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We are setting up an investment club, and have agreed on some ideas for how we want to proceed. How do we structure the club for tax purposes? Should we call ourselves a corporation?

Formally setting up a company or corporation is the more difficult and potentially more expensive way to structure an investment club. That means you’ll pay tax on club earnings as a corporation, plus each individual will pay tax on income they receive.

Revenue Canada allows investment clubs to adopt a far simpler structure called a “modified partnership”. This partnership does not have to be formally registered; in fact, all you have to do to form a modified partnership is agree to become one. Once everyone agrees, you send a letter to Revenue Canada signed by all the members. This means Revenue Canada won’t subject your club itself to tax. Instead, each member is simply responsible for reporting their share of the club’s income on their individual tax returns each year. To qualify for tax treatment as a modified partnership, your club must meet all of the following conditions:

Excerpted from “How to Start and Run an Investment Club for Fun and Learning”, published by the Canadian Securities Institute Tax laws can change. Before you set up your club, find out more about tax treatment and modified partnerships from Revenue Canada by visiting their web site or consult a tax specialist.