Does a partnership file its own tax return?

It never pays income tax itself, but larger partnerships must file an annual information return and give each partner a T5013 slip reporting their share of income or loss. Each partner then pays tax on that share at their own personal or corporate rates, whether or not the cash was actually paid out to them.

Am I really on the hook for my partner's mistakes?

In a general partnership, yes. Each partner can bind the partnership, and each partner is personally liable for all of its debts, however they arose. That is why choosing a partner deserves the same diligence as choosing a spouse, why insurance matters, and why structures like limited partnerships, LLPs and corporations exist.

Do we need a written agreement if we trust each other?

Trust is precisely why you should write one now: the agreement is negotiated while everyone is reasonable, to govern moments when someone is not. Without one, provincial default rules apply, and they may divide profits and control in ways neither of you expects. Death and disability clauses alone justify the document.

Partnership

Société de personnes in French

Quick definition

A partnership is two or more people, or companies, carrying on business together with a view to profit. It is not a separate taxpayer: profits flow through to each partner's own return, and in a general partnership every partner is personally liable for all partnership debts.

How partnership income is taxed

A partnership is essentially a sole proprietorship with more than one owner, and it is taxed the same way: the partnership itself pays no income tax. Each partner reports their share of the partnership's profit or loss on their own return and pays tax at their own rates. Larger partnerships generally have to file an information return and issue T5013 slips showing each partner's share, while smaller ones typically just report the split directly on the partners' returns.

A partnership can exist without anyone signing anything. If two people run a business together and share the profits, the law can treat them as partners whether or not they ever used the word, with all the obligations that follow.

Three flavours of partnership

The word covers three quite different structures:

General partnership. The default. Every partner shares management and profits, and every partner carries full personal liability for all partnership debts, including obligations created by another partner. If your partner signs a disastrous contract or makes a costly mistake, creditors can come after your personal assets for the whole amount, not just your share.
Limited partnership. Splits the roles: one or more general partners run the business and keep unlimited liability, while limited partners are essentially silent investors whose liability is capped at what they put in, as long as they stay out of management. Common in real estate and investment ventures.
Limited liability partnership (LLP). Designed for professionals such as accountants and lawyers. Each partner remains responsible for their own work but is shielded from personal liability for the negligence of other partners. Availability and rules vary by province, and LLPs are typically restricted to designated professions.

The partnership agreement

Nothing predicts a partnership's survival better than whether the partners wrote things down while they still liked each other. A proper partnership agreement settles, at minimum:

Ownership shares and how profits and losses are divided, which need not be equal.
How much each partner can draw out, and when.
How decisions get made, and which ones need everyone's consent.
How disputes are resolved before they reach a courtroom.
What happens when a partner wants out, becomes disabled or dies: who can buy the share, at what price, on what timeline.

The handshake failure mode

The classic partnership disaster follows a script: two friends start a business on a handshake, the business either struggles or succeeds, and either outcome creates money questions the handshake never anticipated. One partner feels they work harder; the other put in more cash. Without an agreement, provincial default rules decide everything, usually an equal split regardless of contribution, and the fight consumes the business and the friendship together. The agreement is cheap insurance against an expensive, common ending. Partnerships that outgrow the structure often convert to a corporation, which also caps the liability problem.

In Canada

Partnership law is provincial, so the fine print on formation, registration and LLPs differs across the country. Quebec's civil law has its own equivalents: the société en nom collectif (general partnership), société en commandite (limited partnership) and their variants, which work broadly the same way for tax purposes. Federally, the flow-through tax treatment is uniform: the CRA looks through the partnership to the partners everywhere in Canada.

Worked example

Marc and Olivia start a renovation business as equal general partners, and this time they sign an agreement: profits split 50/50, purchases over $5,000 need both signatures, and if either leaves, the other can buy their share at a price set by an independent valuation. The business earns $140,000 in its first year; each reports $70,000 of business income on their own return. When Marc orders $30,000 of materials for a job that falls through, the debt legally belongs to both of them, which is exactly the risk they accepted by choosing a general partnership. The agreement does not prevent the loss, but it does dictate calmly how the shortfall is shared, and the business survives it.

See it in actionCanadian Tax Calculator

Reviewed by Alexandre Bernier, CFP®, CIM®, PFP®·Updated August 2026

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