Although the term “domestic partnership” is sometimes used in a tax planning context to describe a partnership constituted under the laws of a Canadian province and the term “foreign partnership” is used to refer to a partnership governed by foreign law, these terms have little relevance for Canadian income tax purposes. The Act does not define the term“partnership” but does define, in Sec. 102, the term “Canadian partnership”, which is important for certain purposes. As discussed later, many
reorganization provisions apply only to a “Canadian partnership”. Further, certain payments made to a nonCanadian partnership may be subject to Part XIII withholding tax. There is no requirement that a Canadian partnership carries on all or any part of its business in Canada or that it be organized under Canadian law. The definition simply requires that all the partners be resident in Canada at the time the definition is applied.
A taxpayer must demonstrate that the requirements for a partnership to exist under Canadian principles have been met if the taxpayer claims that a partnership exists for purposes of the Act.8 Under Canadian law, many of the common law principles governing the creation and existence of partnerships have been codified by provincial partnership statutes.
Generally, the laws of all the common law provinces of Canada define a partnership as the relation that subsists between or among persons carrying on a business in common with a view to profit. Thus, both as a matter of common law and the statutory overlay, there are three “essential ingredients” of a partnership under Canadian principles: (i) a business (ii) that is carried on in common by two or more persons (iii) with a view to profit
A tax motivation for forming a partnership or acquiring an interest in a partnership does not derogate from a finding of partnership so long as the three essential ingredients are present.
Virtually any commercial undertaking can be a “business” as that term is used in provincial partnership legislation. A partnership does not need to be formed to operate a continuing business; it can be formed for a single transaction, and the business may simply be the passive receipt of rent.
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Shared from: Bulletin for International Taxation