New filing requirements for partnership returns

On September 17, 2010 the Canada Revenue Agency (the “CRA”) announced changes to its administrative policy on filing requirements for partnership information returns. The administrative changes will apply for partnership fiscal periods ending on or after January 1, 2011, so December 31, 2010 and earlier fiscal periods are not affected.

As a reminder, a partnership is not a taxpayer or a taxable entity, but the partnership’s income is taxable in the hands of the partners themselves. Nevertheless, Income Tax Regulation 229 requires all partnerships to file an annual “information return” in prescribed form (i.e. Form T5013 and its supporting schedules). Only one partner must file a partnership return on behalf of the partnership and the partner(s). Administratively, it has been CRA’s policy that a partnership with fewer than six partners did not need to file a partnership return, unless one of the partners was another partnership.

Effective January 1, 2011, the new administrative policy requires a partnership return to be filed annually by a partnership that carries on business in Canada, or a Canadian partnership with Canadian or foreign operations/investments if:

  1. at the end of the fiscal period, the partnership has an absolute value of revenues plus expenses of $2 million or more,
  2. or has more than $5 million in assets, or
  3. at any time during the fiscal period the partnership- is a tiered partnership (i.e. has another partnership as a partner,
  4. or is a partner in another partnership), has a corporation or trust as a partner, invested in flow-through shares, or
  5. is requested to file a return by the Minister.

Regarding the first criterion, the “absolute value of revenues plus expenses” means the sum of total revenues and total expenses from the partnership’s financial statements, not revenues minus expenses, which results in net income. In addition, “assets” means the cost of all tangible and intangible assets, without taking into account any depreciation or amortization.

So, which partnership will not have to file a partnership return? Using the new criteria, it appears that a partnership where all partners are individuals (i.e. none of the partners is a trust, corporation or another partnership) will not have to file, unless its revenues plus expenses are $2 million or more, or its gross assets exceed $5 million. In addition, it appears that a partnership will not be required to file a partnership return where it ceases to meet any of the new criteria above in a fiscal period. However, this circumstance is not specifically mentioned in the CRA announcement, and further clarification is required.

Note that an exempt partnership may still wish to file a partnership return to protect itself from a potentially unlimited reassessment period, since the CRA has three years from the date of assessment of the partnership return to reassess the partnership (assuming no misrepresentation attributable to neglect, carelessness or wilful default has been made).

Finally, the CRA announcement also states that Form T5013 is being updated for the 2011 year, so more reporting changes may be forthcoming.

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