes available.