Deck 15: Partnerships

Question 1

Which of the following statements regarding partnerships is true?

A)Partners must contribute equal portions of capital to the partnership.
B)It is possible that a minority partner will have significant influence over the partnership.
C)A holding corporation cannot act as a partner.
D)A general partnership is a protected legal entity, separate from the partners' affairs.

Answer 1

B

Question 2

John Brown and Alice Green want to start a business together.They will have equal ownership of the company.Alice would like to know whether a partnership or a corporation would be the best form of business for her particular situation,strictly from a tax perspective.Alice would not take any form of payment from the company in the first year.
The following information is available for Alice:
Employment income = $100,000
Interest income = $5,000
A business loss of $25,000 is anticipated in Year 1 for the new company.
Personal tax rate = 41% and corporate tax rate = 13%
Required:
Based solely on minimizing Alice's Year 1 tax liability,which form of business will be most beneficial to Alice from a tax liability perspective? Support your answer with calculations.

Answer 2

If the business is incorporated:
$105,000 * .41 = Personal tax liability of $43,050 + NIL corporate tax on the business (due to the loss)
If a partnership is formed:
$105,000 - 12,500 (Alice's share of the loss)= 92,500 Net income for tax purposes * .41 = Personal tax liability of $37,925
Tax savings = $5,125
Solely from a tax perspective,a partnership would be most beneficial for Alice at this point in time as she would be able to utilize her portion of the business loss against her other income.

Question 3

Mandy is a 40% partner in The Tea Shop.The ACB of her partnership interest at the beginning of 20x2 was $50,000.During 20x2,the partnership earned business income of $200,000 and a taxable capital gain of $12,000.Mandy withdrew $10,000 from the partnership for personal expenses during the year.What is the ACB of Mandy's partnership interest at the beginning of 20x3?

A)$124,800
B)$129,600
C)$252,000
D)$264,000

Answer 3

B

Question 4

Green Co.and Blue Co.are equal partners in Turquoise Paint.Turquoise Paint had a net income for tax purposes this year of $300,000,before deducting capital cost allowance.
Green Co.is a CCPC owned by Bob Green.Green Co.'s net income for tax purposes is $200,000.Blue Co.is a CCPC owned by Sally Blue.Blue Co.has suffered net losses the past two years.This year Blue Co.had a loss of $150,000,and the company has non-capital losses of $200,000 which will expire in two years.
The capital cost allowance for Turquoise Paint this year is $72,000.
Required:
Based solely on the facts provided:

A)Calculate the partnership net income for tax purposes that Bob would likely prefer to use,and explain why.
B)Calculate the partnership net income for tax purposes that Sally would likely prefer to use,and explain why.

Question 5

Which of the following statements regarding partnerships is TRUE?

A)Partnership income is taxed in the partnership.
B)Partnership losses cannot be offset against the partners' other income.
C)Partnership income does not have to be reported to Canada Revenue Agency.
D)Partnerships may earn business income, property income, and capital gains.

Question 6

Small Corp.and Big Corp.are equal partners in Medium Enterprises.The partnership has a net worth of $210,000,split 50/50 between the two corporations.Size Corp.has been asked to join the partnership.When the transaction is complete,all three partners will have an equal interest.To accomplish this structural change,Size Corp.will contribute $105,000 to the partnership treasury.This transaction will

A)dilute the original partners' interests.
B)increase the original partners' interests.
C)result in a capital gain for the partners.
D)result in a capital loss for the partners.

Question 7

ABC Co.and XYZ Co.have entered into a partnership for business purposes.Both companies are CCPCs and they share the profits and losses of the business equally.During the year,the partnership earned $200,000 of active business income,and ABC Co.earned $450,000 in business income from operations other than the partnership.All of the companies have a December 31^st year-end.How much of ABC Co.'s share of the partnership profits will be eligible for the small business deduction (assuming all of the $450,000 is allocated to the deduction)?

A)$0
B)$50,000
C)$100,000
D)$200,000

Question 8

Sharon is a 40% partner in Green Nursery.She also works full-time as an engineer,earning a gross salary of $100,000 annually.Green Nursery's net income for tax purposes in 20x0 was $210,000.During 20x0,Green Nursery received $10,000 in non-eligible dividends from a CCPC.Green Nursery also sold a capital asset and recognized a gain of $16,000 in 20x0.(The dividend income and taxable capital gain income have been included in the net income for tax purposes.)Sharon withdrew $20,000 from the partnership during 20x0.The ACB of Sharon's partnership interest was $75,000 at the beginning of 20x0.(Use tax rates and rules applicable for 2019.)
Required:

A)Calculate the partnership's business income for 20x0.
B)Calculate Sharon's net income for tax purposes for 20x0.
C)Calculate the ACB of Sharon's partnership interest for the beginning of 20x1.