In Canada, partnerships are businesses that are run by two or more people. Keep reading to find out what you need to know if you are part of a business partnership that pays taxes in Canada.
When to enter a business partnership
If you run a business with another person, you may be wondering how this will affect your individual tax returns. Unless your company is incorporated, you will be filing your taxes as a self-employed individual. But, if you are sharing your business's profits with one or more additional people, there are a few other aspects to consider.
Starting a partnership
First, you should make sure your business partnership has a contractual agreement. This will help define how to divide your business income, tasks and expenses. It will also define what percentage of the company's income you need to declare on your personal income tax return. There is no law preventing you from working with another person without such an agreement. Having some sort of agreement in place will protect you in the event of a dispute, though. A verbal agreement is better than no agreement at all. A written agreement is better. You need to protect yourself whenever income and property are concerned. You can seek out a professional for advice or draft the agreement yourself. Either way, just get it done!
Business partnership taxes & income
Unlike corporations, the business partnership itself has no tax obligations to fulfill. Instead, each partner must report their share of the business's profits as self-employed income. For example, you and your business partner might decide to split business profits 50/50. In this case, your personal income will be 50% of the business profits for the year. This means that if your business makes $80K in profits for the year, your income will be $40K. Report this amount on lines 135 and 143 of your income tax return. You'll also need to fill out form T2125, which is the Statement of Business or Professional Activities. Certain businesses must also fill out form T5013, which is the Statement of Partnership Income. This form only applies to larger businesses with assets worth more than $5M.
Charging GST/HST/PST
If your business makes more than $30K per year, you must start collecting GST/HST/PST. Before you can do this, you will need to register with the CRA to receive a sales tax registration number. Quebec partnerships should register with Revenu Quebec. Depending on your income, you will need to pay your sales tax bill either annually or quarterly. Make sure you pay these on time, as the CRA charges fines and compound interest to late filers. Revenu Quebec does this too. The good news is that once you start collecting sales taxes, you can also claim a rebate on your business expenses. In a business partnership, each partner can only claim their share of expenses as per the business agreement mentioned above.
When is it time to incorporate?
If your business is very successful, you might consider incorporation. This will allow each partner to receive a set salary. Any extra business income can then stay in the corporation, where it will be taxed at a lower rate. Incorporating your business will also protect the personal assets of all business owners if the company ever goes bankrupt. That being said, the incorporation process can get expensive. You might want to wait until you are reasonably established before you start filling out forms. Once your business starts generating more income than you need to survive, incorporating can be a good idea. It may even save you and your business partner(s) a significant amount of money on your income tax returns.
