Start with the agreement, not the tax forms
For tax purposes, a partnership is a business carried on by two or more people or entities, which can be individuals, corporations, trusts or other partnerships. Each brings something to it, such as money, labour, property or skills, and each is entitled to a share of the profit or loss. The CRA notes that even a verbal agreement can form a partnership, which is exactly why partners often disagree later about what was promised.
Put the agreement in writing before the first dollar moves. The CRA notes that most written agreements cover how partners join and leave and how income is divided. Add what each partner contributes, how contributions are recorded, who can sign for the partnership and how decisions are made. The CRA also points out that a partner’s actions within the usual scope of the business bind the partnership, so ask a lawyer how liability works for your type of partnership.
Register the name and get your CRA accounts
A partnership that trades under a registered name files through the Ontario Business Registry. The steps are covered in our guide to registering a business name in Ontario, so they are not repeated here.
For federal purposes, the partnership needs its own business number if it does not have one. The CRA says you can register through Business Registration Online, or by mailing Form RC1. Each program account adds a two-letter identifier to the same nine-digit number: RT for GST/HST and RZ for the T5013 partnership information return, which you only need if a return is required (see the last section). If you will have employees, you will also need a payroll account, which our first payroll checklist walks through. Each partner keeps their own personal SIN and personal CRA account; the partnership’s number does not replace them.
Decide whether the partnership must register for GST/HST
For GST/HST, the CRA treats a partnership as a separate person. The partnership registers, not each partner individually. The small supplier threshold of $30,000 is measured on taxable revenue in a single calendar quarter and over the last four consecutive quarters, and it includes the revenue of associated persons. You are associated with a partnership when your share of its profits, together with that of people associated with you, is more than half. Because a partner may carry on other businesses, check the combined position instead of assuming the partnership starts from zero.
If revenue is likely to pass the threshold, or customers expect you to charge tax from day one, read our GST/HST registration guide and discuss registering voluntarily. Charge and report tax under the partnership’s number, not a partner’s.
Set up books that show each partner’s position
The partnership does not generally pay income tax on its income. Each partner reports a share of the net income or loss on their own return, whether it was received in cash or only credited to a capital account. That means a partner can owe tax on profit that stayed in the business.
Keep one set of books for the partnership, separate from every partner’s personal accounts. Track capital contributed, amounts withdrawn and each partner’s share of profit. Agree on how often profit is calculated and how much cash is held back for tax. Keep records for six years from the end of the last tax year to which they relate, which is the period the CRA states in its partnership guide. Our monthly bookkeeping checklist covers the routine.
Understand how each partner is taxed personally
A partner who is actively involved reports their share of partnership income as self-employment income. A limited or non-active partner reports on different lines of the return. If the partnership files a T5013, each partner receives a slip showing their share, and active partners take figures from its boxes. Without a slip, the CRA says to follow the instructions on the applicable self-employment form.
Self-employed partners may owe Canada Pension Plan contributions on their share of net income, so budget for that as well as income tax. Whether tax instalments apply depends on each partner’s own situation. Loss carry-over rules apply to each partner, not the partnership, with non-capital losses carried back 3 years and forward 20. Ask your accountant to confirm which category you fall into.
Check whether a T5013 return applies
A partnership carrying on business in Canada must file a T5013 if the combined absolute value of its revenues and expenses exceeds $2 million, or its assets exceed $5 million at the end of the fiscal period. It must also file if it is tiered, has a corporation or trust as a partner, or the CRA asks in writing. Most small partnerships of individuals fall below these tests, but confirm each year rather than assuming.
When a return is required, the CRA’s guide gives March 31 after the calendar year-end if all partners are individuals, five months after the fiscal period if all are corporations, and the earlier of the two otherwise. The late-filing penalty is $25 a day, with a minimum of $100 and a maximum of $2,500. Any one partner can file the single return for all.
Your conversation checklist
- Sign a written partnership agreement covering contributions, profit split and exits
- Register the firm name through the Ontario Business Registry if you will trade under one
- Register the partnership for a business number, and an RZ account if a T5013 is required
- Decide whether to register the partnership for GST/HST and check associated persons
- Open a separate business bank account in the partnership’s name
- Record each partner’s capital, withdrawals and share of profit
- Tell each partner to set aside money for their own tax and CPP
- Test the T5013 thresholds each fiscal year and note the due date
- Keep partnership records for six years from the end of the last tax year they relate to
Further reading & sources
- CRA: Partnership
- CRA: Filing a T5013 Partnership Information Return
- CRA: Guide for the Partnership Information Return (T5013 Forms)
- CRA: General Information for GST/HST Registrants
- CRA: Reporting partnership income
Tax rules and administrative requirements can change. Check the applicable official guidance and confirm your circumstances with a qualified adviser. This guide is not an assessment of your filing, payment or legal obligations.