A Joint Venture or a Partnership? How should I structure my business relationship?
The intention of this blog is to provide a reader with a basic understanding of some fundamental distinctions between joint ventures and partnerships.
Most common-law jurisdictions define a partnership as a relationship between two or more persons carrying on a business in common with a view to profit. As such, there are three essential ingredients to a partnership:
- there must be a business;
- this business must be carried on in common by two or more persons; and
- this business is being carried on with a view to profit.
Similar to partnerships, a joint venture ("JV") is formed when two or more persons agree that each provides its own property to perform a specific task and receives a specific division of profits from the performance of that task.
As such, whether an agreement constitutes a partnership or a JV is dependent on whether it creates a relationship defined as a "partnership" by provincial legislation, which relies on the three essential ingredients listed above. Despite their inherit similarities, the following distinctions exist between JVs and partnerships:
- in a true JV, the property that is provided by each co-venturer cannot be held under joint tenancy or tenancy in common;
- a true JV is limited in time, or to a particular project or task;
- the JV agreement should provide for a sharing of gross revenues and expenses as opposed to calculation of profit and sharing of such profit at the partnership level;
- the joint venturers should each have a right of mutual control and management of the business (although mutual control and management may be delegated to a particular joint venturer);
- the joint venturers should be able to dispose of their own property as they please;
- fiduciary obligations which would normally be imposed in a partnership situation, should be expressly removed under the JV agreement; and
- the JV agreement should expressly provide that the intention of the parties is to establish a JV and not a partnership.
Distinctions for Tax Purposes:
Having considered the general distinctions above, the table below provides a non-exhaustive summary of tax distinctions that should be considered prior to establishing either business relationship:
Allocation of Income
A separate computation of the income (or loss) of the partnership from each source is required, as if the partnership were a separate taxpayer resident in Canada. Relevant deductions are calculated at the partnership level and the net income (or loss) is allocated to the partners who have to include such income (or loss) on their personal tax returns for the year.
In a JV there is no computation of income or loss at the JV level as the joint venturers determine their income or loss by deducting any relevant expenses or allowances from their share of the gross income.
Disposition of Interest
A partner in a partnership can dispose of its interest. As long as partnership interest is capital property to the holder, the disposition of an interest can result in a capital gain (or loss).
A disposition of an interest in a JV is the disposition of the joint-venturer's share of any assets held in co-ownership as part of the JV. The joint venturer's gain (or loss) on the interest in those assets will depend on the nature of the asset and its tax attributes.
Transfer of Assets
Subject to certain rollover provisions, transfers of property between a partner and a partnership of which he is a member are treated as taxable dispositions that are deemed to take place at FMV.
Whether or not a contribution of property to a JV is a taxable disposition depends on whether the other members of the JV acquire an interest in the property.
Adding New Members
The admission of a new partner generally does not entail a disposition of the partnership property.
The admission of a new joint venturer may result in a disposition by each of the original co-venturers of a partial interest in the JV property.
If one of the members of a partnership is a non-resident, the partnership will not qualify as a "Canadian partnership", causing various implications including the denial of rollovers. Furthermore, any rents, royalties, interest payments and other amounts to which withholding tax apply if paid to a non-resident are subject to withholding tax when paid to any partnership that is not a "Canadian partnership".
There are no such issue with a JVs, making them a more appealing arrangement if non-residents are involved.
A partnership has its own fiscal period, independent of the taxation years of its members. At the end of each fiscal period of a partnership it calculates its income or loss from each source as if it were a separate person. Each member of the partnership then includes its share of the income (or loss) from each source in income for the taxation year of the member.
A JV can establish a fiscal period of its own. This generally allows the joint venturers to report their share of the JV income based on the fiscal period of the JV that ended in each joint venturer's taxation year, just as if the JV was a partnership.
A partnership is a "person" for GST/HST purposes and must register for, charge and collect, and claim input tax credits.
A JV is not a "person" and remains a "flow through entity" for GST/HST purposes with each joint venturer having to account for their portion of any GST/HST fees.
Invitation for Discussion:
These are just some of the fundamental distinctions between the two business relationships. If you would like to discuss this blog in greater detail, please do not hesitate to contact one of the lawyers in the Business Law group at Shea Nerland LLP.
Note that the foregoing is for general discussion purposes only and should not be construed as legal advice to any one person or company. If the issues discussed herein affect you or your company, you are encouraged to seek proper legal advice.