Limited Partnerships: an Overview

Everything you always wanted to know about limited partnerships

We have helped hundreds of clients form limited partnerships in Ontario and other provinces and territories. They are very popular structures for certain types of investments because of their flow-through nature. Here are a few things to know about them.

What is a Limited Partnership?

A limited partnership is a type of partnership formed between two or more persons to carry on a business with a view to profit, consisting of one or more “general partners” and one or more “limited partners”.

A limited partnership is formed under the Limited Partnerships Act (Ontario) (the “Act”), or a similar statute of another province or territory. All of the partners would typically execute a limited partnership agreement (a “LPA”) that governs the relationship among the partners.

Other types of partnerships include a general partnership, where all of the partners have unlimited liability, and a limited liability partnership, which is used for professional services such as law firms and accounting firms.

When is a Limited Partnership Used?

A limited partnership structure would typically only be used if there is a compelling tax reason to do so. The key tax attribute for limited partnerships is that, unlike a corporation, a limited partnership is not treated as a distinct entity for tax purposes and instead is a “flow-through entity”, as described below.

We see limited partnerships used primarily to make and hold investments such as real estate. It is the preferred vehicle for private equity funds. We also see limited partnerships used frequently as part of international tax planning for high-net-worth families.

Choosing a Jurisdiction for Formation

Every province and territory allows for the creation of limited partnerships.

While a limited partnership must have an address in its province of formation as its “principal place of business”, the partnership can conduct its actual business anywhere in the world and invest in assets anywhere in the world. There are no Canadian residency requirements for any partners.

Ontario is a top choice for international clients forming limited partnerships in Canada as the regime is well established.

Manitoba may be an attractive jurisdiction to form a limited partnership for certain clients because it offers greater liability protection for limited partners in some cases. However, it also requires some public disclosure about the limited partners and their contributions to the limited partnership which other provinces, including Ontario, do not require.

Features of a Limited Partnership

• General Partners. Each “general partner” is responsible for managing the limited partnership’s business and has unlimited liability for the limited partnership’s debts and obligations. A general partner is often a corporation, but it can also be an individual or other entity. For clients based in the United States, we often see the use of Delaware Limited Liability Corporations (LLCs) as general partners.
• Limited Partners. Limited partners invest capital into the limited partnership, but are generally passive. So long as they do not take on any active role in the management and control of the limited partnership, limited partners are generally 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.
• Business flexibility. Generally, limited partnerships can carry on any type of business, so long as it is “with a view to profit”. A limited partnership can own assets and carry on business anywhere in the world.
• No residency requirements. The partners of a limited partnership do not need to be Canadian residents.
• Flexibility in governance. Beyond baseline requirements set out in the Act, partners are generally free to contractually agree on the governance and workings of the limited partnership in a LPA. In many instances, the LPA may override or supplement the baseline requirements in the Act. Matters that are often dealt with in the LPA include capital contributions, the allocation and distribution of partnership income, record-keeping, admission and removal of partners, and transfers of partnership interests (including in the context of death, incapacity, bankruptcy and resignations).

Certain Tax Advantages of a Limited Partnership

The flow-through of both income and losses on a current basis for limited partnerships is a significant difference from a corporate structure.

In a limited partnership, the character of income (for example, business income, interest, dividends, and capital gains) flows through the limited partnership to the partners. Therefore, the partners have access to both capital and non-capital (i.e. business) gains and losses of the limited partnership on an annual basis, with some restrictions for limited partners.

A limited partnership can be an advantageous business vehicle for a venture where losses are expected for the first little while, as those losses may be able to be used for tax purposes by the investors to offset gains elsewhere.

In contrast, losses of a corporation cannot be passed to its shareholders – the losses belong to the corporation, and a shareholder can generally only realize a loss on a disposition of its shares or the wind-up of the corporation, or in certain other limited circumstances.

In addition, so long as there is no Canadian source income, there are no partners resident in Canada, the limited partnership does not solicit orders or offer anything for sale in Canada, and the limited partnership does not have its effective place of management in Canada, a limited partnership may not need to file tax returns in Canada.

Speak with your tax advisor to confirm whether a limited partnership is a good vehicle to use for your business.

Forming a Limited Partnership in Ontario

Forming a limited partnership in Ontario involves the following documents and steps:

• Identify a “principal place of business” for the limited partnership. A limited partnership in Ontario must specify an address in Ontario as its principal place of business, where certain books and records of the limited partnership are to be kept. This may be the place where the limited partnership has its head office or, especially for non-residents, it may be the address of its attorney or representative in Ontario (in such situations, a power of attorney may be required). If the limited partnership plans to carry on business in any other province or territory, it may need to extra-provincially register in that province or territory in order to do so.
• Choose a name for the limited partnership. In addition to satisfying statutory requirements for limited partnership names, consider if the name will need to be available in any other province or territory where the limited partnership plans to carry on business, or if a corresponding domain name or trademark needs to be available.
• Confirm the limited partnership’s NAICS code. NAICS is the North American Industry Classification System. A NAICS activity code is a 2 to 6 digit number that best describes the limited partnership’s primary activity.
• Enter into a Limited Partnership Agreement. An LPA is not required in order to form a limited partnership, however it can be helpful in setting out a governance framework for the limited partnership because the generic governance framework provided by the Act itself may not be sufficient for the parties’ specific circumstances. In fact, the Act expressly contemplates situations where its own provisions may be overridden or supplemented by an LPA. Often, where parties are pressed for time, a “temporary” short-form LPA is entered into initially at the time of formation while a longer-form LPA is being negotiated.
• File a declaration to establish the limited partnership. A limited partnership is formed when a Declaration of a Limited Partnership is completed and filed under the Act with the Ontario Ministry of Government and Consumer Services (the “Ministry”). For an Ontario limited partnership, the following information is required:
  • the name, telephone number, and email address of the contact person (which is used for the Ministry to contact the person with any questions, and is not made public);
  • the limited partnership’s name;
  • the limited partnership’s NAICS code;
  • an official email address for official documents and correspondence;
  • the address of the limited partnership’s principal place of business in Ontario (this cannot be a post office box);
  • the number of general partners, together with the full name and address for service of each one; and
  • the signature of each general partner at the end of the form.

Once a Declaration of a Limited Partnership has been accepted, the Ministry will send certain key documents, including a “company key” (to be used for regulatory filings online), to the limited partnership’s official email address.

Further Considerations about General Partners

A limited partnership must have at least one general partner that manages the limited partnership’s business and has unlimited liability for the limited partnership’s debts and obligations.

Typically, the general partner is a corporation in order to limit the liabilities of the principals, who can be shareholders of that corporation.

While the same person (including a corporation) may simultaneously be both a general partner and a limited partner, there must be at least two persons as partners to meet the basic definition of a partnership.

It is common for some of the same individuals who are limited partners to also be shareholders of the general partner, although consideration must be given to whether the limited liability status of that individual might be lost.

Liability of Limited Partners

Generally, limited partners are 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, so long as they do not take part in the business of the limited partnership. If they do, they may lose their limited liability protection.

The threshold for participation by a limited partner in a limited partnership’s business varies somewhat by jurisdiction. Some provinces, including Ontario, Alberta, and Saskatchewan, provide that a limited partner will lose their limited liability, and become liable as a general partner, if they assume “control” of the business.

Under other provincial statutes, such as that of British Columbia, the threshold for becoming liable as a general partner is crossed where the limited partner “takes part in the management of the business”. Manitoba, different still, allows a limited partner to “advise as to [the] management” of the limited partnership’s business.

Whether a limited partner has taken part in the control or management of the business, and is therefore liable for the debts of the limited partnership, is a question of fact, determined on a case by case basis based on the nature of the limited partnership’s business, the actions taken by the limited partner, and the terms of any LPA in question. A small handful of court decisions have considered this issue:

• In Haughton Graphic Ltd. v. Zivot, one of the limited partners admitted to being the directing mind of the partnership, and another limited partner made managerial decisions in certain areas of the business. Both were authorized to sign cheques on behalf of the partnership. An Ontario court concluded that both limited partners took part in the control of the business, and held both personally liable for the debts of the limited partnership.
• A limited partner may not need to usurp control entirely in order to attract liability. Most provincial statutes, including that of Ontario, provide that a limited partner faces liability if he or she “takes part in” the control of the business. In Giammarco & Co (Western) Division Ltd v TRL Real Estate Syndicate (05) Ltd, an Alberta court noted that this qualifying language suggested something less than complete control.
• In Stillwater Forest Inc. v Clearwater Forest Products Ltd., a Saskatchewan court found that a limited partner’s acceptance of an offer of financing without consulting the board of the limited partnership did constitute taking part in the management of the limited partnership, it did not constitute taking part in the control of its business, as the financing was subject to the general partner’s ultimate approval and was only incidental to the limited partnership’s business.
• In Foley v The Queen, the Tax Court of Canada extended personal liability to limited partners who controlled and operated several divisions of the limited partnership’s business. Laplante v Canada, another tax case, had a similar result for a limited partner who admitted to being the principal person in control of the limited partnership’s operations.
• However, in Nordile Holdings Ltd. v Breckenridge, a British Columbia court accepted that certain individuals who were both limited partners and officers and directors of the general partner were acting only in the latter capacity when they participated in the management of the limited partnership, and the limited partners retained their limited liability status.

Tax Liability

It is also important to note that since a limited partnership is a flow-through entity for tax purposes, there is no limitation on a limited partner’s tax liability for the portion of a limited partnership’s income attributable to that limited partner.

Before entering into a limited partnership, limited partners should carefully consider how income allocation and cash distribution are dealt with in the limited partnership. Care should be taken to avoid situations where the limited partner may have incurred a tax liability on income generated from the limited partnership without having actually received any cash distributions from the limited partnership in respect of that income.

What Information Appears on the Public Record?

The following information appears on the public record for an Ontario limited partnership:

• the limited partnership’s name;
• the limited partnership’s NAICS code;
• the address of the limited partnership’s principal place of business;
• each general partner’s name and address for service; and
• any other business names registered to the limited partnership.

If the general partner is an Ontario corporation, the following information about the general partner will be publicly available:

• the names of the director(s) and their address for service;
• the names of the officer(s) and their address for service;
• the registered office address;
• the corporation’s articles; and
• any other business names registered to the corporation.

For more information about ownership transparency and disclosure requirements in respect of corporations, see our blog.

For Ontario limited partnerships, the identities of the limited partners do not need to be publicly disclosed. However, a “record of limited partners” must be kept and maintained at the limited partnership’s principal place of business and may be subject to inspection (including by the Registrar under the Act) upon request. The LPA is not generally made public, and the limited partnership’s financial statements are not generally required to be disclosed.

In Manitoba, by contrast, the identity of each limited partner, and the amount of capital contributed by them, must be publicly disclosed.

What Information is Contained in the Records of a Limited Partnership?

The following information about each limited partner is kept in the records of the limited partnership:

• if the limited partner is an individual, the limited partner’s name in full and the partner’s residential address or address for service, including the municipality, street and number, if any, and postal code;
• if the limited partner is not an individual, the limited partner’s name and address or address for service, including municipality, street and number, if any, and postal code, and the limited partner’s Ontario corporation number, if any; and
• the amount of money and the value of other property contributed or to be contributed by the limited partner to the limited partnership.

Maintaining a Limited Partnership and Ongoing Regulatory Compliance

Ontario limited partnerships (especially those whose partners are all non-residents) have very few ongoing compliance obligations. However, a limited partnership must complete filings with the Ministry in the case of:

• Renewal: A limited partnership declaration must be renewed at least every five years. Every declaration expires five years after the date that it is accepted for filing unless the declaration is cancelled or renewed. A limited partnership is not automatically dissolved if a declaration expires, but an additional fee is payable for any late filings of a renewal.
• Changes: A limited partnership must file a declaration of change for every change in information required to be stated in the original limited partnership declaration.
• Dissolution: An Ontario limited partnership must file a declaration of dissolution if the limited partnership is dissolved or if all of the limited partners cease to be limited partners. An extra-provincial limited partnership may cancel the declaration and power of attorney by filing a declaration of withdrawal.

Key Take-Aways

Limited partnerships can be a simple, flexible, and tax-efficient way for Canadian residents and non-residents alike to organize a business entity in Canada.

• A limited partnership should only be used if there is a tax reason to do so. Always get tax advice.
• If limited liability is important for the limited partners, careful drafting is required. Consideration should be given to the jurisdiction of incorporation. Manitoba can offer some advantages for limited partners, but requires disclosure of more information about limited partners than other provinces such as Ontario.
• Since the general partner has unlimited liability, consideration should be given to using a corporation as the general partner.
• The limited partnership agreement can be highly customized to meet the requirements of the partners.
• Since a limited partnership is a flow-through entity for tax purposes, a limited partner may have taxable income without actually receiving any cash. Careful planning is required.