1. The three partners have sought your advice on a number of issues related to the income tax treatment of their business. Provide advice on each of the following issues.

A.	Explain to the partners how business income from partnerships is taxed in the hand of partners.
B.	The partners have not chosen a partnership year end and would like to know what options they have.
C.	Designer gowns, for which there are no production economies of scale, are designed and made by private seamstresses who work in their own homes. Montpetit supplies the fabric and accessories and pays a previously agreed fixed amount upon satisfactory completion of each gown. The partners are uncertain as to the need for source deductions (income tax, EI, and CPP contributions) on these amounts.

Explain to the partners how business income from partnerships is taxed in the hand of partners.

Choose the correct answer below.

A. Partners are required to include all of the business income from the partnership.

B. Partners are required to include 50% of business income from the partnership.

C. Partners are required to include their respective allocations of business income from the partnership.

D. Partners are not required to include business income from the partnership.

The partners would like you to review the following transactions that occurred during their first fiscal year of business ending on December 31,

2021. Advise the partners on the income tax treatment of these transactions. Similarly, for expenditures, provide advice on the specific deductions (with amounts) that can be claimed.

A.	Legal fees of $2,200were paid for drafting a partnership agreement.
B.	Five industrial sewing machines were acquired at the beginning of the year at a cost of $2,800 each. Sewing accessories (thread, needles, scissors, etc.) were also acquired for a total of $8,600.
C.	Each partner made capital contributions of $10,300 to get the business off the ground. On July 1, 2021, each partner loaned the partnership $15,000. Interest at 4% per year on the loans was paid by the partnership for the last six months of the year. In addition to the interest, the partners are planning to deduct the $10,300 capital contributions made on their individual income tax returns for the current year.
D.	At year end, designer clothes with a retail price of $258,000 are held on consignment by boutiques throughout the city. The cost of making these clothes was $50,200 in labour and $45,200 in fabric.
E.	Mineola paid $14,600 for the exclusive right to distribute Deerfield sweaters for five years.
F.	During 2021, payments totaling $3,150 were made to the Cocheco Club. Of this amount, $1,200 was for the annual membership fee and the remaining $1,950 was for charges in the Clement Diner. Of the dining charges, $1,600 was spent for entertaining clients and the remainder was for the personal use of the three partners.

3.Part I C. Designer gowns, for which there are no production economies of scale, are designed and made by private seamstresses who work in their own homes. Mineola supplies the fabric and accessories and pays a previously agreed fixed amount upon satisfactory completion of each gown. The partners are uncertain as to the need for source deductions (income tax, EI, and CPP contributions) on these amounts.

Choose the correct answer below.

A.The partners should determine whether the business and workers intended to have an employee/employer relationship and whether these intentions are supported by actions. If this information is not available, then other factors can be considered.

B. The partners must only assess whether the workers have an opportunity for profit. If they do, they are considered employees, while if they do not, the worker is not considered an employee and source deductions would not be required.

C. Since the workers are being paid, they are considered employees and therefore source deductions would be required.

D. The partners should assess whether the business exercises control over the workers, ownership of the tools and equipment they use, and their ability to subcontract or hire assistants. If these are unknown, then the partners can look into the intent of the business and workers.

4. At year end, designer clothes with a retail price of $258,000 are held on consignment by boutiques throughout the city. The cost of making these clothes was $50,200 in labour and $45,200 in fabric.

Choose the correct answer below.

A. The designer clothes held on consignment at year end are inventory of the partnership, and therefore, are not deductible as cost of sales. The inventory must be valued at its cost of $95,400.

B. The designer clothes held on consignment at year end are inventory of the partners, and therefore, are deductible as cost of sales. The inventory will be valued at its cost of $95,400 or its market value of $258,000.

C. The designer clothes held on consignment at year end are inventory of the partners, and therefore, are not deductible as cost of sales. The inventory must be valued at its market value of $258,000.

D. The designer clothes held on consignment at year end are inventory of the partnership, and therefore, are not deductible as cost of sales. The inventory will be valued at its cost of $95,400 or its market value of $258,000.