What Is a Partnership? Ontario, Alberta, and Federal Tax Rules

What Makes a Partnership

A partnership is not a company you register into existence the way you incorporate a corporation. It is a legal relationship that arises from how people actually carry on business together. In Ontario, the Partnerships Act defines it as “the relation that subsists between persons carrying on a business in common with a view to profit” (Partnerships Act, RSO 1990, c P.5, s 2). Alberta’s Partnership Act uses essentially the same wording: “the relationship that subsists between persons carrying on a business in common with a view to profit” (Partnership Act, RSA 2000, c P-3, s 1(g)). Both provinces reach the same test through nearly identical statutory language, so there is no material difference between them on this point.

Both Acts also draw the same line at the edge of the definition: the relationship among members of an incorporated company is not a partnership. Ontario’s statute excludes “the relation between the members of a company or association that is incorporated by or under the authority of any special or general Act” (Partnerships Act, RSO 1990, c P.5, s 2), and Alberta’s excludes “the relationship between members of any company or association who constitute a corporation under any law in force in Alberta” (Partnership Act, RSA 2000, c P-3, s 3).

There is no separate federal definition of “partnership” as a business structure. Partnership law falls under provincial jurisdiction, and the Supreme Court of Canada has confirmed that whether a partnership exists is determined by looking to the partnership statute of the relevant province or territory (CRA Income Tax Folio S4-F16-C1, para 1.1-1.2, citing Continental Bank Leasing Corp v Canada, [1998] 2 SCR 298).

How Partnerships Are Taxed Federally

The federal Income Tax Act does not itself define what a partnership is. It “recognizes the existence of partnerships and sets out the income tax consequences of transactions involving partnerships and their members” (CRA Income Tax Folio S4-F16-C1, para 1.1). In practice, this means the Act borrows the provincial definition to decide whether a partnership exists, then applies its own rules to how that partnership is taxed.

Those rules treat a partnership as a flow-through for tax purposes. Under section 96, a partner’s share of partnership income is computed as if the partnership were a separate person resident in Canada, even though the partnership is not itself a taxable entity. As CRA puts it: “A partnership by itself does not pay income tax on its operating results and does not file an annual income tax return.” Instead, each partner reports their share of the partnership’s income or loss on their own personal or corporate return.

Each Partner Can Bind the Others

One of the most consequential features of a partnership, in both Ontario and Alberta, is agency. Each partner acts as an agent of the firm and of the other partners for the purpose of the partnership’s business. Ontario’s Act states that “the acts of every partner who does any act for carrying on in the usual way business of the kind carried on by the firm…bind the firm and the other partners” (Partnerships Act, RSO 1990, c P.5, s 6). Alberta’s Act says the same: “Each partner is an agent of the firm and of the partner’s other partners for the purpose of the business of the partnership” (Partnership Act, RSA 2000, c P-3, s 6).

Practically, this means a partner does not need the consent of the others to make a decision that legally obligates the whole partnership, so long as it falls within the usual course of the firm’s business.

What Does Not Automatically Create a Partnership

Ontario’s Partnerships Act sets out specific situations that, on their own, do not make people partners. Jointly owning property does not create a partnership in that property: “Joint tenancy, tenancy in common, joint property, common property, or part ownership does not of itself create a partnership as to anything so held or owned.” Likewise, simply sharing gross returns from a jointly or commonly owned property “does not of itself create a partnership” (Partnerships Act, RSO 1990, c P.5, s 3, rules 1-2). The test looks past labels and property arrangements to whether the parties are actually carrying on a business together with a view to profit.

Partnership vs. Corporation

The core structural difference is what separates a partnership from a corporation. CRA describes a partnership simply as “a relationship in which two or more persons (members) carry on a business together” (CRA GST/HST Memorandum 14-9-1, para 10, draft guidance still subject to comment at time of publication). A corporation, by contrast, is a separate legal entity distinct from its owners. That distinction is why both the Ontario and Alberta Acts specifically exclude incorporated companies from their definitions of partnership: the two structures are legally different things, with different tax treatment (a partnership flows income through to its partners; a corporation is taxed as its own entity) and different consequences for who can be bound by whose actions.