Legislation and policy are two different things with Canada Revenue Agency. Legislation is the rules, and policies are how they are enforced. One of these enforcement changes has particular interest for real estate investors in partnerships, and may catch many real estate investors and other partnerships off-guard.
For partnerships, the CRA has changed an administrative policy that was first proposed in September, 2010. The change triggers additional filing requirements for many partnerships throughout Canada.
Bottom line is more paperwork. But I’ll spell out the details.
The technical details
The reporting rules generally require partnerships to submit a T5013 Partnership Information Return to the CRA by March 31 of each year. This includes a variety of schedules primarily related to the financial status of the partnership and tracking partner capital balances. Previously, partnerships with fewer than six partners were typically exempt from the reporting. Now, the CRA is basing the threshold for reporting on the financial size of the partnership as well as the nature of the partners.
The forms themselves will be changing as well for 2011.
Financial thresholds for reporting
Effective January 1, 2011 (for the March 31, 2012 reporting deadline) a partnership will need to report:
- If, at the end of the fiscal period, the partnership has an absolute value of revenues plus an absolute value of expenses of more than $2 million, or has more than $5 million in assets; or
- If, at anytime during the fiscal period,
- the partnership is a tiered partnership (has another partnership as a partner or is itself a partner in another partnership);
- the partnership has a corporation or a trust as a partner;
- the partnership invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership; or
- the Minister of National Revenue requests one in writing.
So, what does this mean? If you have a partnership, you’re more likely now to require additional reporting to the CRA. This can be as simple as a partnership with:
- your spouse in owning different pieces of real estate
- another entity such as a corporation or a trust (which includes an estate – so for example if your partner passed away you’ll need the additional reporting)
- another partnership
The financial thresholds will get easier and easier to breach as the investment portfolio grows, and given the CRA’s reluctance to regularly update many threshold levels over the years for inflation. Initially, I think the financial thresholds seem relatively reasonable.
A word of caution on “joint-venture partnership”
Further, to all of those who have been ignoring my words of caution related to calling your business/investment relationship with others a “joint-venture partnership”, I really hope that the additional reporting requirements don’t affect you. However, I have serious concerns. Partnerships and joint ventures can be very different creatures. Please don’t confuse them or invite the CRA to distinguish them on your behalf.
While more reporting to the CRA is not the end of the world, this is another administrative burden imposed on real estate investors that investors may regard with frustration.
More recent changes to the partnership rules will effectively result in changes in the year-ends for different corporations, but we’ll talk about that in a future article.
For additional information you can refer to http://www.cra-arc.gc.ca/tx/bsnss/tpcs/prtnrshps/menu-eng.html
George E. Dube, CATags: cra, joint ventures, partnerships, tax