Running a business with one or more other people raises an immediate question: what structure do you use? For many Canadians, the answer is a partnership — and understanding how partnership taxes in Canada work is critical before you sign anything or split your first dollar of revenue.
This guide covers the full picture: what a partnership is, the different types, your filing obligations, and how income flows through to your personal return.
A partnership exists when two or more people carry on a business in common with a view to profit. That definition, drawn from provincial Partnership Acts across Canada, is deliberately broad. You do not need a formal written agreement to have a partnership — in fact, partnerships can arise unintentionally simply by operating a business together and sharing profits.
The most important thing to understand about a partnership from a tax perspective is what it is not: a separate legal entity. Unlike a corporation, a partnership does not pay tax in its own name. Instead, partnership income is calculated at the partnership level and then allocated to the individual partners, who each report and pay tax on their share. This is called a flow-through or pass-through structure.
That single characteristic — the flow-through nature — shapes everything about how partnerships are taxed, administered, and compared to corporations.
A general partnership is the most common and simplest form. All partners participate in managing the business and all partners are personally liable for the debts and obligations of the partnership. If the partnership cannot pay a creditor, that creditor can pursue each partner's personal assets.
General partnerships are governed by provincial legislation — in Alberta, that is the Partnership Act, RSA 2000. There are no minimum capital requirements, no registration with a corporate registry (though a trade name registration may be required), and the administrative burden is low compared to a corporation.
A limited partnership has at least one general partner, who carries unlimited personal liability and runs the business, plus one or more limited partners. Limited partners contribute capital but their liability is capped at the amount they invested — they cannot lose more than they put in, provided they do not take an active management role.
Limited partnerships are widely used for real estate investments, private equity funds, and resource projects because they allow passive investors to participate in a venture without exposing personal assets beyond their investment. The flow-through treatment also makes them attractive when investors want access to losses or resource deductions in the early years of a project.
An LLP is available to specific regulated professions — most commonly lawyers and accountants. Partners in an LLP are protected from personal liability arising from the negligence or misconduct of other partners, which solves a major concern in professional service firms where one partner's error could otherwise expose everyone.
The LLP remains a flow-through for tax purposes. Many of Canada's largest law firms and accounting firms operate as LLPs precisely because the structure combines liability protection from a partner's negligence with pass-through taxation, avoiding the complexity and cost of full incorporation.
Even though a partnership is not a taxpayer itself, CRA requires certain partnerships to file a T5013 Partnership Information Return. This is the partnership's own tax filing — not the partners' personal returns, but a separate information return that calculates the partnership's total income, deductions, and allocations.
A T5013 is required when any of the following apply:
Even if your partnership does not technically meet those thresholds, CRA can request a T5013 filing, and many partnerships file voluntarily to maintain clean records.
The T5013 return reports the partnership's revenues, expenses, and net income or loss, then shows exactly how that net figure is allocated among the partners. Once the T5013 is filed, each partner receives a T5013 slip showing their allocated share, which they then carry to their own personal or corporate return.
The partnership's fiscal year end does not have to match the calendar year, though CRA rules restrict fiscal year choices for partnerships that include individual partners, generally requiring a December 31 year end unless the partnership meets specific conditions under the stub-period election rules.
Each partner reports their allocated share of partnership income or loss on their personal T1 return. For business income earned through a partnership, that amount flows onto Form T2125 — Statement of Business or Professional Activities.
Partnership income is taxed at the partner's personal marginal tax rate. In Alberta in 2025, the top combined federal-provincial marginal rate is approximately 48 per cent. There is no separate or preferential tax rate for partnership income — it stacks on top of your other income just like employment income or self-employment income.
This stands in contrast to a Canadian-controlled private corporation (CCPC), where active business income up to $500,000 qualifies for the small business deduction, reducing the combined federal-provincial corporate tax rate to roughly 11 per cent in Alberta. Partnerships cannot access the small business deduction. All income is taxed at personal rates, regardless of whether partners actually draw cash out of the partnership.
That last point matters: you are taxed on your allocated share of partnership income in the year the partnership earns it, not in the year you actually receive a distribution. If the partnership retains earnings, partners may owe tax on income they have not yet received in cash.
The partnership agreement governs how income, losses, and other amounts are allocated among partners. Allocations do not need to be equal — a 60/40 split, a preferential return to one partner, or a carried interest structure are all permissible if the agreement supports them.
However, CRA can challenge allocations that appear to be motivated primarily by tax avoidance rather than a legitimate commercial arrangement. If you allocate most of the income to the partner in the lowest tax bracket without a genuine business reason, expect scrutiny. The general anti-avoidance rule and specific partnership attribution rules give CRA tools to recharacterise allocations that lack commercial substance.
One of the attractive features of a partnership — particularly a limited partnership — is that losses flow through to partners proportionally, just as income does. A partner can use their share of a partnership loss against other income on their personal return, subject to the loss being from a source (business, property, etc.) that would otherwise be deductible.
For limited partners, however, the deductible loss is capped by the at-risk amount. Under section 96(2.1) of the Income Tax Act, a limited partner cannot claim losses exceeding their at-risk amount, which is broadly their investment in the partnership plus amounts they have guaranteed plus undistributed income allocations, less certain amounts owed to the partnership. Losses that exceed the at-risk amount are not lost — they are suspended and carried forward to be applied against future income from that partnership or when the limited partner disposes of their interest.
General partners face no equivalent restriction on losses (though general anti-avoidance provisions may still apply in abusive structures).
Choosing between a partnership and incorporation is one of the most consequential decisions a business owner makes, and the right answer depends heavily on your specific circumstances.
Advantages of a partnership over a corporation include simpler administration with no articles of incorporation, no annual corporate returns, and generally lower professional fees. Losses flow directly to investors in the year they arise, which is valuable in startup or capital-intensive phases. And there is no double taxation risk on winding up — when a partnership distributes assets, partners are generally taxed once on their allocated share.
Disadvantages include unlimited personal liability for general partners, no access to the small business deduction, and all income taxed at personal marginal rates. For a profitable, established business, the tax deferral available inside a corporation can be significant — paying 11 per cent now and deferring personal tax until dividends are paid is a genuine advantage the partnership structure cannot offer.
For professionals operating an LLP, the calculus is different again. Many law firms and accounting firms prefer the LLP because it delivers shared liability protection from partners' individual negligence without the administrative and tax complexity of full incorporation. The pass-through taxation keeps things clean, and the liability shield addresses the main practical concern.
If you are weighing these options for your situation, the team at Swift Accounting Calgary works through partnership and corporate structures regularly and can help you model the actual numbers for your business.
The T5013 must be filed by March 31 following the partnership's fiscal year end. Partners must receive their T5013 slips in time to file their own returns. For individuals, the T1 deadline is April 30 (June 15 if you or your spouse carry on business, though any balance owing is still due April 30). Penalties for late T5013 filing run $25 per day, up to $2,500 per return, with repeat-offence escalations.
If your partnership has a non-December fiscal year end under a stub-period election, the income inclusion rules can create a timing adjustment — another area where working with an accountant familiar with partnership tax at Swift Accounting can prevent expensive surprises.
A partnership does not file a T2 corporate return or a T1 personal return in its own name — it is not a separate taxpayer. However, partnerships that meet certain thresholds (a corporate partner, gross revenue over $2 million, or more than five members) must file a T5013 Partnership Information Return. This is an information return that calculates and reports income allocations to each partner; the actual tax is paid by the partners on their own returns.
Partnership income flows through to each partner and is taxed in their hands at their personal marginal tax rate. In Alberta in 2025, the top combined rate reaches approximately 48 per cent. Partners are taxed on their allocated share of income in the year the partnership earns it, regardless of whether cash is actually distributed. There is no small business deduction available to partnerships — that benefit is exclusive to Canadian-controlled private corporations.
Yes, but only up to their at-risk amount. Under the Income Tax Act, a limited partner's deductible loss in a given year cannot exceed their at-risk amount — broadly, the amount they have invested plus undistributed allocations, less amounts owed to the partnership. Losses beyond that threshold are suspended and carried forward to offset future income from the same partnership or gains on disposition of the partnership interest.
It depends on your profession, income level, and growth plans. An LLP gives professionals — lawyers, accountants — protection from liability for a partner's negligence while keeping the tax structure simple and pass-through. A professional corporation can provide tax deferral on income retained inside the corporation, which becomes valuable at higher income levels. Many smaller or mid-size professional firms prefer the LLP for its simplicity; larger practices or those accumulating retained earnings often incorporate. A tax adviser can model the after-tax difference for your specific revenue and distribution plans.
Partnership tax in Canada has genuine complexity once you move beyond a simple two-person general partnership — and getting the structure, agreement, and filings right from the start saves significant cost and CRA friction later. Reach out to the team at Swift Accounting to discuss your partnership's setup or filing obligations.
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