LIMITED PARTNERSHIP FACT SHEET - Foreign Business Entry to Canada
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For international commercial enterprises requiring Canadian legal services call 403-400-4092 / 905-616-8864 or email Chris@NeufeldLegal.com
Overview of limited partnerships in Canada
A Canadian limited partnership (LP) is a business structure consisting of at least one general partner and at least one limited partner, created under provincial or territorial legislation (for example, Ontario’s Limited Partnerships Act). The general partner manages the business and has unlimited liability for the debts and obligations of the partnership, while limited partners generally contribute capital and share in profits without taking part in management. LPs are typically treated as flow‑through entities for income tax purposes, meaning income and losses are allocated to the partners rather than taxed at the partnership level. For foreign investors, LPs are a commonly used vehicle, particularly in sectors such as investment funds, real estate, and holding structures. Unlike corporations, an LP is generally considered a legal relationship rather than a separate legal person, though the details and practical treatment can vary by province and context.
Legal structure and roles of partners
General partners:
The general partner (or partners) manages the business, enters into contracts on behalf of the LP, and is fully liable for its debts and obligations. In many foreign‑owned LPs, the general partner is itself a corporation, which can limit ultimate liability to the assets of that corporate general partner.
Limited partners:
Limited partners contribute capital and share in profits, but they generally do not participate in day‑to‑day management. Their liability is typically limited to the amount they have contributed or committed to contribute, provided they do not take part in management or act as de facto general partners under the applicable statute.
Partnership agreement:
The relationship between partners is governed by a limited partnership agreement, which typically addresses capital contributions, profit allocations, distribution policies, decision‑making, admission and withdrawal of partners, and dispute resolution. For foreign investors, careful drafting is critical to align commercial objectives with tax, regulatory, and governance requirements across multiple jurisdictions.
Formation and registration
Provincial/territorial basis:
LPs are formed under provincial or territorial law; there is no single federal LP statute in Canada. Each jurisdiction (e.g., Ontario, British Columbia, Alberta, Québec) has its own limited partnership legislation and registration requirements.
Public filing:
To create an LP, a declaration or certificate of limited partnership is filed with the relevant provincial or territorial registry, identifying the LP’s name, the general partner(s), registered office, and sometimes other details. The limited partnership agreement itself is usually not filed publicly, allowing for some privacy of commercial terms.
Name and extra‑provincial registration:
The LP’s name typically must include a designator such as “Limited Partnership” or “LP” and must comply with provincial naming rules. If the LP carries on business in more than one province, extra‑provincial registration may be required in each additional jurisdiction where it operates.
Foreign ownership:
There is generally no prohibition on non‑resident partners in Canadian LPs, though foreign investment may be subject to review or notification under the federal Investment Canada Act depending on the sector, size, and nature of the investment. Sector‑specific rules may also apply (e.g., in regulated industries such as financial services, telecommunications, or energy).
Taxation of limited partnerships and foreign partners
Income tax flow‑through:
For Canadian income tax purposes, LPs are typically treated as flow‑through entities rather than separate taxpayers. Income, losses, and certain tax attributes are computed at the partnership level but allocated to partners according to the partnership agreement; each partner then reports their share on their own tax return.
Non‑resident partners:
For non‑resident partners, Canadian tax consequences depend on whether the LP’s activities constitute carrying on business in Canada, the nature and source of the income, and any applicable tax treaty between Canada and the partner’s home jurisdiction. Withholding tax may apply to certain types of payments (such as interest, dividends, and some partnership distributions) to non‑resident partners, subject to treaty reductions.
Tax‑neutral scenarios:
Some LP structures used by non‑residents are designed to be “tax neutral” in Canada - for example, where the LP has no Canadian‑source income or where specific planning ensures that Canadian taxation is minimized. Canadian LPs are often used as tax‑neutral vehicles for foreign investors when properly structured and when no Canadian‑source income arises, though specialist tax advice is essential.
Early‑stage losses and planning:
Because of their flow‑through nature, LPs can be attractive where early losses are expected, allowing those losses to be allocated to partners (subject to various limitations). This feature can be particularly useful for foreign investors who can utilize such losses in their home jurisdictions, depending on local tax rules and treaties.
GST/HST and indirect tax considerations
Investment limited partnerships (ILPs):
The Canada Revenue Agency (CRA) provides specific guidance on “investment limited partnerships” (ILPs) for GST/HST purposes. Amendments proposed in 2018 clarified that certain investment LPs may be treated as “investment plans” or “selected listed financial institutions” for GST/HST, affecting how tax applies to their management and financial services.
GST/HST registration:
Whether an LP must register for GST/HST depends on the nature of its activities, its status (e.g., ILP vs. regular LP), and the value of taxable supplies it makes in Canada. Investment LPs may be required to self‑assess GST/HST on management or administrative services provided to them, depending on their classification.
Foreign investors’ perspective:
For foreign businesses using Canadian LPs, indirect tax implications can be complex where the LP provides services to, or acquires services from, non‑resident entities, or operates in multiple provinces with different sales tax regimes. CRA’s ILP guidance highlights that LPs engaged in investment activities should carefully assess their GST/HST status and reporting obligations. This is particularly relevant for cross‑border funds and structured finance vehicles.
Advantages for foreign businesses
Flexibility and investor appeal:
LPs combine centralized management (through the general partner) with limited liability for passive investors (limited partners), which is attractive for fund‑style and co‑investment structures. The partnership agreement can be customized to allocate profits, losses, governance rights, and exit mechanisms in a manner tailored to sophisticated foreign investors.
Flow‑through taxation:
The flow‑through nature of LPs can allow non‑resident investors to achieve efficient tax outcomes, especially where treaty relief or foreign tax credits are available in their home jurisdictions. This is often cited as a key reason why LPs are chosen over corporations for cross‑border investments expecting early losses or variable returns.
Reputation and legal infrastructure:
Canadian LPs are commonly used in international structures and benefit from Canada’s reputation as a stable, rule‑of‑law jurisdiction. Law firms advising foreign investors note that LPs, alongside corporations, are among the preferred vehicles for inbound investment into Canada because of their flexibility and familiar legal framework.
Risks, limitations and points of caution
Unlimited liability of general partner:
The general partner’s unlimited liability is a central risk, which is why many foreign structures interpose a limited‑liability corporation as general partner. However, lenders and contractual counterparties may still require guarantees or security that partially re‑expose ultimate stakeholders.
Limited partner involvement:
Limited partners must avoid taking part in management if they wish to preserve limited liability under provincial legislation. Inappropriate involvement in control or decision‑making can lead to reclassification as a general partner, exposing the limited partner to broader liability.
Regulatory and tax complexity:
For foreign investors, LPs can create multiple layers of tax and regulatory analysis across Canada and the investor’s home jurisdiction. Issues include permanent establishment risk, treaty interpretation, withholding tax, CFC/anti‑deferral rules in the home country, and sector‑specific regulation in Canada.
Evolving GST/HST rules for ILPs:
CRA’s evolving GST/HST rules for investment LPs show that the tax treatment of LPs, particularly in financial and investment sectors, is not static. Foreign businesses must monitor legislative and administrative changes affecting ILPs, SLFIs, and cross‑border financial services.
Practical considerations for foreign businesses
Choosing jurisdiction(s):
Decide which province(s) to form and register the LP in, considering local partnership legislation, tax rates, and regulatory environment. For businesses operating in multiple provinces, plan for extra‑provincial registrations and possible multi‑jurisdictional tax obligations.
Structuring partners:
Consider using a Canadian or foreign corporation as general partner to manage liability, governance, and treaty access, while non‑resident individuals or entities participate as limited partners. Confirm how each partner will be treated for Canadian and home‑country tax purposes, including eligibility for treaty benefits.
Drafting the partnership agreement:
Ensure the agreement addresses capital commitments, distribution waterfalls, governance, transfers, default remedies, and dispute resolution in a way that aligns with cross‑border expectations and local law. Pay particular attention to clauses affecting limited partners’ participation in decisions, to protect limited liability status.
Regulatory and foreign investment review:
Assess whether your activities trigger reporting or review under the Investment Canada Act, as well as sector‑specific licensing or ownership rules. For sensitive sectors (e.g., critical infrastructure, defense‑related industries), additional scrutiny may apply regardless of the LP structure.
As such, when your international business seeks the professional services of an experienced Canadian business lawyer to facilitate its entry into Canada's commercial market, contact our law firm for a confidential initial consultation at 403-400-4092 [western Canada], 905-616-8864 [eastern Canada] or Chris@NeufeldLegal.com.