Partnership

How a partnership is taxed

A partnership generally does not pay income tax or file an income tax return of its own. Instead, each partner reports their share of the partnership’s net income or loss on their own return, whether that is a personal return, a corporate return or a trust return. That share is reportable whether it was paid out in cash or simply credited to the partner’s capital account.

You can owe tax on a share of profit that is still sitting in the business. The partnership’s losses also stay with the partners: loss carry-over rules apply to each partner individually, not to the partnership.

Who is liable, and what the types are

A partnership has no separate legal existence from its partners. In a general partnership, each partner can be personally liable for the business’s contracts and debts. A limited partnership has at least one general partner who manages the business and has unlimited liability, plus limited partners who contribute capital, do not take part in daily operations and have limited liability.

A partnership can be formed verbally or in writing, and whether a partnership exists depends on the type and extent of each person’s involvement in the business and on provincial law. A written partnership agreement is recommended. It should set out ownership shares, how profit and losses are divided, what each partner contributes, and what happens when a partner leaves.

An illustrative example

Suppose, for illustration, two partners share profits equally and the partnership earns net income of $80,000 for its fiscal period. Each partner reports $40,000 of business income, even if each only withdrew $10,000 during the year. Each partner pays tax on the full $40,000 at their own rates.

The T5013 information return

Even though the partnership is not taxed, the CRA asks some partnerships to file a T5013 Partnership Information Return. Under its administrative policy, a partnership that carries on business in Canada generally must file if, at the end of the fiscal period, the combined absolute value of its revenues and expenses exceeds $2 million or it has more than $5 million in assets. It must also file if, at any time in the period, it is a tiered partnership, has a corporation or a trust as a partner, or the CRA asks for one in writing. Farm partnerships made up only of individuals were exempt for the 2025 fiscal year, and other special cases exist, so confirm the current criteria for your own situation.

What to discuss with your accountant

Bring your partnership agreement, or the notes of what you agreed if nothing is written down. Ask how profit shares will be calculated and documented, how each partner’s drawings and capital will be tracked, and who keeps the records. If a corporation may become a partner, or if you are considering moving the business into a corporation, discuss the tax rules on transferring assets and on a partner leaving before you act.