T5013 or T2125: First Year of a General Partnership in Canada

Does our general partnership have to file a T5013 in its first year?

The CRA requires a Canadian general partnership to file a T5013 partnership information return for a fiscal period if one of the tests below is met, and excuses partnerships that meet none of them. The fiscal period is the partnership's accounting year. A partnership is not taxed itself: its income or loss flows through to the partners, who report their shares on their own returns (CRA: Guide T4002, chapter 1). The T5013 reports those shares; it does not change who pays the tax.

Source: CRA: Guide T4068.

The first year gets no special treatment. The same tests apply to the first fiscal period. Revenue and expenses are added, not netted, so a partnership that breaks even can still be over the limit. There is no test based on the number of partners: the CRA's own worked example is a new partnership of ten individuals under the limits that does not have to file (CRA: Guide T4068). The Income Tax Regulations put the duty to file on every member of a partnership that carries on business in Canada (section 229), but the CRA excuses partnerships that meet none of these tests as administrative policy, so a written request for a return still has to be answered (CRA: Guide T4002, chapter 1).

Five things make a first year less simple: no written profit split, a corporation or trust among the partners, partners who put in or took out unequal cash, a year-end other than December 31, and a first year that has already ended without books. To answer any of the questions below, gather the partnership agreement, the provincial registration, any CRA account numbers, bank statements, and a list of the cash each partner put in or took out.

What if we are under those limits: does each partner still report?

Yes. A partnership under the T5013 limits is still a partnership, and each partner still reports their share of its income or loss. Without a T5013, partners use the partnership's financial statements (CRA: Guide T4068).

The CRA's example gives a partnership under the limits two options:

1. Give each partner a copy of its financial statements for the fiscal period.
2. File a T5013 voluntarily and issue each partner a slip.

Either way, the books must produce a statement of revenue, expenses, net income and each partner's share for the fiscal period. That statement is what the partners work from.

T5013 or T2125: how does each partner report their share?

An individual partner who takes part in the business reports their share on a T2125 filed with their T1; the partnership itself files no T2125. What goes on the form depends on whether the partnership issued a slip (CRA: Guide T4002, chapter 2).

On the identification area, a partner enters their percentage of the partnership and, if there is a slip, the nine-digit business number printed on it.

The partnership claims capital cost allowance (CCA) on property it owns; individual partners cannot claim it themselves. CCA shown in box 040 of the slip is already taken out of box 116, so a partner does not deduct it again (CRA: Guide T4002, chapter 1). For costs a partner paid personally, see business expenses paid personally. For the tax, CPP and instalments on the result, see how self-employed income is taxed.

What is our first fiscal period, and can we choose a year-end other than December 31?

Normally no: if any partner is an individual, a professional corporation, or a partnership that is itself capped this way, the fiscal period cannot end after December 31 of the year it began, so the first period runs from the start date to December 31 at the latest (Income Tax Act, section 249.1). A fiscal period also cannot be longer than 12 months, and a new business can have a shorter first period (CRA: Fiscal period). If no partner is an individual, a different test in section 249.1 applies; this page does not cover it.

The only way around the December 31 limit is the alternative method, which lets the business end its year on another date. The CRA's rules for it (Form T1139):

• Every partner must be an individual.
• It is not available if the partnership is itself a partner in other partnerships, or includes a professional corporation as a partner.
• A partner with authority to act for the partnership makes the request. Every partner fills in their own Form T1139 with their share and files it with their own return for the year that includes the first day of the first fiscal period, by that return's due date, normally June 15 of the following year. This holds even if the first fiscal period ends in the next year (Income Tax Act, subsection 249.1(4)).
• While the year-end is not December 31, the form must be filed every year to add extra income for the days between the year-end and December 31. That stub-period amount is worked out from the fiscal period's net income.

A partnership cannot adopt a floating fiscal period, and it needs approval to change an established one (CRA: Guide T4068). Each partner reports their share in the tax year in which the partnership's fiscal period ends (Income Tax Act, section 96).

When is the T5013 due, and what is the late penalty?

Partner types are tested throughout the fiscal period, looking through a partnership partner to its end members. The T5013 is due March 31 after the calendar year in which the fiscal period ended when every partner is an individual (the CRA counts a trust as an individual, though a trust partner still makes a T5013 required), five months after the fiscal period ends when every partner is a corporation, and the earlier of those two dates for any other mix. If the partnership stops its business before then, a return not yet filed is due by the earlier of that date and 90 days after it stops (Income Tax Regulations, section 229). The penalty for a required return filed late is $25 per day, from $100 to $2,500 (CRA: Guide T4068).

Slips go to each partner on or before the filing due date. A partnership that files needs a partnership account number, made up of the nine-digit business number, the program identifier RZ and a four-digit reference number. If it has none, it must apply before filing. Business Registration Online works for most partnerships, but it cannot register a business owned by another business, such as a corporate or partnership partner; those mail Form RC1 (CRA: register as a resident). Either way, select the Partnerships Group program account type and the T5013 Partnership Information Return. If a partnership issues more than five slips for a calendar year, it must file them online; paper filing can bring a separate penalty even when on time (Income Tax Regulations, section 205.1).

For how late-filing penalties are worked out and when they are cancelled, see penalties, interest and relief. If the first year has already passed, see catching up on overdue books.

How is profit split among partners, and who is taxed on it?

The partnership agreement sets each partner's share of profit or loss. The CRA says business profits or losses are usually divided among the partners based on that agreement (CRA: Definitions, partnership). A partnership can exist without a written agreement (CRA: Guide T4002, chapter 1).

When partners have no agreement on the split, the provincial partnership act fills the gap. In British Columbia, for example, partners share capital and profits equally and a partner is not paid for working in the business, unless they agreed otherwise (B.C.: Partnership Act, section 27). Check your own province's act. The Income Tax Act can also override a split whose main reason is to reduce or postpone tax (section 103); for how partners set a split, see partnership or corporation.

A partner is taxed on their share of the partnership's income whether or not they took the cash out (Income Tax Act, section 96). Money a partner takes out is not an expense of the partnership: salaries and drawings paid to a partner are not deductible (CRA: Guide T4002, chapter 3). The books therefore track three things for each partner separately: cash put in, cash taken out, and share of income. Property is different from cash: a partner who puts equipment, a vehicle or inventory into the partnership is treated as selling it at fair market value, unless all partners jointly elect a rollover on Form T2059, due by the earliest return filing date among the partners for the year of the transfer (Income Tax Act, sections 97 and 96(4)).

What books and records does a partnership keep, and for how long?

A partnership keeps records of all its income and expenses, with the documents behind them, for six years from the end of the last tax year to which they relate. If a partner files an income tax return late, the six years run from the day it is filed, and records tied to an objection or appeal stay until it ends (Income Tax Act, subsections 230(4) to (6); CRA: Business records; CRA: Guide T4068).

• Income: the date, amount and source of each receipt, backed by sales invoices.
• Expenses: a receipt or voucher for each purchase.
• Bank: deposit slips, bank statements and cancelled cheques.
• Papers: the partnership agreement, the provincial registration and the CRA account details.
• Each partner: cash put in, cash taken out, and costs paid personally, with dates.
• Assets: a list of what the partnership owns, because the partnership, not the partners, claims CCA.

To build the books from nothing, see setting up books for a new business.

Does GST/HST registration look at the partnership's revenue or each partner's?

The partnership's. For GST/HST the CRA treats a partnership as a separate person from its members (CRA: Folio S4-F16-C1). The CRA's small supplier test is $30,000 in a single calendar quarter or over four consecutive calendar quarters. A partnership counts its total revenue from worldwide taxable supplies, before expenses, together with its associates' (CRA: When to register). General partners are also jointly liable for the partnership's GST/HST: for amounts that came due while they were partners, even after they leave, and after a dissolution if they were partners when it ended. A partner who joins late answers for earlier amounts only up to partnership property (Excise Tax Act, subsection 272.1(5)). For timing and what happens after crossing the limit, see when to register for GST/HST. For every other return the business may owe, see which returns your business files.

Do we have to register the partnership with the province, and what decides whether a partnership exists?

Provincial partnership law decides whether a partnership exists, and registration alone does not settle it. The CRA says the question is answered under the partnership law of the province or territory (CRA: Guide T4068). It describes the test as carrying on a business, in common, with a view to profit; sharing profits alone, or owning property together alone, does not by itself make a partnership, and registration does not necessarily prove one exists (CRA: Folio S4-F16-C1). British Columbia's Partnership Act, for example, defines a partnership the same way (section 2).

Whether and when you must register is set by each province. In British Columbia, a partnership for trading, manufacturing or mining purposes must file a registration statement within three months after the firm is formed (B.C.: Partnership Act, sections 81 and 82), and the province's business page says a general partnership registers with the BC Registry and reserves a business name. It also says partners in a general partnership are responsible for all aspects of the business, including its debts (B.C.: Proprietorships and partnerships). Whether a service business falls inside the "trading, manufacturing or mining" wording is a question for the provincial registry. Other provinces differ, so check yours.

This page covers federal rules and uses British Columbia only as an example. Québec decides whether a partnership exists under its Civil Code and adds its own registration and provincial return; the federal rules on this page still apply, but confirm the Québec parts with Revenu Québec. To weigh a partnership against other structures, see partnership or corporation.

What changes if a corporation, a trust or another partnership becomes a partner?

A corporation, a trust or another partnership as a partner makes a T5013 required whatever the partnership's size, and it can close the off-calendar year-end option.

• The T5013: it is required if the partner was in the partnership at any time in the fiscal period (CRA: Guide T4068). With a corporate partner alongside an individual or trust partner, the due date is the earlier of the two dates in the due-date section above.
• The corporate partner's return: a corporation reports its share on its T2 and a trust on its T3, not a T2125. Individual partners still use the T2125 (CRA: Guide T4002, chapter 1).
• Year-end: if an individual, a professional corporation or a capped partnership is a partner, the fiscal period cannot end after December 31. The alternative method needs every partner to be an individual and is closed where the partnership is a partner in other partnerships (Income Tax Act, section 249.1; Form T1139).

For the full list of returns, see which returns your business files.

Example

These examples are illustrative. All figures are in Canadian dollars.

Two individuals under the limits

Two designers in Ontario start a general partnership on March 1. Their first fiscal period runs from March 1 to December 31. Revenue is $180,000 and expenses are $60,000, so net income is $120,000. Revenue plus expenses is $240,000, far below the T5013 revenue-plus-expenses limit, and both partners are individuals and assets are well under the asset limit, so no T5013 is required. They split profit 50/50 under their agreement. The partnership gives each partner its financial statements, and each reports $60,000 on a T2125, filling in the Details of other partners chart. If the sales are taxable, $180,000 is also over the $30,000 GST/HST small-supplier limit, so the partnership registers for GST/HST (when to register).

A larger consultancy

Three individuals run a consultancy. Revenue is $1,900,000 and expenses are $450,000. Revenue plus expenses is $2,350,000, over the $2,000,000 limit, so a T5013 is required, due by March 31 after the calendar year. Net income is $1,450,000, split 50/25/25. The slips show $725,000, $362,500 and $362,500 (box 116 for business income, or box 120 for professional income), and each partner enters their amount at amount 5A of their T2125. Taxable sales of this size also mean GST/HST registration.

One partner is a holding corporation

A partnership has two equal partners: one individual and one holding corporation. Revenue is $90,000 and expenses are $30,000, so net income is $60,000 and each share is $30,000. A corporate partner makes a T5013 required whatever the size. Because one partner is an individual, the fiscal period cannot end after December 31. With a December 31 year-end, the T5013 is due March 31, the earlier of that date and five months after the period ends. The individual reports $30,000 on a T2125; the corporation reports $30,000 on its T2. If these are taxable sales, $90,000 is over the $30,000 GST/HST small-supplier limit, so the partnership registers as well.

Different for you?

• There is no written profit split, or partners put in or took out unequal cash: the first return depends on each partner's share of income and on the opening capital, so these are worth settling first. Get bookkeeping help with the opening books and individual tax help with the return.
• A corporation, a trust or another partnership is a partner: a T5013 is required and the corporation files its own return. See which returns your business files and get corporate tax help alongside individual tax help.
• You want a year-end other than December 31: it needs an election, a Form T1139 from every partner and a yearly extra-income calculation. Get individual tax help before the first return is filed.
• The first year has already ended and the books or the T5013 are behind: see catching up on overdue books and penalties, interest and relief, and get bookkeeping help to rebuild the records.
• You are still choosing a structure: see partnership or corporation.
• A partner paid business costs personally: see business expenses paid personally.
• A partner lives outside Canada: Canada and the other country may both tax the share, and filing rules differ. Get cross-border tax help.
• The business is in Québec, or a partner lives there: Québec can add its own partnership return and slips, even for a partnership run elsewhere. This page does not cover them; confirm with Revenu Québec and see which returns your business files.