Limited Partnerships (LPs) in Canada present a compelling option for businesses seeking flexibility, confidentiality, and tax advantages. However, LPs are not suitable for every business, and understanding their intricacies is crucial before diving in. Let’s explore the nuances and benefits of LPs, particularly in the context of Ontario, Canada.
1. Understanding Limited Partnerships
Partnerships offer a straightforward way to set up a business in Canada without imposing tax and filing responsibilities on partners who are not Canadian residents.
A partnership is essentially a collaboration between two or more individuals, corporations, trusts, or other partnerships who come together to operate a business. Each partner contributes resources like money, labor, property, or skills to the venture. In return, they share in the business’s profits or losses, typically based on the terms outlined in the partnership agreement. It is governed by Limited Partnership Act, R.S.O. 1990, c. L.16- Government of Ontario. Click here to read the Act.
Limited Partnerships offer a unique business structure where the liability of certain partners (Limited Partners) is limited to their investment, while others (General partners) assume unlimited liability. We shall read more about them below.
2. Tax Considerations
Unlike corporations, LPs are not taxed as separate legal entities. A partnership by itself does not pay income tax on its operating results and does not file an annual income tax return. Instead, each partner includes a share of the partnership income or loss on a personal, corporate, or trust income tax return. Here, the profits flow to partners, who then report and pay taxes according to their country of residence. For non-resident partners, this means no tax liability in Canada, except to the extent that the profits of the LP are derived from certain Canadian source like rent, royalty or any other income which is sourced in Canada. However, Canadian residents must pay personal income tax on the profits received from the LP in Canada.
For instance, if an LP is engaged in business of online marketing; then in such cases the non-resident partners are not liable to file the Tax Return in Canada and their profits from such LP shall be taxed in their resident country only. And LP not being a separate entity, is exempted from filing such returns. However, there is an exception to the above, as explained below:
Exception to above:
A partnership that carries on a business in Canada, or a Canadian partnership with Canadian or foreign operations or investments, has to file Form T5013, Statement of Partnership Income, for each of the fiscal periods of the partnership where, one of the following occurs:
1. at the end of the fiscal period, the partnership has an absolute value of revenues plus an absolute value of expenses of more than CAD$2 million, or has more than CAD$5 million in assets.
OR
2. at any time during the fiscal period:
• the partnership is a tiered partnership (has another partnership as a partner or is itself a partner in another partnership)
• the partnership has a corporation or a trust as a partner
• the partnership invested in flow-through shares of a principal-business corporation that incurred Canadian resource expenses and renounced those expenses to the partnership
• the Minister of National Revenue asked in writing for a completed Form T5013, Statement of Partnership Income
3. Withholding Tax Implications
Payments made to LPs with non-resident partners may be subject to withholding tax under Canada’s Income Tax Act. Even if some partners are Ontario residents, the presence of a single non-resident partner triggers withholding tax requirements. However, there is no Withholding Tax when the LP distributes its profits to its partners.
4. Advantages of LPs
• LPs offer confidentiality, making them ideal for venture capital and private equity investments.
• They are also favored by online businesses, software developers, and IT service providers due to their flexible structure.
• No restrictions on the residency of partners
• Availability of one-man limited partnership, when one person is a sole general and limited partner
• There is no minimum authorized capital. Partners can make any contribution to the limited partnership
• No withholding tax on profit received by partners outside of Canada
• No requirements to file corporate tax returns
• No corporate income tax
• No requirement of Annual General meeting
5. Formation Requirements
A. Name of the LP:
• Every Limited Partnership must possess a unique legal name, which should contain a legal descriptor like “Limited Partnership” or “LP”.
• The LP’s name cannot contain a surname or a unique corporate name, unless it belongs to one of the general partners.
• If the full name or surname of a limited partner or a distinctive part of the corporate name of a limited partner appears in the firm name, the limited partner is liable as a general partner to any creditor of the limited partnership who has extended credit without actual knowledge that the limited partner is not a general partner
• Names for Limited Partnerships can be in English, French, or both. However, certain restricted terms such as “bank,” “trust,” “insurance,” “stock exchange,” “university,” “academy,” etc., cannot be included in the name.
B. General Partner
A minimum of one general partner is required, and may be a resident of any country. Corporate general partners are also permitted. If a corporation is incorporated outside of Canada, it must be registered in Ontario as Extra-Provincial Corporation before it becomes a general partner.
C. Limited Partner:
Each limited partnership must have a minimum of one limited partner, who may be an individual or legal entity. No Canadian residency is required. When a non-Canadian corporation is a limited partner, extra-provincial registration of the corporation in Ontario is not required.
A limited partner is not liable for the obligations of the limited partnership except in respect of the value of money and other property the limited partner contributes or agrees to contribute to the limited partnership, as stated in the record of limited partners.
A person may be a general partner and a limited partner at the same time. Therefore, just one person is needed for registration of a limited partnership.
D. Contribution:
There are no minimum or maximum amount of contribution required. A Limited Partner may contribute money and other property to the limited partnership but not services.
E. Share of profits:
(1)A limited partner has the right,
(a) to a share of the profits or other compensation by way of income; and
(b) to have the limited partner’s contribution to the limited partnership returned.
(2) However, no payment of a share of the profits or other compensation by way of income shall be made to a limited partner from the assets of the limited partnership or of a general partner if the payment would reduce the assets of the limited partnership to an amount insufficient to discharge the liabilities of the limited partnership to persons who are not general or limited partners
F. Renewal:
Each LP needs to renew its registration after 5 years by paying fees to Government. Non- renewal of LP does not automatically mean dissolution
G. Registered Address:
We offer the convenience of a virtual registered address for receiving all documents and mails related to your business. However, if you prefer to use your own address or that of an acquaintance, we can designate that address as the registered address, and our service charges for providing a virtual address will be excluded. The annual cost of our address shall be CAD $ 1970.
6. Registering for the GST/HST
Since a partnership is considered to be a separate person, it may be required to register for and collect GST/HST if it provides taxable supplies in Canada
7. Planning for the Future
• General partner death/ retirement/ incapacity to run the business:
A general partner retirement/ death or a corporate general partner dissolution dissolves the LP unless the business is continued by remaining General Partners pursuant to a right to do so and with consent of all the remaining partners
• Limited partner death/ retirement/ incapacity to run the business:
If limited partner dies, the executor or administrator of the estate of LP has all rights of a limited partner for purpose of settling estate of limited partner and has same powers of the deceased limited partner.
A substituted limited partner is a person admitted to all the rights and powers of a limited partner who has died or who has assigned the limited partner’s interest in the limited partnership in case of retirement or incapacity to run the business by prior written permission of all remaining partners.
8. Dissolution:
A LP is dissolved either when a declaration is accepted for dissolution with the Registrar in accordance with the Act or all the limited partners cease to be Limited partners.
Conclusion
Limited Partnerships offer a robust business structure with distinct advantages, particularly for professionals and online businesses. However, careful consideration of tax implications, legal requirements, and future contingencies is vital to leveraging their full potential.
We at KLA understand the intricacies of LPs and provide comprehensive legal and tax consultations beginning from formation of the LP to its maintenance so that businesses can make informed decisions that align with their long-term goals and objectives. Our service charges to register a LP including the Government fees, preparing of standard partnership agreement and internal resolutions are CAD $900.
To read more about LP, please click here.
Feel free to contact us at mail@klaggarwal.com