Chances are you’ve heard terms like ‘trusts’ and ‘partnerships’ before – but what do they really mean in relation to your business and filing your taxes? Below, we’ll discuss both in depth so that you have an understanding of each and their importance relative to your business.
What is a Partnership?
A partnership refers to any business (or businesses) that are run by two or more people. It is a form of shared ownership and a mutual agreement to share certain responsibilities and benefits.
When entering into a partnership, a contractual agreement between business parties is a must. A written contact will not only protect you in the event of a dispute but will also help lay out the important details of your partnership, such as how to divide your business income, responsibilities, and expenses.
It should also include what percentage of the company’s income you need to declare on your income tax – something that we will discuss in more detail down below.
Partnerships and Income Tax
Partners in unincorporated businesses will file taxes as self-employed individuals. Unlike corporations, business partnerships don’t have specific tax requirements to complete. Each partner is responsible for reporting their contractual share of the business’s profits as self-employed income. Learn more about Canadian guidelines on the Government of Canada Website.
Here’s an example.
Let’s say you and your business partner decide to split profits 50/50. Your personal income will then be 50% of the business profits for the year. If your business made $100,000 profit in 2021, you would report $50,000 of income on lines 135 and 143 of your return.
Both partners will also need to fill out a T2125 form, which is a Statement of Business or Professional Activities. You will also be required to submit a Statement of Partnership Income, or a T5013 form, if you are partner in a business whose assets total more than 5 million.
What is a Trust?
A trust is a multifaceted vehicle for protecting and preserving assets such as property, cash, and shares. This is usually done with business, tax, and estate-planning purposes in mind as trusts can be used to shelter property from potential liabilities.
Three persons of interest hold responsibility within a trust.
- Settlor: Creates and contributes assets into the trust.
- Trustee: Looks after the assets and carrying out the settlor’s wishes.
- Beneficiary: Receives benefits from the trust.
Types of Trusts
Trusts are wide and varied to support a number of personal, financial, and business related goals. We will go over the most common ones together in broader terms to establish a base understanding.
Inter-vivos trusts (also known as family trusts) are created during the lifetime of the settlor and are governed by a trust deed – a legal document primarily used in real estate transactions. In this type of trust, the settlor allocates some property to a trustee to be managed on behalf of the beneficiaries in the trust deed.
A testamentary trust is created when the settlor passes away. The parameters of the trust are directed by their final will.
Within those frameworks, a trust can be either discretionary or non-discretionary. Discretionary trusts allow the trustee to choose how they allocate income and capital, while in a non-discretionary trust a trust deed stipulates those specifics.
Knowing what kind of trust will best serve you, your family, and your business is important before trying to allocate your funds anywhere – and knowing how it will impact your finances come tax season should also be factored into your decision.
Trusts and Income Tax
If the trust has tax payable, disposes of capital property, or it distributes any part of its income to its beneficiaries, then an annual T3 form must be filed come income tax time.
There are, however, a few exceptions in which a T3 form doesn’t need to be submitted. This is if (1) the trust has been in existence for less than three months come the end of the year, or (2) if the trust holds less than $50,000 in assets over the course of a taxation year.
There are also several types of trusts that are exempt from reporting. They are as follows:
- Regulated trusts
- Segregated fund trusts
- Mutual fund trusts,
- Trusts for non-profit organizations/registered charities
- Registered savings plans (such as RRSP, RESP, TFSA, etc.)
- Qualified disability trusts
- Master trusts
- Employee life and health trusts
- Some government funded trusts
- Graduated rate estates
- Cemetery care trusts
IAPC Has You Covered
When it comes to trusts and partnerships, there’s a lot of information to navigate and doing what is best for you and your company can quickly become lost in a sea of grey. Let us help you stay on track and on time for your goals and tax times by taking out the guesswork.
Book a free consultation with one of our trusted Chestermere Chartered Professional Accountants today. We’ll be happy to answer your questions about your taxes and accounting needs!
