Understanding the Digital Signature Lawfulness for Assignment of Partnership Interest in Canada

How to eSign a document: digital signature lawfulness for Assignment of Partnership Interest in Canada

welcome to this tutorial on partnerships now we learned in earlier chapters that a partnership is not a person so it is not going to be subject to income tax so a partnership does not file an income tax return so then how is the income in a partnership going to be taxed well all the income that's earned in a partnership will be allocated to each partner and that's going to be based on the terms set out in the partnership agreement so every partnership will have the partnership agreement and that's going to determine how much income will be allocated at the end of every year to each partner now in terms of the different types of income most partnerships will have business income and partnerships will also prepare their own financial statements under generally accepted accounting principles so usually when a partnership prepares their financial statements they're going to have their income statement and so they're going to have their net income for accounting purposes now when they determine how much of that income will be allocated to each partner they actually have to reconcile that accounting income to net business income for tax purposes now this reconciliation is similar to what we learned in earlier chapters in chapter six where we talked about business income and when we talked about corporate business income in chapter 12. we had to do that reconciliation we took the accounting net income we made some adjustments for example we added back accounting amortization we deducted tax cca and then we came up with the business income for tax purposes so a partnership will have to do the same and when they figure out what is the net business income for tax purposes then they can use that amount to allocate to the individual partners now a partnership could have other types of income as well so for example if a partnership has dividend income when that dividend income gets distributed to the individual partners it will retain the same characteristics so then each individual partner will need to determine was that dividend income eligible or not eligible and then on their individual tax return they will report it as such and then they'll be subject to the gross up and also the dividend tax credit same with capital gains and capital losses so if a partnership earns let's say capital gains and capital losses those will be allocated to the individual partners once again based on the partnership agreement and then when each individual partner receives that amount they will take 50 of that and include it in 3b when they calculate their net income for tax purposes and there's also the same method for charitable and political donations that are made by the partnership so if the partnership makes contributions to a charity or a political party the partnership because it does not file a tax return does not get to deduct that amount once again that donation amount will be allocated to each individual partner based on the partnership agreement and then each individual partner can use that amount to determine the amount of their donation tax credit so that's sort of a brief overview of partnerships what i want to do next then is go to a really simple example so let's just scroll and look at this simple example here so let's say we have this partnership we have partner one and partner two now we're just going to focus on partner two and in this partnership sixty percent of the income is allocated to partner one and forty percent is allocated to partner two so let's say that partner two initially contributes ten thousand dollars to the partnership you know just sort of think about a partnership just like a corporation when a corporation has first formed it must issue shares to the shareholders so the shareholders will contribute money to the corporation in exchange for shares now with a partnership the same thing happens each partner will contribute money to the partnership money or other assets and the partnership will track each partner's investment using what we call their capital account so if partner 2 contributes ten thousand dollars to the partnership the partnership then will record that in partner two's capital account as an increase of ten thousand dollars think of that just as sort of the equity that the partnership has now a partner also has to track what we call their partnership interest now think about the partnership interest just like a shareholder would think of as their shares they're going to contribute money to the partnership now the partner can sell that interest down the road and if they sell that interest down the road then they're going to have to figure out did they make a gain or loss on the sale of the partnership interest so for tax purposes the partner has to track the adjusted cost base of their partnership interest so if partner 2 contributes 10 000 to the partnership the adjusted cost base of the partnership interest will obviously increase by ten thousand so if they were to contribute the ten thousand to this partnership and let's say nothing else happens and then partner two was to sell their partnership interest to a new partner than to figure out their gain or loss they would use ten thousand dollars as their adjusted cost base now let's just say that also during the year partner two withdrawals five thousand so whenever there's a withdrawal from the partnership for accounting purposes that's going to decrease the accounting capital account and for tax purposes that's also going to decrease the adjusted cost base of the partnership interest because they took 5 000 out so that's going to reduce the adjusted cost based by 5000. now another thing that happens is the partnership is going to be generating business income during the year so let's say that during the year this partnership generates a counting net income of a hundred thousand remember partner number two gets forty percent of that so from an accounting perspective forty thousand of that accounting net income will be allocated to partner number two now for accounting purposes that 40 000 is going to increase their capital account so for accounting purposes at the end of the year partner number two's accounting capital account will be forty five thousand dollars that's what's going to show up on the partnerships balance sheet now for tax purposes remember we said that there could be some adjustments that are made to get from accounting net income to net business income for tax purposes so let's just sort of go through a simple reconciliation here let's just say that this partnership started off with accounting net income of a hundred thousand that's based on the accounting rules and then let's say included in that accounting net income they deducted amortization expense of 20 000. now for tax purposes we cannot deduct the amortization so that has to be added back however for tax purposes they get to deduct cca and once again let's say that cca was 40 000 just making up some numbers here so therefore for tax purposes the net income for tax purposes is going to be 80 000 now once again forty percent of that goes to partner number two so for tax purposes partner number two is going to include 32 000 so partner number two for tax purposes will include 32 000 of business income in their net income for tax purposes calculation so that amount would be included in 3a because that would be where business income gets included now even though the partnership may not actually give that money to partner number two partner number two is going to be taxed on that amount on an accrual basis so the partnership earns this income during the year we figure out that partner number two is going to get 32 000 of that net income for tax purposes and so they partner number two has to include that on their tax return in the same year on an accrual basis even though the partnership may not actually give that cash to partner number two now this is the amount that we use to adjust partner numbers to partnership interest adjusted cost base so for tax purposes to track the value of the partnership interest adjusted cost base we would add the 32 000 we're using the tax amount and so for tax purposes partner number two's partnership interest will have an adjusted cost base of 37 000 so if partner number two let's say was after this year was over if they decide to sell their partnership interest to a new partner they would use this 37 000 as their adjusted cost base to determine whether they had a capital gain or loss on the sale of that partnership interest so that's sort of a simple example sort of tracking a partner's partnership interest adjusted cost base and also reconciling the partnerships accounting net income to net business income for tax purposes and then figure out how much is allocated to each partner what i want to do next then is go through an example or question that i want you to work on so this is the question that i want you to work on your instructor may have given this to you ahead of time and you may have already worked through it if you have then just scroll directly to the solution but if you haven't yet worked through this problem pause the video read through the problem and then once you have your solution prepared then resume the video to compare your solution to the answer now there are two requirements here the first requirement is to do that reconciliation we've given some accounting net income amounts above and we have to reconcile the accounting net income to net business income for tax purposes and then we have to figure out that based on the partnership's income and losses and other amounts how much will be allocated to each partner so pause the video now complete the requirements on your own and then when you are ready resume the video okay let's have a look at the solution so the first thing we have to do is to reconcile the accounting net income and determine net business income for tax purposes so the starting point is going to be our accounting net income so we're told that the partnership has accounting net income of 625 000 now most of these adjustments are fairly self-explanatory remember meals and entertainment only 50 is deductible for tax purposes so we have to add back 50 now the loss and the sale of the asset the investment it was noted in the question that this is a capital asset so because this is a capital asset and there was a loss on it we have to separate that out here we're just trying to calculate the business income so we have to take out that capital loss because it's treated differently for tax purposes now in your textbook it also says that any club dues and cost of recreational facilities are not deductible for tax purposes so we have to add that back for tax purposes accounting amortization we're not allowed to deduct so we add that back as well and also charitable contributions remember for tax purposes charitable contributions for individuals are deducted or are treated as a tax credit so they're not deductible for the calculation of net business income for tax purposes so we have to add that back however we get to deduct cca and also terminal losses so this is the net business income for tax purposes that's the first step what we do next then is we have to allocate that to each partner rick and kelsey based on the terms of the partnership agreement now when you look at the partnership agreement you'll notice that there are some priority amounts those are those salary amounts and so rick gets the annual salary of 50 000 and kelsey gets an annual salary of 25 000. so we take the 721 thousand we minus the 50 000 and the 25 000. those are priority amounts and the remaining 646 thousand is going to be allocated 40 to rick and 60 to kelsey so we work through those numbers and then once we figure that out of the net business income for tax purposes 308 400 will go to rick and 412 600 will go to kelsey and if you add up those two amounts that's going to give us the total 721 000. so that's how we allocate the net business income for tax purposes these amounts will go into each of their calculations for net business income are net income for tax purposes in 3a now we also have other types of income as well there's also the capital loss so the capital loss of 48 000 remember only 50 of that's allowable for tax purposes so there's going to be a total allowable capital loss of 24 000 and we're told that capital gains and losses are going to be split evenly so each partner is going to get an allowable capital loss of 12 000 and they can use that in 3b to offset any taxable capital gains now this is going to be based on each individual partner rick and kelsey will include that 12 000 allowable capital loss separately if they don't have sufficient taxable capital gains to use it up then the unused amount will become a net capital loss carryover now the final item is the charitable contribution now the total charitable contribution was 23 000 and we're told that that's going to be shared evenly so each partner is going to get 11 500 and once again that's going to be used as a tax credit so they can use that 11 500 to calculate their donation tax credit on their individual t1 tax return so that brings us to the end of this question and also to the end of this video tutorial on partnerships good luck with your studies and we'll see you in the next video tutorial