In contrast, other deductions or 
expenses, such as CCA claimed by a 
partnership and operating expenses 
of the partnership, are deductible 
by the partnership in computing its 
income or loss.

Provided that a partnership claims the 
maximum deductions available to it, 
the income tax consequences to a 
partner will be the same whether or 
not the partner claimed a share of the 
deductions directly.

SIFT Legislation

In the first decade of this century, a 
number of publicly traded corporations 
converted to trusts or partnerships. 
The conversion enabled the entities to 
avoid corporate-level income tax and 
capital tax. 

The government became concerned 
about the erosion of the corporate tax 
base and perceived distortions to the 
economy that arose because the entities 
chose to distribute most of their income 
rather than reinvest in their businesses. 
Accordingly, the government introduced 
the SIFT legislation to tax publicly traded 
trusts and partnerships in a manner 
similar to corporations. In particular, the 
SIFT legislation imposes an entity-level 
tax on the non-portfolio earnings of SIFT 
partnerships and SIFT trusts that is similar 
to a corporate tax, and treats distributions 
of non-portfolio earnings by SIFT 
partnerships and SIFT trusts as dividends. 

The ITA imposes tax on the business 
income of public partnerships; these are 
partnerships whose units have a market. 
The ITA harmonizes the tax treatment of 
these partnerships with corporations in 
respect of their non-portfolio earnings. 
Partners pay tax on their share of the 
after-tax business income as if it were 
a dividend.

Advantages of Partnerships

A partnership can be used by a small 
number of persons wishing to carry out 
exploration and development where 
the desired tax and commercial results 
cannot be secured by the use of a 
corporate structure. (A non-resident 
member of a partnership will be deemed 
to be carrying on business in Canada 
and will be required to file an annual 
federal income tax return.)

A partnership provides a number of 
advantages over the use of other forms 
of organization.

Reorganization of Partnerships

The ITA contains a set of beneficial 
reorganization provisions for Canadian 
partnerships. These provisions permit:

• a person to transfer property to the 

partnership on a tax-deferred basis in 
exchange for a partnership interest,

• the winding-up of the partnership on 

a tax-deferred basis, and

• the merger of two or more Canadian 

partnerships.

A partnership form of organization 
permits one person to transfer an 
indirect interest in mining assets to 
another in exchange for the funding 
by the other of the exploration for or 
development of the assets. (In some 
circumstances, this result may be 
accomplished through the use of a 
farm-in arrangement, described below.) 
In contrast, the direct transfer of an 
interest in the mining assets from 
one person to another would be a 
taxable event. 

Dispositions

 

Partnership interests may be held 
on capital account so that a future 
disposition could result in a capital 

gain. In contrast, since parties to a 
joint venture hold assets directly, a 
disposition of a joint venture interest 
is regarded as a disposition of the 
underlying assets in respect of that 
joint venture. Such dispositions may 
result in income in the case of resource 
property (if the proceeds cause the 
CCDE account to be negative at the 
end of the year) or recapture in the case 
of depreciable property, as well as a 
capital gain on capital property.

As an Alternative to a Corporation

Frequently, two or more persons 
(usually corporations) wish to cooperate 
in carrying out an exploration or 
development program. If the persons 
entering into the project are in different 
circumstances and wish to participate 
differently in the project, the creation 
of a new corporation may not be 
appropriate for the project.

Subject to anti-avoidance rules, a 
partnership may be used to allocate 
disproportionately the amount of eligible 
deductions incurred through the project, 
as illustrated in Example 5.

A partnership may also be used as an 
alternative to a sole purpose corporation 
for the development of a project. A 
sole purpose corporation may not be 
appropriate because the deductions 
generated by the project may be used 
only against the income generated 
from the project. It may well be that 
the partners could use the deductions 
generated by the project directly 
against their own income long before 
the sole purpose corporation would be 
entitled to do so. Consequently, in such 
circumstances, a partnership could be 
used and the various expenses could be 
allocated to the partners that could use 
the deductions sooner. 

© 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.

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 A Guide to Canadian Mining Taxation