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A partnership doesn’t pay income tax and doesn’t file an income tax return. Each partner reports a share of the net income or loss on their own return, so the accounting job is to work out those shares fairly and prove them. Get that right and partnership accounting is mostly bookkeeping with one extra layer.
Why are you taxed on profit you haven’t taken out?
Because the CRA taxes your share of the partnership’s income even if the money never left the business and only showed up in your capital account. Leave $40,000 of profit in the business to fund a truck and you still report it.
Sound odd?
It catches new partners out. They see a bank balance that hasn’t moved and assume nothing is owed. Plan for it: set aside cash for each partner’s tax, or agree a regular draw that covers it. Picture Maria and Joel, who run a two-person renovation shop in Saskatoon. The shop earns well, but the cash goes into a new van. Come tax time, each owes tax on half the profit, van or not. A monthly draw agreed at the start of the year would have covered it.
Losses work the same way in reverse. The CRA page says loss carry-over rules apply to each partner and not to the partnership. Non-capital losses can be carried back three years and forward twenty.
What records does partnership accounting need?
The books belong to the business, not to any one partner, but each partner needs a separate account. Keep four things apart for each person.
- Capital put in at the start and later.
- Draws taken out during the year.
- Their share of profit or loss.
- Anything the partnership owes them or they owe it, such as a loan.
Write the profit split down in the partnership agreement. The CRA notes a partnership can be formed verbally or in writing, but a verbal deal is hard to prove when two partners remember it differently. A written agreement settles what share each person reports.
Keep the business bank account apart from everyone’s personal accounts. Post each draw to the partner who took it, on the day it happens. A draw isn’t a business expense, so it shouldn’t sit in the expense accounts, where it would make profit look smaller than it is.
When does a partnership have to file a T5013?
Not every partnership does. The CRA says a partnership with business in Canada must file the T5013 information return if, at the end of its fiscal period, revenues plus expenses (as absolute values) are over $2 million or assets are over $5 million. It must also file if at any time in the period it is a tiered partnership, has a corporation or a trust as a partner, invested in certain flow-through shares, or the Minister asks in writing. The CRA’s page on filing a T5013 partnership information return sets out the tests.
| Test | Filing trigger |
|---|---|
| Revenues plus expenses | Over $2 million at fiscal period end |
| Assets at original cost | Over $5 million |
| Partners | A corporation, a trust or another partnership is a partner |
| Flow-through shares | Invested in qualifying shares |
| Minister | Asks in writing |
A two-person consulting partnership with $300,000 of revenue and two individual partners may not be required to file one. The T5013 due date wasn’t on the filing page we read, so check the CRA’s T5013 guide for the current deadline before you rely on a date.
When a return is filed, each partner gets a T5013 slip showing their share, and they use it to report income. The $2 million test counts total worldwide revenues and expenses without netting them, so a busy partnership with thin margins can trip it.
What does splitting partnership income do to the tax?
Take $120,000 of net income in Ontario. One person reporting all of it pays $34,774.46 in income tax and CPP, according to the self-employed tax calculator. Two equal partners each report $60,000 and pay $14,602.92 each, so $29,205.84 between them.
The gap is $5,568.62, and you’d feel it. It comes from the progressive rates, since the second $60,000 isn’t stacked on top of the first.
But an equal split only works when the income really is shared. The share each partner reports has to match the real arrangement, so don’t pick a split because it gives you a low tax number. The calculator also leaves out EI and expenses, and has no view on partner-specific items like a spouse’s share.
To see where one partner lands at the top end, try the marginal tax rate calculator, and the tax instalments calculator for paying through the year.
Changing partners without a mess
If a partner joins or leaves, the legal status doesn’t change as long as at least two partners remain, and no business number is closed. Close the books on the day of the change, allocate the profit to date, and settle the departing partner’s capital account.
A partnership that turns into a corporation does follow a different path, with new accounts and a joint election on form T2058.
What should you do if partners disagree about the numbers?
Go back to the paper. The agreement says how profit is shared, the ledger says who put in and took out what, and the bank statements say what really happened. Most disputes shrink fast once all three are on the table. If they don’t, an outside accountant who isn’t loyal to either partner can reconcile the capital accounts, and that usually costs far less than a legal fight.
What this page is based on
The filing thresholds and the reporting rules come from CRA pages on filing a T5013 and reporting partnership income, and the legal status rule from the CRA change of legal status page. Tax figures come from our 2026 calculator data. Partner CPP rules weren’t confirmed on a CRA partnership page, so the calculator’s CPP figure follows the self-employed rules only. This is an independent site, not affiliated with the CRA.
Frequently asked questions
Does a partnership pay income tax?
No. The CRA says each partner reports their share of the net income or loss on their own return.
Am I taxed on profit left in the business?
Yes. You report your share whether it was paid in cash or credited to your capital account.
Who must file a T5013?
Partnerships over $2 million of revenues plus expenses or $5 million of assets, and those with a tiered structure, a corporate or trust partner, flow-through shares or a written request from the Minister.
Can partners carry back a loss?
The CRA says loss carry-over rules apply to each partner, with non-capital losses going back 3 years and forward 20.
Does adding a partner change legal status?
Not if at least two partners remain. A partnership converting to a corporation does change status.
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