Capital Tax - Corporate Partners in Limited and Ordinary Partnerships

Bulletin 3017
Published: March 2004
Content last reviewed: November 2010
ISBN: 0-7794-2162-0 (PDF)

Publication Archived

Notice to the reader: Capital Tax was fully eliminated on July 1, 2010. It was eliminated effective January 1, 2007 for Ontario corporations primarily engaged in manufacturing or resource activities.

This publication was archived and kept for historical purposes. Use caution when you refer to it, since it reflects the law in force at the time it was released and may no longer apply.

References: section 59, subsections 3(1), 61(5), 62(3), 68(1), (3), 69(1), (4), (5), clause 1(1)(a)


This bulletin replaces Interpretation Bulletin Number L-12 originally published October 15, 1979 and is updated for comments contained in previous Interpretation Bulletins L-7R and L-16 and in Information Bulletins 15-79, 20-81, and 26-82.

The bulletin sets out the policy of the Corporations Tax Branch regarding the capital tax treatment of corporate partners in limited and ordinary partnerships. It is provided as a guide to taxpayers and is not intended as a substitute for the relevant legislation. Any references to legislation are to the provisions of the Corporations Tax Act, R.S.O. 1990, c. C.40 (CTA) and its Regulations, unless otherwise noted.


  1. This bulletin describes the capital tax treatment of a corporate partner's interest in an unincorporated joint venture or partnership. Except for paragraphs 3, 4, 7 and 8 which apply to limited partnerships, the comments in this bulletin apply with appropriate modifications to all unincorporated joint ventures and partnerships.

Ordinary Partnerships: Partner's Share of Paid-up Capital

  1. Pursuant to subsection 61(5), each corporate partner must include in the computation of paid-up capital, its share of those liabilities and other amounts of the partnership or joint venture that would otherwise be included in the paid-up capital of a corporation. For example, a mortgage liability of the partnership would normally be attributed to each partner in proportion to the profit-sharing ratio of each partner in the partnership.

Limited Partnerships: Partner's Share of Paid-up Capital

  1. Clauses 61(5)(c) and (d) provide for similar rules to be applied to taxpayers investing in limited partnerships. Each corporate general and limited partner must include in computing paid-up capital, its share of those limited partnership liabilities and other amounts that would be components of the paid-up capital of a corporation. Partners' shares, except for the share of a general partner, are to be determined by reference to the profit-sharing ratio of the limited partnership. A general partner must report, in addition to its own share, the shares of noncorporate limited partners of the limited partnership who are:
    • shareholders of the general partner
    • members of such shareholders' family
    • related to the general partner, or
    • trusts, the beneficiaries of which are related to any of the above persons.
  2. In a partnership that has more than one corporate general partner it may be that there is a non-corporate limited partner who is related to two general partners. Those two general partners must include in their calculation of paid-up capital their proportionate share of that limited partner's liabilities. The proportions used derive from the profit-sharing ratios of the general partners in the limited partnership. This is illustrated in the numerical example in paragraph 7.

Definition of "Related"

  1. Subsection 251(2) of the Income Tax Act (Canada) provides a definition describing the circumstances under which a person or persons are considered to be related. Pursuant to clause 1(1)(a), this definition applies for purposes of subsection 61(5).
  2. Under that definition, an individual limited partner who is, for example, the controlling shareholder of the parent company of a corporate general partner, is related to that general partner.

Limited Partnership Example

  1. In the example below, General Partner A with 40% has an interest twice that of General Partner B at 20%. They therefore divide the share of limited Partner C in two parts to A and one part to B.

    Limited Partnership Balance Sheet as at April 30, 2000

    Land $1,000,000
    = $1,000,000

    Mortgage Payable: $400,000
    Partners Accounts and Profit Sharing Ratios:

    • Corporate general partner A - 40%: 150,000
    • Corporate general partner B - 20%: 150,000
    • Individual limited partner C (shareholder of A and B) - 30%: 200,000
    • Non-related individual limited partner D - 5%: 75,000
    • Corporate limited partner E (subsidiary of A) - 5%: 25,000

    = $1,000,000

  2. Using the information in the Balance Sheet of Limited Partnership:
    • A will include in its paid-up capital, in addition to its own 40% of the mortgage payable, 40/60 of C's 30% share, for a total of 60% or $240,000
    • B will include the remaining 20/60 of C's 30% share plus its own 20%, for a total of 30% or $120,000
    • E will include only its 5% share or $20,000 in paid-up capital
    • D's 5% share representing $20,000 will not be subject to capital tax.

Profit-Sharing Ratio

  1. The paid-up capital of the partnership (determined as if it were a corporation) is allocated to each partner in the same proportion as the share of the profits to which the partner is entitled under the partnership agreement. The paid-up capital of the partnership is allocated to the partners using the "profit-sharing ratio" even if the partnership agreement provides for a different ratio ( "loss-ratio"), in situations where the partnership has no profit or incurs a loss in the year.

Partnership's Financial Statements

  1. Corporations that have entered into a partnership or joint venture agreement must enclose the complete partnership or joint venture financial statements with their tax returns. Paid-up capital is measured at the close of the taxation year of the taxpayer corporation. When the fiscal year of the partnership does not coincide with the taxation year of the corporate partner there may be hardship in obtaining a partnership balance sheet at the close of the corporate partner's taxation year. In such instances a corporation should include in its taxable capital for a year its share of partnership taxable liabilities for those partnerships whose year end falls within the taxation year of the corporation.
  2. For example, a partnership's fiscal year may run from April 1, 2000 to March 31, 2001 whereas the corporate partner's taxation year may end on December 31, 2000. The Corporations Tax Branch (Branch) would prefer a partnership balance sheet as at December 31, 2000, but where this is not available, the partnership balance sheet as at March 31, 2000 is acceptable for capital tax purposes. Using the March 31, 2000 balance sheet for reporting the partnerships' "liabilities" for capital tax purposes matches the reporting of the partnerships' income for income tax purposes.
  3. For taxation years ending prior to May 20, 1981, when the fiscal year of the partnership did not coincide with the taxation year of the corporate partner and where financial statements coinciding with the corporation's year end were not prepared, previous Branch policy was to accept partnership financial statements at the date "closest" to the taxation year end of the corporate partner. Corporations that filed prior to 1981 based on the "closest" fiscal year of the partnership and that have consistently filed on the same basis thereafter, are permitted by the Branch to continue such filing.
  4. The Branch's acceptance of partnership financial statements falling within the corporate taxation year is based on administrative policy. This policy applies for most corporations. However, in cases where the difference in year ends between the corporation and the partnership results in a substantial reduction in a corporation's capital tax liability, the Branch reserves the right to request that a corporate partner compute its share of partnership capital based on partnership financial statements prepared as at the corporate partner's year end.

Partnership Eligible Investments

  1. The CTA does not permit a corporate partner to claim an investment allowance on that partner's share of eligible investments of the partnership. The partners of a partnership each have an interest in the partnership itself but not in any specific assets of the partnership. This is especially true for limited partners of limited partnerships where the general partner has exclusive control of all the partnership assets until such time as the partnership is dissolved.
  2. However, as an administrative concession, the Branch allows a corporate partner (general partner or limited partner) to claim an investment allowance on its share of any qualifying investments of the partnership. This share is the same proportion as the partner's share of the partnership paid-up capital and is added to the corporate partner's own eligible investments. For a discussion of what investments qualify for the investment allowance, refer to Interpretation Bulletin 3015.

Partnership Total Assets

  1. Pursuant to subsection 62(3), the corporate partner's share of the partnership's "total assets" (based on the profit-sharing ratio) should be added to the partner's own "total assets" and a deduction made from "total assets" for the amount of "investment in the partnership" shown on the corporate partner's balance sheet.

Computation of Partnership Total Assets: Numerical Example

  1. Consider the following balance sheets for A Ltd and AB Partnership:

    A Ltd. Balance Sheet
    As at April 30, 2000

    Investment in bonds: $ 100,000
    Investment in AB Partnership: 500,000
    Other Assets: 400,000
    = $1,000,000

    Accounts payable: $ 400,000
    Capital Stock: 600,000
    = $1,000,000

    AB Partnership Balance Sheet
    As at April 30, 2000

    Accounts receivable: $ 400,000
    Other Assets: 1,600,000
    = $2,000,000

    Accounts payable $ 1,000,000
    Capital Accounts:

    • A LTD. - 50%: 500,000
    • B LTD. - 50%: 500,000

    = $2,000,000

    Total Assets per A Ltd.'s balance sheet

    Add: Share of total assets of AB Partnership (50% of $2,000,000)

    Deduct: Investment in AB Partnership per A Ltd.'s balance sheet

    Total Assets to compute A Ltd.'s investment allowance

Partnership Impact on Exemption or Reduction in Capital Tax

  1. As explained in Interpretation Bulletin 3011, for periods in a taxation year after May 4, 1999 and for taxation years that commence before October 1, 2001, corporations with taxable paid-up capital up to $2,000,000 are exempt from capital tax while corporations with taxable paid-up capital in excess of $2,000,000 but less than $3,2000,000 receive a reduction of capital tax payable at the general rate. For taxation years commencing after September 30, 2001, a corporation that is not associated with other corporations is exempt from capital tax if the corporation's taxable paid-up capital does not exceed $5,000,000.
  2. If a corporation is a member of a partnership or a "connected partnership", subsections 68(3) and 69(4) require that the corporation's share, as well as the share of related partners, of the taxable paid-up capital of the partnership or connected partnership be added to the taxable paid-up capital of the corporation when calculating whether the overall taxable paid-up capital falls within the above limits for an exemption from or reduction in capital tax.
  3. Subsection 69(5) provides the rules for determining whether a partnership of which the corporation was a member is connected with another partnership. Generally, two partnerships are considered connected to each other when more than 50% of the total income or loss of both partnerships is allocated to the same person, same group of persons, or corporations associated with the person or group.
  4. The corporation's share of taxable paid-up capital of the partnership or connected partnership that is added to the corporation's taxable paid-up capital is computed using the last fiscal period of the partnership or connected partnership ending in the corporation's taxation year.

Partnership Impact on Gross Revenue and Total Assets Exemption Threshold

  1. For taxation years that end after December 31, 2000 and commence before October 1, 2001, pursuant to clause 68(1)(a) and subsection 68(3), a corporation with "gross revenue" and "total assets" not exceeding $1,500,000 and taxable paid-up capital not exceeding $2,000,000 is eligible for a small business capital tax exemption. For taxation years commencing after September 30, 2001, a corporation is eligible for a capital tax exemption if neither the corporation's "gross revenue" nor its "total assets" exceeds $3,000,000 and if the corporation's taxable paid-up capital does not exceed $5,000,000.
  2. For purposes of this exemption, pursuant to subsection 69(1), a corporate partner must add to its own "gross revenue" and "total assets" the corporation's share in the partnership's "gross revenue" and "total assets" for the fiscal period of the partnership ending in or coinciding with the taxation year of the corporation. Consistent with the definition of total assets in subsection 62(3), total assets are reduced by the corporation's investment in the partnership.
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