To overcome the disadvantage of 
unlimited liability, participants in 
a mining project may establish a 
limited partnership, in which a general 
partner manages the interests of the 
participants (the limited partners). 
However, investors may prefer the 
flexibility afforded by a joint venture 
arrangement. In order to ensure that the 
arrangement is not considered to be a 
partnership, the parties should:

• explicitly state in the joint venture 

agreement that their intention is not 
to create a partnership;

• share gross revenues and not net 

revenues; and

• fund each expense directly and not 

out of undrawn revenues.

The tax treatment of joint ventures and 
partnerships, discussed below, may 
govern the investment decision.

Income Tax Consequences

The ITA does not recognize joint venture 
arrangements. A joint venture therefore 
is not a separate taxable entity; instead, 
each party to the joint venture is 
directly taxable in its own right, with no 
intermediary computation of income or 
loss at the joint venture level. 

In contrast, the ITA recognizes the 
existence of partnerships and provides 
for extensive rules relating to the 
computation of income and deductions 
by a partnership.

Except for some specific provisions 
(such as the rules applying to flow-
through shares and to SIFT entities) 
discussed below, a partnership is not a 
separate taxable entity under the ITA. 

However, a partnership computes its 
income as if it were a separate person 
resident in Canada, and each partner 
is required to include in computing 
its income in a taxation year end its 
share of the income or loss of the 
partnership for each fiscal period of 
the partnership ending in that taxation 
year. As a result, where a corporation 
is a member of a partnership and 
the fiscal period of the partnership 
ends after the taxation year of the 
corporation, the corporation may be 
able to defer its share of partnership 
income until the following taxation 
year. However, the ITA contains 
detailed rules that limit this deferral. 

If the corporate partner (together 
with related or affiliated persons or 
partnerships) owns more than 10 percent 
of the interests in the partnership, 
the corporation is required to accrue 
partnership income for the portion of 
the partnership’s fiscal period that falls 
within the corporation’s taxation year (a 
stub period). In particular, the corporation 
must include in income an amount called 
“adjusted stub period accrual” (ASPA) 
in respect of the partnership for the 
stub period. ASPA is computed by a 
formula that prorates forward over the 
stub period the corporation’s share of a 
partnership’s net income from a business 
or property and net taxable capital gains 
for the partnership’s fiscal periods that 
fall within the corporation’s taxation year. 
The corporation may reduce ASPA by 
making either or both of the following 
discretionary designations:

• If the partnership incurs qualified 

resource expenses (QRE), which 
consist of CEE, CDE, FRE, and 

COGPE incurred by the partnership 
in the stub period, the corporation 
may be entitled to designate some or 
all of such QRE for the year to reduce 
its ASPA.

• The corporation may designate a 

discretionary amount to reduce 
ASPA to reflect the corporation’s 
expectation or knowledge of the 
partnership’s actual income for the 
stub period. The corporation may 
be required to include an interest 
charge in its income in the following 
year if the designation results in a 
deferral of partnership income by 
the corporation.

These rules were introduced in 2011. 
As a result of these new rules, a 
corporation might have been required 
to include in income an amount that 
represented more than one year of 
partnership income. A transitional 
reserve apportions the incremental 
income realized by the corporation on 
the transition over a five-year period.

The computation of the income or 
loss of the partnership excludes any 
proceeds from the disposition of a 
Canadian resource property or foreign 
resource property and any deductions 
in respect of CEE, CDE, COGPE, or 
FRE. Instead, proceeds of disposition 
are allocated to the partners according 
to their respective interests in the 
partnership; and CEE, CDE, COGPE, 
or FRE incurred by a partnership in the 
partnership’s fiscal year are included 
in computing the CCEE, CCDE, 
CCOGPE, and ACFRE accounts of each 
of the partners, who can then claim 
deductions for those expenses.

© 2013 KPMG LLP, a Canadian limited liability partnership and a member firm of the KPMG network of independent member firms 
affiliated with KPMG International Cooperative (“KPMG International”), a Swiss entity. All rights reserved.

 

Structuring Mining Investments 

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