What happens when a partnership changes or ends?

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the Agricultural Producers Association of Saskatchewan.

Article provided by the Farm Business Consultants www.fbc.ca

A business partnership agreement should recognize that people come and go in our lives and businesses. It should be drafted in a way that accommodates change so as to avoid problems later on.

A partner might want to leave, so the agreement should anticipate how to buy out that person’s interest.

The partners might want to welcome a new person. How does that person buy in?

And a partner might die. How does the deceased ownership interest pass to the estate, and how is it taxed?

Adding a new partner

Under law, all partners must agree to the admission of a new partner unless the partnership agreement permits otherwise.

As well, if there are no specific instructions in an agreement, it is assumed that new partners will have the same rights and obligations of existing partners.

Care should be taken to ensure that the addition of the new partner does not create a new partnership or dissolve the existing one.

In particular, the agreement should specify the required contribution, participation rights, liability before and after admission and management role of the new partner. A firm integration plan needs to be outlined.

There are two ways a new partner may be admitted to a partnership:

  • The new partner acquires the interest from one or more partners.
  • The new partner acquires interest by contributing capital to the partnership.

In the former method, a new partner acquires his interest from one or more partners. Those partners will be deemed to have disposed of a portion of their interest for proceeds equal to the consideration received from the new partner. A capital gain or loss may result.

In the latter method, the acquisition cost, which is assumed to be at fair market value, is now the partner’s adjusted cost base.

The other partners are not deemed to have disposed of a portion of their interest. As a result, no tax consequences is associated with the existing partners.

Death or disability

What happens if the partnership is automatically dissolved?

Without a partnership agreement, rights do not transfer to successors, heirs or executors when a partner dies because the relationship is specific to the partnership.

However, the partners can use an agreement to stipulate that death or disability does not dissolve the obligations of the remaining partners and the rights of the withdrawing partners.

Deemed disposition

From a tax perspective, the death of a partner usually results in the deemed disposition of his partnership interest on the date of death, and the estate then represents the partner until the partnership interest is settled.

The partnership agreement usually addresses the immediate sale to the existing surviving partners or the admission of a replacement partner, such as a spouse or child.

Many farm partnerships, which may only include the spouses, create a scenario where the surviving spouse is now the only member of the partnership.

Unless a child or another individual replaces the spouse that has died, the partnership automatically dissolves and we have dispositions of partnership interests for both spouses. The partnership assets are now those of the surviving spouse.

The assets transfer at cost, except for the capital gain-loss on the disposition of the partnership interests. There are no tax consequences.

The partnership is deemed to continue if children replace the deceased.

A professionally prepared partnership agreement will address these scenarios, so it is always prudent to involve tax and legal professionals when preparing such an agreement.

Grant Diamond is a tax analyst in Saskatoon, SK., with FBC, a company that specializes in farm tax. Contact: fbc@fbc.ca or 1-800-265-1002.

I’ll trade you these for two of those …

Disclaimer: The views and opinions expressed in this article are those of the authors and do not necessarily reflect the official policy or position of the Agricultural Producers Association of Saskatchewan.

Article provided by the Farm Business Consultants www.fbc.ca

I’ll trade you these for two of those …

Bartering is alive and well on the farm and in business everywhere.

It also continues to have the attention of the Canada Revenue Agency, which maintains the practice is covered by the rules and regulations of the Income Tax Act.

Trading by exchanging one commodity for another may not involve the exchange of money, but it is taken for granted that each of those involved in the transaction believes the value of whatever is received is equal to the value of whatever is given.

Bartering can be as simple as a private exchange of goods and services between two people or as sophisticated as computer-controlled franchised, member-only barter clubs using credit units with an implied monetary unit value as currency.

Friends or neighbors exchanging services to occasionally help each other out receive a free pass on this one as long as it isn’t a frequent habit.

Digital currency is one of the newest developments in this area with Bitcoins one of the most prominent examples.

They can be bought or sold in return for traditional currency, transferred from one person to another and traded anonymously. They are not controlled by central banks or regulated by any country.

However, when moviegoers pay for their seats with Bitcoins, the value of those seats are considered taxable income for the theatre.

In general, the CRA says that when a taxpayer barters goods or services for other goods or services, then the value of those goods or services must be brought into the taxpayer’s in-come if they are business related.

The agency’s example cites a grocer providing groceries to someone in exchange for something else. The value of the groceries is treated as income to the grocer.

It calculates their value based on the price of the goods or services that the taxpayer would have normally received if they had been sold to a stranger.

If the goods and services that are given up cannot readily be valued but the goods or property that are received can be, then the price of the latter will be used to establish the price of the transaction.

Bartered goods might also result in a capital gain if property such as land, vehicles or a valuable painting is bartered for goods or services.

GST/HST must also be applied to barter transactions in the same way that it is on the supply of any taxable goods and services.

When the transaction takes place within a registered barter exchange network, then the tax must be applied to the value of the service supplied, such as legal fees, but not to the barter units used to pay for the transaction.

If registrants exchange similar types of property, such as farm property, and use it as inventory for commercial activities, then the value in each case is considered to be nil, and GST/HST is not applied.