The Ins And Outs Of Oil And Gas Partnerships
Authors: Parsons Robert B. 
Published: March 2010

Abstract
There are many vehicles/or structuring an investment in an oil and gas venture in Canada. One of these, the partnership, offers a number of advantages over either common share investments or direct ownership. This month, Tax Topics takes a look at some of the tax implications of the partnership arrangement which are not always explained in clear language in prospectuses.

Introduction
Despite increasingly strict disclosure requirements, it is simply not possible for a partnership prospectus to spell out all of the tax considerations that are relevant to a taxpayer's investment in an oil and gas partnership. Also, it is not always practical or prudent to explain in easily understood terms the essential details of such an investment. This article seeks to answer some of the more common tax questions which are not clarified in the typical partnerships prospectus or other communication to the investor.
The term "partnership" is not defined either in the Income Tax Act ("The Act") or in any other relevant federal legislation. A partnership is established through the agreement of the partners. In many cases, a formal partnership agreement will be prepared and signed setting out arrangements; however, such formal documentation is not essential to the creation of the partnership.
Joint ventures and syndicates mayor may not constitute partnerships for income tax purposes. "Joint venture" and "syndicate" are terms which have no particular significance at law; rather they have become popular through commercial usage. In a joint venture, for example, participants may not necessarily accept liability for the entire venture's debts. Co-ownership of property for investment purposes would not normally constitute a partnership.
In a "limited" partnership there must be at least one partner with unlimited liability while the remaining partners have limited liability in respect of partnership losses. Usually a limited partner's liability is restricted to his investment in the partnership, including his share of undistributed profits and property of the partnership. Limited partners are often barred from taking an active part in management as a price for the enjoyment of limited liability.
In general, limited partnerships are subject to the same tax rules as ordinary partnerships. There are, however, certain exceptions because of the limited liability feature. Since a limited partner's share of economic loss cannot exceed a certain amount, his share of losses for tax purposes may be restricted accordingly.

Computation of Partnership Income
Generally speaking, income earned by a partnership is taxed in the hands of each of the partners. Although the partnership itself is not a taxable entity under the Act, the computation of income earned by a partnership is made at the partnership level for its fiscal period as if the partnership itself were a separate person resident in Canada subject to tax, with specific exceptions as noted below. This principle does not make the partnership a separate person. It merely requires that income be computed, in the first instance, at the partnership level before it is ailoeated to the partners (Tabie 1).