In Canada, the partnership is becoming an increasingly popular vehicle for investors, including non-residents, to achieve tax efficiency. This blog outlines the rules surrounding general partnerships and limited partnerships and their advantages.
A partnership is an association or relationship between two or more individuals, corporations, or trusts to carry on a trade or business. Each partner contributes money, labor, property, or skills to the partnership. In return, each partner is entitled to a share of the profits or losses of the business. The business profits (or losses) are usually divided among the partners based on the partnership agreement.
A partnership can be formed as a result of a simple verbal agreement. However, most partnerships are governed by a written agreement setting out rules for partners entering or leaving the partnership, the division of partnership income, and other matters.
The partnership is bound by the actions of any member of the partnership, as long as these are within the usual scope of the operations.
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A partnership by itself does not pay income tax on its operating income and does not file an annual income tax return. However, many partnerships are obligated to file form T5013, Statement of Partnership Income, for instance where the partnership has a corporation or a trust as a partner, or where at the end of the fiscal period, the partnership has an absolute value of revenues plus an absolute value of expenses of more than CAD2m, or has more than CAD5m in assets.
Instead, each partner includes their share of the partnership income or loss on a personal, corporate, or trust income tax return.
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.
A form of partnership that is being increasingly used for investment holdings and carrying out transactions is the limited partnership.
A particular advantage of a limited partnership is that a limited partner has limited liability, to the extent of the interest they have in the partnership. There is no minimum contribution requirement in an LP, although specific contribution requirements may be set out in a partnership agreement.
A limited partner may be a natural person or a corporate entity. In return for their limited liability, limited partners are usually not permitted to be involved in the management or running of the partnership.
An LP must have at least one general partner and one limited partner. It is the general partner who is responsible for the management of the partnership, and they have unlimited liability for the debts and obligations of the partnership. As such, it is usually the case that a corporate entity is chosen to take the role of general partner.
In Canada, a general partner may be a non-resident. However, non-resident general partners must complete an "extra-provincial" registration, and this is normally renewed annually. As limited partnerships are formed under provincial legislation, each province has its own distinct set of rules.
LPs have the same tax advantages as general partnerships, in that income and losses flow through to the individual partner. Losses from a partnership for instance can be used to reduce income tax liability on regular income.
There is no requirement for non-resident LPs engaged in investment activity outside of Canada to file a tax return, although they may be subject to tax payment and reporting obligations in other jurisdictions in which they operate.