Release date: April 5, 2011
Guest: Elizabeth Johnson
Running time: 10:22 minutes
In this episode of Tax Tracks, Liz Johnson explains how changes in CRA’s administrative policy affect Partnership information returns. Specifically, she talks about what financial thresholds are, what the new criteria are for filing the partnership information returns, effective date, and CRA’s filing deadlines. She also shares why she thinks the rules changed.
Liz is a partner in Wilson & Partners LLP, a law firm affiliated with PwC, and in the Canadian National Technical Services group. She is a frequent speaker at seminars and conferences on income tax matters and has written extensively on a wide range of topics including corporate finance, partnerships, interest deductibility and tax avoidance.
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You’re listening to another episode of PwC’s Tax Tracks at www.pwc.com/ca/taxtracks. This series looks at the most pressing technical and management issues affecting today’s busiest tax directors.
Gerry Lewandowski: I'm speaking with Elizabeth Johnson, a partner in Wilson & Partners, LLP, a law firm affiliated with PricewaterhouseCoopers LLP. Liz, you are the co-author of a book called Understanding the Taxation of Partnerships, published by CCH, and your expertise covers many aspects of tax.
Why did you feel it important to specifically discuss partnership information returns today?
Liz: Partnership information returns are important for a number of reasons, but what prompted me to do this podcast episode was a recent change in the Canada Revenue Agency’s administrative policy.
Gerry: What changed?
Liz: The CRA has announced a new rule to determine what partnerships must file a T5013 Statement of Partnership Income return. This change was announced in a News Release in September 2010.
In theory, legislation requires all partnerships to file an information return. However, until now, the CRA sometimes exempted partnerships with fewer than six members. The rule now - by which I mean for fiscal periods ending after 2010 - looks at financial thresholds rather than counting the partners.
Inadvertently, there are some special rules that apply to reporting by partnerships that are referred to as “public investment partnerships”, but these rules haven’t been affected by the new position so I won’t touch on these rules today.
Gerry: Is the new rule complicated?
Liz: It is a little technical, but it should be relatively clear in most cases whether there is a filing obligation.
First, of course, is the effective date - January 1, 2011.
Then you must determine whether the partnership either:
If either of these tests is met, you go on to look at financial thresholds and some other factors. Basically the intention seems to be that all Canadian partnerships, that is partnerships with only Canadian residents as members, are subject to filing if the other tests are met, on the other hand a partnership with only foreign members is required to file only if it carries on a business in Canada and meets the other tests. What is a little unclear is whether the CRA will consider a foreign partnership with only Canadian investment assets to be subject to filing obligations.
Gerry: What are the financial thresholds?
Liz: You determine whether, at the end of the fiscal period the partnership meets either of the following tests. The first test is it has an absolute value of revenues plus an absolute value of expenses of more than $2 million. I will refer to that as the Revenues and Expenses test. The other test looks at assets and requires that the partnership have over $5 million in assets.
The News Release gives some examples of how to determine whether these tests are met. For the Revenue and Expenses test, you essentially take the sum of the partnership’s top-line revenues and its expenses. A partnership with revenues of $1.5 million and expenses of $1.25 million would have $2.75 million of absolute value of revenues plus absolute value of expenses, so it would cross the threshold. What’s important to recognize here is that you don’t deduct expenses from revenues in determining whether the test is met. You add them. On the asset test, the Release says that you look at the cost figure of all assets, without taking into account the depreciated amount. In other words, you look at the financial statement value, but have to add back any depreciation. If either of these financial thresholds is met, the partnership information return must be filed.
Gerry: And what if it isn’t?
Liz: Assuming the partnership satisfies 1 and 2 that I mentioned before - that it is carrying on business in Canada or it is a Canadian partnership with foreign or Canadian operations or investments - then whether or not the financial thresholds are met, filing is required if at any time during the fiscal period the partnership meets any of three conditions:
Given the second test, that is, that the partnership have a corporation or trust as a partner, many partnerships will be caught under the filing rules. The return is also required if the Minister of National Revenue demands that the partnership file a T5013.
Gerry: OK, so assuming you have concluded that a filing is required. When are the returns due?
Liz: There are two kinds of due dates. For partnerships that have only corporations as members, the filing deadline is five months after the end of the partnership’s fiscal period.
But in most cases the deadline is March 31 of the year following the calendar year in which the partnership fiscal period ended.
Gerry: I know there are rules about filing returns when individuals die. Is there anything like that for partnerships?
Liz: Actually, yes. If the partnership discontinues its business or activity, the filing deadline is the earlier of the normal deadline - under the rules which we just went through - and 90 days after the discontinuance of the business.
Gerry: And no doubt filing late is a bad thing?
Liz: It always is.
There are penalties, which range from fairly modest to quite substantial.
If a partnership misses the deadline, the basic penalty is $25 a day, but with a $100 minimum amount and a $2,500 maximum.
But that can get much worse, because if the partnership has already been assessed a late-filing penalty for any of its previous three fiscal periods, it will have to add $100 for each partner, multiplied by the number of months or part-months (up to 24 months) during which the T5013 is late.
In addition, there are potential fines and even the possibility of jail.
As well, Quebec has similar penalties for late filing of the relevé 15 form.
Gerry: And one thing I believe we haven’t covered – exactly what has to be in the partnership information return?
Liz: Fortunately, the form is pretty easy to follow. First, there is identifying information, including:
As well, the return includes details about the partnership’s income or loss and certain other information required on the form.
The CRA has announced that the T5013, along with the accompanying tax guide (T4068E), are being updated for the 2011 tax year and will be available later.
Gerry: Why do you think the rules changed?
Liz: This change fits in with other CRA initiatives to get more disclosure from taxpayers. We can see this in some of the measures that Quebec has adopted, and the federal government has announced, to require disclosure of certain arrangements that are considered to be “aggressive tax planning”.
Partnerships have been used in a lot of tax structuring, both domestic and cross-border. The old rules, which only focused on the number of partners, obviously allowed some planning to fall below the radar screen. We think that the CRA now recognizes that it needs more information on the different ways in which partnerships are used.
Gerry: Such as?
Liz:I’m thinking of things like using partnerships to obtain a deferral of income and in some financing structures.
Gerry: Do you have any final comments?
Liz: Just a reminder that because the rules have changed, partnerships that haven’t had to file because they have fewer than six partners may have to do so going forward - so it is important for these partnerships to determine if they meet the new reporting thresholds we talked about at the beginning. Of course, your PwC tax adviser can help you with this.
Gerry: And Liz, how do our listeners go about getting a copy of your 6th edition of the book “Understanding the taxation of partnerships?"
Liz: They can go onto the website www.cch.ca and order the book online from there.
Gerry: Thank you for joining us today Liz.
Liz: My pleasure.
Thank you for tuning into Tax Tracks at www.pwc.com/ca/taxtracks.
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Through interviews with prominent PwC tax subject matter professionals, Tax Tracks is an audio podcast series that is designed to bring succinct commentary on tax technical, policy and administrative issues that provides busy tax directors information they require.