Relevance of ITA treatment
15. … [W]hen a partnership is recognized for income tax purposes, it will be treated as one for GST/HST purposes, and so the income tax considerations are relevant for GST/HST purposes as well.
Must be a view to sharing of profits
17. In the common law provinces, a partnership is a relationship that exists between two or more persons who join together to carry on a business in common with a view to sharing the profits of the business. A partnership may arise by verbal or written agreement or by the conduct of the parties.
Determination of partnership status of foreign partnership by reference to provincial law
20. … Continental Bank … Backman … and Spire Freezers confirmed that the existence of a partnership must be determined by reference to the relevant partnership law of the province or territory and this is the case even when dealing with a partnership established in a jurisdiction outside Canada.
Partnership not formed until commencement of business conduct
24. Since the definition of partnership in partnership law requires the carrying on of a business, it follows that a partnership cannot exist before the business is commenced, subject to the special rules that apply to limited liability partnerships (LLPs) … .
25. Therefore, a partnership commences when the persons embark on the business on which they have agreed to, that is, when they start to carry on an activity or undertaking together with the object of making a profit. It is the actual carrying on of the activity by the persons who have purported to have entered into a partnership, and not a mere agreement to carry on a business, which indicates whether there is a contemplated partnership or an actual partnership. …
27. In addition, an activity that might not ordinarily be classified as a business (such as buying, selling and holding investments) may be considered as such if it is carried on as a business endeavour. …
29. … [T]he fact that a partnership is formally registered under partnership law does not necessarily mean that a partnership (or business) actually exists. In addition, express declarations against the existence of a partnership will not be determinative if the facts indicate otherwise. …
31. …[I]t is generally understood that the business must actually be carried on for more than a brief moment in time and not be disposed of almost as soon as an alleged partnership is formed.
Mark-to-market profits can be used
40. In a valid partnership under partnership law, the members share in the profits (and losses) determined at the level of the partnership. The ordinary commercial meaning of profit is an increase in the value of assets or revenue generated in excess of expenses.
Salaried partner is not a partner
43. In addition, under partnership law, if a person is to be paid a salary or other remuneration rather than receive a share of the profits from the business activity in question based on the interest that the person holds in the partnership, then that person is not acting in partnership with the other parties engaged in that activity. For example, if one member is actually supplying consultancy or other services to the partnership or charges the other members with any sum for compensation, whether a fixed or variable fee based on profits, commission or otherwise on account of their efforts in conducting the partnership business, then that member is carrying on a separate business independent of the partnership.
Events of termination
53. … [E]xamples of events that may result in a partnership ceasing to exist for purposes of the relevant partnership law include:
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- when the members cease to carry on a business in common and all of the operations of the partnership are discontinued …
- when a general partnership is converted to a limited partnership such that the general partnership ceases to exist
- when a change in the members of a partnership is made, such as when a person ceases to be a member or a new person is admitted as a member
- when an event occurs that makes the partnership business illegal
54. Based on established partnership law, a dissolution of a partnership should be evidenced by a declaration duly registered with the relevant authority and signed by all the members, usually the general partners, in order to be effective with respect to third parties that are not included in the partnership agreement.
Partnerships distinguished from other relationships
69. A partnership is distinguished from … other types of relationships and arrangements [which] include joint ventures, co-ownership relationships, and fee-sharing and cost-sharing arrangements. …
Whether a partner in a foreign limited partnership need contribute capital
74. … [L]egislation in certain jurisdictions of other countries may permit the formation of a partnership having a legal personality distinct from its members, with limited liability for debts and obligations afforded to all members, including the general partner. Further, legislation in certain jurisdictions may permit a person to be admitted to a limited partnership as a general partner or as a limited partner without making a contribution or being obligated to make a contribution or without acquiring an interest in the limited partnership. However, based on provincial partnership law, a person must have an interest that is greater than zero to be a member of the partnership. In these circumstances, it will have to be determined if the foreign entity more fundamentally resembles a partnership arrangement under Canadian law than a corporation, trust, or a “body that is a society, union, club, association, commission, or other organization of any kind” .. .
Distinction with co-ownership
84. The following is a list of some of the factors that distinguish a co-ownership arrangement from a partnership:
- A co-ownership does not necessarily result from an agreement, whereas a partnership is the result of an express or implied agreement.
- Co-ownership does not necessarily involve a sharing of profit or of loss.
- Parties to a co-ownership relationship do not necessarily have an expectation of deriving a profit from the co-ownership, whereas the expectation of profit is an essential element of a partnership.
- A particular co-owner can, without the consent of the other co-owners, transfer the particular co-owner’s interest to a third party, whereas in a partnership, any transfer of a partnership interest generally requires the consent of the other partners.
- Unlike a partnership, each of the owners in a tenancy in common arrangement have the freedom to deal independently with their respective interests in the co-owned property and each of their interests in the property remains separate, such that each co-owner is free to dispose of their own interest in the property.
- Co-owners are not agents of each other in the absence of an express agreement, whereas in a partnership, generally, a member who is not a limited partner is an agent of the partnership and other members as a matter of law with respect to the business carried on by the partnership.
- In the absence of a specific agreement, co-owners generally have no right of recourse in the form of any claim against property that is co-owned, whereas a member of a partnership may recover amounts on a winding-up of a partnership.
- Partnership law provides rules for the dissolution of a partnership, but they do not apply to a co-ownership arrangement.
85. Where co-owners share the profits realized from their joint property, their relationship may appear similar to a partnership. In such a case, having regard to all of the circumstances, it might be assumed that an agreement for a partnership exists. However, if each co-owner merely receives that person’s due share of the gross returns derived from the joint property, no partnership is created.
