Partnerships in Canada: tax haven or undesirable misfortune?
Contributed by Honest & Bright Ltd
24 January, 2018
Canadian law system is a mixture of common and roman law. The common law system prevails in Canada except the province of Quebec. The Canadian provinces have their own legislation (including corporate) with exception to matters under the federal jurisdiction.
The legal forms of incorporation in Canada widely used in international business include:
- Limited Partnerships (LP)
- Limited Liability Partnerships (LLP)
- Extra-provincial corporations (EPC)
In this article we are going to lit some light on the limited partnerships and discuss all the pros and cons of this legal entity.
What are the features of Limited Partnerships in Canada?
Limited Partnerships are established under the Ontario Limited Partnerships Act 1990. A limited partnership may, subject to this Act, be formed to carry on any business that a partnership without limited partners may carry on.
The legal nature of Limited Partnerships is that they are not separate legal personalities but have some its features (they can open bank accounts, make transactions with contract partners in the course of their business).
Limited Partnership requires minimum 1 general partner and 1 limited partner (natural person or legal entity of any residence). Foreign company may be appointed as general partner provided that it is registered in Ontario as an extra-provincial corporation. Foreign company may be appointed as limited partner without meeting this requirement.
Limited Partnership may be formed by one person being both general and limited partner.
There are no requirements for the amount of partners' contributions into Limited Partnership. The contribution may be made in money or other property (but not services).
General partners bear unlimited personal liability for Limited Partnership's obligations. The liability of limited partners is limited to the amount of their contribution into the partnership.
Limited Partnership must have an address in Ontario to receive official correspondence. The copies of the partners' resolutions and of the partnership agreement must be kept in the registered office.
Partners who are non-residents of Canada usually have no tax liability in Canada. The Canadian resident partner declares his part of profit earned as a result of Limited Partnership's activity as his personal income and pays the income tax. The non-resident partner does the same in the country of his tax residence.
And what about taxation? Limited Partnership is not considered as a taxable entity. Therefore, LP is not required to file corporate tax returns and pay income taxes.
All profit received by Limited Partnership passes through the company to its partners. Partners, who are not Canadian residents do not have tax liabilities in Canada. If a partner is a Canadian resident, he is required to include his part of profit received through his Limited Partnership into his personal tax return and pay personal income tax.
Is it okay for an investor to use Limited Partnership as a business instrument? The answer is yes, because Canadian companies have no tax haven image and can be used as a well-respected instrument in international business. On the other hand, Canada is not a member of The Hague Convention of 5 October 1961 abolishing the requirement of legalization for foreign public documents (i.e. apostille is not available so the documents to be used abroad require consular legalization).
Therefore, an expirienced consultant can analyze the risks of your business and help you make the right decision.
Honest & Bright Company Ltd.
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