Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

As a follow up to a previous blog I wrote about limited partners losing their limited liability status, in this blog, I’ll be discussing this matter in more detail.  So we start off with the idea that, in Ontario, a general partnership does not confer limited liability status on the partners.  That means they will be personally liable for the debts and obligations of the partnership.  Now, if that general partnership register as a limited partnership and complies with the Limited Partnerships Act, then the limited partners’ liability will be limited while the general partners’ liability will be unlimited.  There is an exception to this rule, however: if a limited partners “takes part in the control of the business” of the limited partnership, then they shall be fixed with the same UNLIMITED LIABILITY as a general partner: s. 13(1).  Keep in mind that a limited partner, simply by exercising their other rights and powers granted to them under the Act (as discussed in my previous blog post), will not assume the liability of a general partner.  Such liability only attaches to them exercising control beyond the scope of what they are allowed to under the Act.

So, given this, the question comes up: what if the general partner of the limited partnership is a corporation and the director or officer of the corporation is the limited partner?   So, in this example, the limited partner is an individual (e.g. John Doe) and is also the director or officer (e.g. President) of the general partner.  If the individual acts on behalf of the general partner, will he or she have personal UNLIMITED LIABILITY for the limited partnership?

This is a tricky situation.  The limited partner is essentially trying to go around the rules of the Limited Partnerships Act by being a controlling the general partner.  Now since the general partner is a corporation, and because corporations are assumed to be separate legal entities, the limited partner would think that he or she is personally NOT the general partner and therefore not subject to unlimited personal liability…that’s the idea, at least…  Well, lets see what the courts have said, shall we?

In Laplante v. R., [1995] 1 C.T.C. 2647, the Federal Tax Court of Canada had to deal with an interesting situation that arose in the context of tax law.  A taxpayer claimed certain losses arising from a partnership.  The partnership had incurred certain losses and the taxpayer wanted to take advantage of those losses.  The Minister of National Revenue, however, claimed that the partnership was actually a limited partnership (not general partnership).  As such, the Minister argued that certain tax-rules (known as ‘at risk’ rules – which I’ve previously blogged about) limited the amount of losses which that taxpayer could deduct.  So the issue for court to decide was whether the taxpayer was a general partner or limited partner during the relevant time period (i.e. when the partnership incurred the losses)?  Ultimately, the Court agreed with the tax payer: he was not a limited partner for 2 reasons.  First, a general partnership existed but had not been registered with the government (recall: to have a limited partnership, you must file a declaration with the provincial government).  Since a limited partnership is not recognized at common law, and because nothing had been filed during the relevant years, there was no limited partnership.

The second reason the taxpayer was not a limited partner was because he had taken part in the control of the business (which would make a limited partner have unlimited liability like a general partner).  Specifically, the taxpayer had been a director and officer of the general partner,had authority to effect banking transactions, and had rendered personal services as a sole proprietor in respect of the partnership.  The tax court cited Zivot as authority for this proposition and concluded:

23          The evidence in this case indicated the appellant was the principal if not the sole person in control of the operation. This is also indicated in the partial agreed statement of facts, supra, even to the extent that the appellant was operating as a sole proprietor. Surely this is indicative of control.

So based on these two reasons, the Court allowed the taxpayer’s appeal and sent the matter back to the Minister of National Revenue for reconsideration as to the taxpayer’s tax liability (in light of the fact that he was NOT a limited partner).

So what’s the moral of this story?  Well, this is another example – in addition to Zivot – that shows that a limited partner who is a director or officer of a general partner may have unlimited liability because they take part in controlling the business of the limited partnership.

So what about contracting out of this position?  In other words, could a limited partner use contracts to have control over the business of the limited partnership but still maintain limited liability?  A 1992 British Columbia Court of Appeal case  offered limited support for the idea that a party could do so: Nordile Holdings Ltd. v. Breckenridge (1992), 66 B.C.L.R. (2d) 183 (B.C. C.A.).  But the better view is that it is unsettled law.  That’s what the Saskatchewan Court of Queen’s Bench said in Stillwater Forest Inc. v. Clearwater Forest Products Ltd. Partnership 2000 SKQB 110:

Loss of Limited Liability by SGGF

7          The plaintiffs allege that SGGF took part in the control of the business of the Limited Partnership and that pursuant to s. 64 of the Act it is therefore liable for the debts and obligations of the Limited Partnership. Section 64 states:

8          On the nonsuit, SGGF argues that even if the plaintiffs are successful in establishing a factual basis for a claim under s. 64 of the Act (which, of course, it does not accept), any potential liability of SGGF is completely answered by the contractual provisions of the agreements. According to SGGF, the parties contracted out of any liability that might arise under s. 64 of the Act. It argues that the specific contractual terms of each of the agreements unequivocally preclude it from having any liability for the general partner’s or the Limited Partnership’s obligations thereunder and it therefore submits that the claim against SGGF in relation to such liability should be dismissed.

9          There are no Saskatchewan cases interpreting s. 64 of the Act and only two Canadian cases that deal with similar statutory provisions in other provinces: Haughton Graphic (Graphics) Ltd. v. Zivot (1986), 33 B.L.R. 125 (Ont. H.C.) and Nordile Holdings Ltd. v. Breckenridge (1992), 66 B.C.L.R. (2d) 183 (B.C. C.A.). As to its argument based on contract, SGGF relies on the chamber judge’s decision in Nordile which supports its position that a party may contract out of liability that would otherwise arise under limited partnership legislation. It is noted however, that although the Court of Appeal upheld the chamber judge’s conclusion in Nordile, the appeal court found it unnecessary to deal with the contract issue. There is therefore very limited authority to the effect that a limited partner may contract out of the statutory consequences of participating in the control of a limited partnership’s business.

10          I am satisfied that the plaintiffs have led sufficient evidence which, if uncontradicted, could reasonably support a finding that SGGF participated in the control of the Limited Partnership. As the contractual argument that SGGF relies on is far from being well settled law; and, given the paucity of case law interpreting s. 64 of the Act generally or more particularly, its effect, if any, on contractual provisions acknowledging limited liability, I am not prepared at this early stage of the proceedings to preclude the plaintiffs from pursuing this aspect of their claim. The nonsuit will therefore not be granted with respect to the plaintiffs’ claim that pursuant to s. 64 of the Act, SGGF is liable as a general partner of Clearwater.

So because the idea of whether you can contract out of the clear language of the Ontario Limited Partnerships Act has not been resolved, it is best to comply with the act and not try to get around it through contracts.  It’s unsettled law and you could find yourself in hot water!

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Contractor Agreement Template – $97

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.   If you need legal advice with respect to becoming an independent contractor, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Ontario business lawyers in this regard.  You can contact me directly at michael@carabashlaw.com.

So you need an contractor agreement, but don’t have hundreds or thousands of dollars to spend hiring a lawyer to draft it from scratch?  Well, you’ve got two options: (1) you can purchase a do-it-yourself online kit for only $97 or (2) you can do the first option but have a lawyer review it after you’re done (just make a FREE and anonymous post).

So let’s discuss the two options, shall we?

Contractor Agreement Template: Purchase a Legal Form + Video Guide for $97

First thing’s first: why $97?  Well, considering that we’re providing you with a legal form that would normally cost hundreds or more (indeed, I’ve personally charged clients over $1,500 for an independent contractor agreement) plus all the free additional information you’re getting (a video tutorial and 2 written guides), it’s well worth it.

The stuff that’s on the internet selling for $10 or $20 or even $40 is crap compared to this.  How can I say that?  Well, for starters, the other contractor agreement templates may not be prepared by an Ontario lawyer. Keep in mind that laws change from one jurisdiction to the next. A B.C. lawyer has no business drafting or advising on an Ontario independent contractor agreement. Next, the other stuff on the internet does not come with any guidance. I’ve personally put together video tutorials (typically about 10 minutes each) showing you an example of how to fill out the legal form. I’ve also put together a primer (DL Guide #1)that discusses the various issues you should be familiar with.  I’ve charged clients thousands of dollars to research and educate them on these types of issues.  YOU GET IT FOR FREE!  Finally, if you’re worried about whether your legal form is valid and enforceable, I’ve put together another FREE primer (DL Guide #2) entitled “Is My Legal Form Valid and Enforceable?”  It takes you through the various issues you should be familiar with when completing and entering into your legal form so as to minimize future challenges.  The reality is that any agreement – whether a LAWYER HAS PREPARED IT OR NOT – can be challenged.  There’s nothing stopping anyone from alleging that the agreement is bad, unfair, incomplete, etc.  It will always be up to a judge to make the final call.  But going to court is both costly and time-consuming.  So it’s simply best to try to mitigate those challenges from happening to begin with.

The second option will give you additional peace of mind if you need it: simply purchase a contractor agreement for $97 and make a post to have a lawyer quote you on how much it would cost to review.

Now one final thing: when you’re looking to purchase a contractor agreement, there will be two kinds: (1) with a Statement of Work and (2) without a Statement of Work.  So what’s a statement of work and which contractor agreement template is best for you?  The “No Statement of Work” means that the services to be performed by the Independent Contractor are dealt with WITHIN the actual agreement and not in a Schedule (attached and incorporated into the agreement as a “Statement of Work”).   If there is a Statement of Work, then it will allow you to enter things like: pay, time, location of work, etc. (basically the details of the services to be performed).

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

I’ve already discussed in a previous blog how a limited partnership can be dissolved.  Here, I’ll be talking about what happens next.

So once the limited partnership is terminated, section 24 of the Limited Partnerships Act kicks in and says that the first persons to get paid are the creditors of the limited partnership.  Next, unless the partnership agreement or another agreement says otherwise, the following persons are paid in this order:

1. Limited partners in respect of their share of the profits and other compensation by way of income on account of their contributions.
2. Limited partners in respect of their contributions.
3. General partners other than for capital and profits.
4. General partners in respect of profits.
5. General partners in respect of capital.

Now in the kinds of limited partnership agreements which I deal with and draft, a limited partnership can be terminated in one of two general ways: (1) by the general partner giving notice or (2) by a special 2/3 vote of the limited partners.  Yes, there are other ways in which the limited partnership can terminate, but I want to focus on these two ways for now.  So if the general partner is the party dissolving the limited partnership, then you need to make sure that all the notice requirements are met and that the general partner has sufficient authority (i.e. the person representing the general partner if it is a corporation) to do so.   If there’s a meeting called for the special resolution to be passed, then you need to make sure that the requirements for the meeting (e.g. notice, quorum, minutes) are addressed.

Once the limited partnership is dissolved, the general partner will wind up the affairs of the limited partnership.  This will involve liquidating assets, closing down bank accounts, preparing financial statements, and then paying out the proceeds that are realized from liquidating the assets (e.g. creditors first, etc.).  The limited partnership will also need to file a DECLARATION OF DISSOLUTION with the registrar under the Business Names Act. If you are looking for a lawyer to help you dissolve a limited partnership, make a post on Dynamic Lawyers or give me a shout.

A final thing to keep in mind is the possible tax consequences which the partners will realize upon dissolution.  First, there’s the profits that will be distributed (assuming there are profits).  Generally, these profits will be taxed as business income.  Then there are taxable capital gains.  If one of the partners initially contributed $1 for his, her or its units and then received a $100 return of capital upon dissolution of the limited partnership, then there will a capital gain of $99 – half of which is taxable at the partner’s full tax rate.  Be sure to consult with a tax lawyer about the tax effect of dissolving a limited partnership.

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to buying or selling a dental, medical, pharmacy or other health-related business, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your professional corporation.  I should know – I’m one of them and you can contact me directly (michael@carabashlaw.com).

I’m going to shift gears here now and start talking about asset purchases instead of share purchases.  Here’s the situation: you’re a doctor, dentist, pharmacist, physiotherapist, chiropractor, etc. and you’ll looking to buy the assets of an existing practice.  You don’t want to simply buy the shares because there may be hidden liabilities or because you want a clean / fresh start.  So where to begin?

It’s all about Conveyancing!

Well, in an asset purchase, unlike in a share transfer, you’ll need to prepare a lot of conveyancing documents.  This could, for example, include a bill of sale for inventory, an assignment of lease / trademark / employee / license agreement(s), an agreement of purchase and sale for real property, etc.  You may also need third party authorizations and consents for these transfers.

Tax Implications?

There may be tax implications on the transfer of the assets.  For example, if both parties to the asset purchase / sale agree, they can jointly elect not to pay any GST under the Excise Tax Act on the transfer of all or substantially all of the assets used by the business.  You should contact a lawyer or an accountant for more information on this.  Furthermore, if you’re acquiring certain depreciable capital property, you’ll want to know what your cost base is and what you can deduct (as an expense) as a capital cost allowance each year.

Lawyer / Agent Fees

There may also be additional costs that appear in the form of lawyer or agent commissions and registration fees (e.g. assigning a trademark, assigning a lease agreement, transferring real estate).

What’s the Deal Really About?

When you’re looking to buy assets, your primary concern is that the assets belong to the seller (i.e. the seller has clear and free title to them) and that the seller is capable of transferring the assets (i.e. they have all power, capacity, authority, consent, etc. to do so).   This will come out in representations, warranties, and indemnities agreed to by the seller, as well as documentary review title searches on the part of the purchaser’s lawyer.

Employees

Simply because you’re buying assets doesn’t necessarily mean that you won’t become the DEEMED employer of the old business’ employees!   The Ontario Employment Standards Act, 2000 says for example:

9. (1) If an employer sells a business or a part of a business and the purchaser employs an employee of the seller, the employment of the employee shall be deemed not to have been terminated or severed for the purposes of this Act and his or her employment with the seller shall be deemed to have been employment with the purchaser for the purpose of any subsequent calculation of the employee’s length or period of employment.

So if the assets of a dental practice are sold and the purchaser employs a dental hygienist or receptionist of that old business, then that person’s employment is deemed to have continued under the purchaser.  Unless otherwise agreed to by the purchaser, seller, or employee, this could affect the purchaser when it comes to things like salary, notice periods for termination, bonuses, and severance!

written by admin \\ tags: agent commissions, asset purchase, asset purchases, assignment of lease, business lawyers, buying and selling assets, conveyancing documents, dental corporation, dental health, excise tax act, medical corporation asset purchase, medical pharmacy, share transfer

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to the rules and regulations of your lottery or gaming scheme,  you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you.  I should know – I’m one of them and you can contact me directly (michael@carabashlaw.com).

So you have a business and want to have some kind of lottery to promote your business.  Is it legal?  Does it comply with federal gaming laws and provincial / municipal gaming and lottery licensing requirements?  It will depend on the specific scheme you’re using or advertising.  You should DEFINITELY contact a lawyer such as me to find out how to get a legal opinion as to the legality of your scheme.  You could, if you’re doing something illegal, end up being shut down, charged, and prosecuted.  Your reputation will be tarnished and you could face criminal and provincial penalties.  Remember: spending an ounce on prevention to avoid a pound of pain is always worth it!

Now with that all said and done, I thought about sharing some basic observations about certain sections of the Criminal Code and how courts have interpreted them – all dealing with lottery schemes.  Remember: this isn’t legal advice.  You cannot rely on it in any way, shape or form whatsoever.  You should contact me or another lawyer to discuss the particulars of your situation.  You’ve been warned!  You’re playing with fire if you try to do these things yourself and you are strongly urged not to do so!

The Criminal Code and Lottery Schemes:
The Criminal Code creates a number of offences as they pertain to engaging in a “lottery scheme” in Canada.  A “lottery scheme” is defined under s. 207(4) in the Criminal Code as “a game or any proposal, scheme, plan, means, device, contrivance or operation described in any of paragraphs 206(1)(a) to (g)…”.   Of the various lottery schemes described in s. 206(1), two of them are worth looking at in greater detail: s. 206(1)(a) and (d).

Section 206(1)(a)
Section 206(1) creates an offence for everyone who conducts or manages any lottery scheme for the purpose of determining winners of any property so disposed of purely by chance alone (i.e. no skill involved).

That section provides as follows:

206. (1) Every one is guilty of an indictable offence and liable to imprisonment for a term not exceeding two years who

…

(a) makes, prints, advertises or publishes, or causes or procures to be made, printed, advertised or published, any proposal, scheme or plan for advancing, lending, giving, selling or in any way disposing of any property by lots, cards, tickets or any mode of chance whatever;

Worth mentioning here is that the word “property” is defined in section 2 of the Criminal Code to include “real and personal property of every description and deeds and instruments relating to or evidencing the title or right to property, or giving a right to recover or receive money or goods”.

Caselaw
Lets take a look at how courts have interpreted this section in the past (note: this doesn’t guarantee anything about the present or future.  It’s just an example of what’s been done in the past).

In R v. Cheney, [1955] O.W.N. 289, 111 C.C.C. 239 (Ont. C.A.), the accused had advertised three articles (two large cards and a contest entry form) calling attention to a contest or to an opportunity to win prizes.  There was nothing in the advertising to suggest that the disposal of property (in this case, money) was by mode of chance.  Indeed, the contest entry form included a question for entrants to answer as well as a requirement that entrants agree to answer a further question to qualify for a prize.  The accused was charged with what is now s. 206(1)(a) of the Criminal Code.  The accused was ultimately acquitted.  Pickup C.J.O. held the following on behalf of the Ontario Court of Appeal:

4 Looking at all of this advertising, and having in mind that the advertising cannot be identified with any proposal, scheme or plan carried into effect, we are of the opinion that the Crown has failed to prove that the appellant did, by such advertising, advertise a proposal, scheme or plan, for advancing, lending, giving, selling, or in any way disposing of any property by a mode of chance alone.

Other Canadian courts have reiterated the view that, for a conviction to be sustained under s. 206(1)(a), the advertising must for be in respect of a scheme for disposing of property by a mode of chance alone.  See for example, R. v. Robinson, [1918] 1 W.W.R. 258; R. v. Regina Agricultural & Industrial Exhibition Assn., [1932] 2 W.W.R. 131 (Sask. C.A.); and R. v. Young, [1979] 2 W.W.R. 231 (Alta. S.C., Appellate Division).   So this section of the Criminal Code has previously been circumvented by advertising a lottery scheme that doesn’t mention or suggest that property would be disposed of by any mode of chance alone and includes or mentions a genuine element of skill in the method of determining the winner of the lottery scheme.  Remember: just because this section of the criminal code may not apply to your particular lottery scheme, you’ve still got to deal with provincial / municipal licensing laws!

Section 206(1)(d)
Section 206(1) creates an offence for everyone who conducts or manages any lottery scheme for the purpose of determining winners of any property so disposed of purely by chance alone (i.e. no skill involved).

That section provides as follows:

206. (1) Every one is guilty of an indictable offence and liable to imprisonment for a term not exceeding two years who

…

(d) conducts or manages any scheme, contrivance or operation of any kind for the purpose of determining who, or the holders of what lots, tickets, numbers or chances, are the winners of any property so proposed to be advanced, lent, given, sold or disposed of;

Caselaw
Lets take a look at how courts have interpreted this section in the past (note: this doesn’t guarantee anything about the present or future.  It’s just an example of what’s been done in the past).

The leading case on s. 206(1)(d) is Roe v. R., [1949] S.C.R. 652.  In that case, the accused had acted as the secretary of The Canadian Tourist Club and conducted a scheme for the sale of tickets.  Upon payment of fifty cents, the purchaser of a ticket was entitled to estimate how long it would take a barrel to travel between two named places on the Red River in Manitoba.  After the barrel had completed its journey, and the exact travelling time was ascertained, the ticket holder who had made the closest estimate of the time taken, was to be declared the winner, and awarded a larger sum of money that that paid for their ticket.  The accused was charged under what is now s. 206(1)(d).  Taschereau J. of the Supreme Court of Canada held that:

12 It is clear to me that the words “so … disposed of” [which appear at the end of s. 206(1)(d)] refer to the scheme indicated in the preceding subsections, that is, “by some mode of chance”. If there is merely skill or a mixed element of skill and chance, there is no offence.

The accused was ultimately acquitted on the basis that there was an element of skill in determining how long it would take a barrel to travel between two named places.  The authority arising from this case that a conviction under s. 206(1)(d) requires a lottery scheme dependent entirely upon chance has been reiterated and followed by various courts.  See for example, R. v. Procter & Gamble Co., [1960] S.C.R. 908 (S.C.C.); R. v. Pasternick (1956), 116 C.C.C. 140 (Sask. C.A.); R. v. Regina Agricultural & Industrial Exhibition Assn., [1932] 2 W.W.R. 131 (Sask. C.A.); Brown v. Bonnycastle (1935), 65 C.C.C. 57 (Man. C.A.) and R. v. Marshall (1930), 53 C.C.C. 118 (Ont. C.A.).

Overall, section 206(1)(d) has been successfully circumvented in the past by schemes that select contestants by chance, but require them to answer a question to test their skill and knowledge in order to win a prize.  Remember: just because this section of the criminal code may not apply to your particular lottery scheme, you’ve still got to deal with provincial / municipal licensing laws!

So there you have it: an introduction to lottery and gaming laws as seen in the eyes of the Criminal Code of Canada.  If you would like to establish a LEGAL lottery scheme in Ontario, then it’s best to contact me or make a post on Dynamic Lawyers.

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to setting up a dental, health, or legal professional corporation, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your professional corporation.  I should know – I’m one of them and you can contact me directly (michael@carabashlaw.com).

So you are a dentist and you want to have a professional corporation for tax purposes.  Here’s the general process:

1. Under the Regulated Health Professions Act, 1991, no corporation shall hold itself out as a health profession corporation unless it holds a valid certificate of authorization: s. 34.1(1).
2. Schedule 2 of that Act discusses Health Profession Corporations (ss. 85.8 through to 85.14).
3. Subject to the regulations made the Act and the by-laws, one or more members of the same health profession may establish a health profession corporation for the purposes of practising their health profession: s. 85.8(1).
4. The Certificates of Authorization (Ontario Regulation 39/02) are made under the Act.
5. You will need to have a corporation BEFORE you can have a health profession corporation.  In other words, a health profession corporation is simply a corporation holding a certificate of authorization. So the corporation will need to be registered under the Canada Business Corporations Act or the Ontario Business Corporations Act.  To register a corporation, you should have a lawyer prepare the articles of incorporation, the by-laws, director and shareholder resolution and meeting minutes, director and shareholder registry, etc.  A lawyer may also be needed to  create a special class of shares for certain family members (for income-splitting purposes).
6. If you would like a lawyer to fill out the Certificate of Authorization, lawyers would charge extra for their time and it would also cost $750 in fees to the Royal College of Dental Surgeons of Ontario.
7. Depending on the name you choose for your professional corporation, the normal time frame to incorporate is between 1-3 business days.  If there are issues with the name you’ve selected, it could take longer.

FYI, you might want to consider getting a memo from a lawyer on the tax advantages/potential traps of having a dental professional corporation.  There are many things that you should be aware of (e.g. income splitting, loans, attribution rules, etc.).  The way I see it, if you’re going so far as to spend $2,500 to $3,000 incorporating (which includes getting a certificate of authorization), you should spend a bit extra to find out what you can legally do with a corporation with respect to taxes.

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

Following up on my recent blogs about Ontario limited partnerships, what they’re all about, how a limited partner can lose their limited partner status, how a limited partnership is not a separate legal person, and securities laws compliance, I thought I would blog about certain tax considerations for limited partnerships.

Not a Separate Legal Entity
I have previously blogged about limited partnerships NOT being separate legal entities from the partners.  Partnership income, losses, assets, and liabilities are all attributable to the partners.  As per the Canada Income Tax Act, partnerships do not file separate tax returns.  They file annual “information returns” setting out their income and details of the partners who are entitled to that income.  It is the partners who are required to pay income tax.  The limited partnership is simply a flow-through entity.  So to recap: the net income of the partners (for income tax purposes) of a limited partnership is determined by figuring out the net income of the limited partnership.

To figure out the net income of the limited partnership, the Act says that you look at it as if it were a separate legal person: s. 96(1)(a).  So you include income and deduct allowable expenses and other credits.  Then, the limited partnership’s income will be attributed to the partners (usually as per the limited partnership agreement).  Each partner must report their income or losses from the partnership and pay taxes accordingly: s. 96(1)(f).

It’s important to note here that the Act doesn’t just allow partners to determine the allocation of their partnership interests as they wish.  There are two important restrictions here under ss. 103(1) and (1.1):

103. (1) Where the members of a partnership have agreed to share, in a specified proportion, any income or loss of the partnership from any source or from sources in a particular place, as the case may be, or any other amount in respect of any activity of the partnership that is relevant to the computation of the income or taxable income of any of the members thereof, and the principal reason for the agreement may reasonably be considered to be the reduction or postponement of the tax that might otherwise have been or become payable under this Act, the share of each member of the partnership in the income or loss, as the case may be, or in that other amount, is the amount that is reasonable having regard to all the circumstances including the proportions in which the members have agreed to share profits and losses of the partnership from other sources or from sources in other places.

(1.1) Where two or more members of a partnership who are not dealing with each other at arm’s length agree to share any income or loss of the partnership or any other amount in respect of any activity of the partnership that is relevant to the computation of the income or taxable income of those members and the share of any such member of that income, loss or other amount is not reasonable in the circumstances having regard to the capital invested in or work performed for the partnership by the members thereof or such other factors as may be relevant, that share shall, notwithstanding any agreement, be deemed to be the amount that is reasonable in the circumstances.

So basically, s. 103(1) says that, if the “principal reason” for the partnership allocation may be “reasonably considered” for the purpose of reducing or postponing tax, then the Act will re-allocate partnership interests to what is “reasonable in the circumstances”.  Meanwhile s. 103(1.1) says that non-arms length persons (so it doesn’t apply to arm’s length persons) have a partnership allocation that is not “reasonable” with respect to the partners’ respective capital contributions, work performed, etc., then the Act will re-allocate partnership interests (once again) to what is “reasonable in the circumstances”.

Fiscal Year End
For tax purposes (remember that partnerships must file an annual partnership information return after their fiscal period), the combined effects of ss. 96(1) and 249.1 of the Canada Income Tax Act make it clear that the fiscal period will be determined by the type of taxpayers (e.g. individuals, corporations, etc.) that make up the partnership group.  If any member of the partnership is an individual, then the fiscal year end must generally be the calendar year end (with certain limited exceptions).  If all of the members of the partnership are corporations, the the fiscal year end can be anywhere, so long as the fiscal period does not exceed 53 weeks: s. 249.1(1)(a).

At Risk Rules
Generally, limited partnerships have been used as flow-through investment vehicles for the limited partners to realize and capture losses of a start-up business in its first few years.  They are beneficial structures because they give investors limited liability (so long as they are limited partners) while allowing losses to be directly attributable to the partners.  It’s typical to see the general partner receive a fee for managing the limited partnership while the limited partners receiving the lion’s share of flow-through income/losses.

So we start off with the idea that losses of a limited partnership are directly attributable to the limited partners in proportion to what the limited partnership agreement says.  But there are exceptions to this general statement (as noted above).  And there are additional limits on the extent to which limited partners can deduct these losses.  The Act says that limited partners can only deduct limited partnership losses up to their “At Risk” amount at the end of the fiscal year.   The “At Risk” amount is more or less what it means: partners can only deduct losses according to a calculation that measures their risk in the limited partnership.  Here’s how it works under ss. 96(2.1) and (2.2):

1. Add the adjusted cost base of the limited partner’s interest at the time of computation;
2. Add the the partner’s share of income of the partnership for the current fiscal period;
3. Subtract all amounts owing by the partner to the limited partnership or to a person with whom the partnership does not deal at arm’s length with; and
4. Subtract any amount or benefit which tends to reduce the investment risk to the limited partner.

If there is an excess in this calculation (i.e. a limited partner’s share of losses is greater than their “at risk” amount), then this amount could be carried forward indefinitely (but not backwards) if certain requirements are met: s. 111(1)(e).  Again, it’s best to speak with an accountant and a lawyer to find out more about the tax treatment of limited partnerships.

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Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

Following up on my recent blogs about Ontario limited partnerships, what they’re all about, how a limited partner can lose their limited partner status, and how a limited partnership is not a separate legal person, I thought I would blog about an important yet often overlooked aspect of using limited partnerships to raise money for an investment: complying with securities laws.

Ontario limited partnerships are generally used for tax planning purposes.  A group of persons want to start a business.  They realize that the business will generate losses in the first few years (which is normal when you’re first starting out).  They want to offset their income with those losses.  If they use a corporation, the losses will get trapped in the corporation.  The corporation can carry them forward (to a certain extent), but cannot transfer those losses through dividends to the shareholders.  Since a limited partnership is simply a flow-through structure and not a separate legal entity, its losses can be attributed to its partners.  So, to recap: Ontario limited partnerships are generally used for tax purposes (since they offer no advantages to mitigate liability vis-a-vis a corporation).

Now, we move on to securities laws implications.

When limited partnerships are being established, it’s not just a matter of complying with the provincial partnerships acts, the Income Tax Act, and any partnership agreement that may exist between the partners.  If the limited partnership is going to be offering “securities” (as defined under the Ontario Securities Act) through the offering of limited partnership interests that fall under that definition, then the limited partnership will need to comply with dealer registration, prospectus requirements, and other onerous obligations before it is allowed to offer those securities.  The limited partnership can, however, avoid complying with those securities law obligations if it qualifies for an exemption.  You should definitely consult with a business lawyer familiar with these exemptions BEFORE offering limited partnership interests. Also keep in mind that you’ll need to comply in ALL of the jurisdictions you’re proposing to offer securities.  So you’ll need to consult with lawyers about compliance in those jurisdictions (and the rules are not necessarily the same wherever you go!).  All too often, parties don’t think about complying with securities laws until it’s too late.  Then it’s only down hill from there: Ontario Securities Act proceedings which could result in worse things (e.g. civil litigation, bankruptcy, divorce, etc.).  OUCH!!!

written by admin \\ tags: business lawyers, educational purposes, first few years, legal advice, limited partnership agreements, limited partnerships, ontario business, partner status, professional assistance, securities laws, separate legal entity, shareholders, tax planning, tax purposes

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

So following up on my previous blogs about limited partnerships (e.g. what they’re all about and how a limited partner can lose their limited partner status), I thought I would dedicate this blog to address the following question: is a limited partnership a separate legal entity from its partners?

The answer is “no”.

A limited partnership is a type of partnership governed by the Ontario Limited Partnerships Act, the Ontario Partnerships Act, and the limited partnership agreement that exists between the general and limited partners (if any).  There is nothing that confers on a limited partner the status of being a separate legal person.

With these things being said, there are a number of legal situations where a limited partnership appears to be a separate legal entity.  For example, a limited partnership:

• can sue and be sued;
• can file its own income taxes;
• can be petitioned into bankruptcy; and
• has its own property (for the purposes of dissolution and redistribution);

But don’t get confused: these instances are mere conveniences granted by statutes to a limited partnership to recognize it temporarily for various purposes (e.g. civil litigation, tax, bankruptcy, etc.).  Always remember that a limited partnership is simply a special kind of partnership that is not a separate entity from its partners.  Think of it like a marriage between persons…

written by admin \\ tags: business lawyers, Civil Litigation, legal person, legal situations, limited partners, limited partnership agreement, limited partnership agreements, limited partnerships, ontario business, ontario limited, partner status, partnerships act, professional assistance, separate legal entity, tax purposes

Please note that the information provided herein is not legal advice and is provided for informational and educational purposes only.  If you need legal advice with respect to drafting, reviewing, interpreting or resolving disputes concerning partnership and limited partnership agreements, you should seek professional assistance (e.g. make a post on Dynamic Lawyers).  We have Toronto, Ottawa, Hamilton, Mississauga, Brampton, and other Ontario business lawyers registered on the website who can answer your questions or help you with your partnership and limited partnership agreements.  I should know – I’m one of them and you can contact me directly.

As a follow up to my recent blog post about limited partnerships (what they are, how to create one, partnership name, etc.), I thought I’d follow up with another blog about how limited partners can LOSE THEIR LIABILITY STATUS!!!  Remember: I’m only dealing with Ontario limited partnerships.  You should check out your province’s own legislation dealing with limited partnerships and the caselaw that interprets that legislation.  Also, be sure to get a lawyer to update you on any new legislation or cases that impact limited partnerships.

So we start off with the idea that limited partners are generally liable only to the extent of their contribution.   Their contribution must be stated in the records of the limited partnership and such records must be kept at the limited partnership’s principal place of business in Ontario: s. 4.

Limited partners have a number of rights in the limited partnership (same as general partner) under the Ontario Limited Partnerships Act, including:

• the right to inspect and copy the books of the limited partnership (s. 10(a)):
• the right to be given a complete and formal account of the limited partnership’s affairs (s. 10(b));
• the right to obtain dissolution of the limited partnership by court order (s. 10(c));
• the right to share in the profits and other compensation of the partnership (s. 11(1)(a)), subject to other provisions of the Act;
• the right to have their initial contribution returned (s. 11(1)(b)), subject to other provisions of the Act;
• the right to examine the “state and progress” of the limited partnership business and advise as to its management (s.12(2)(a));
• the right to act as a contractor for or an agent or employee of the limited partnership or of a general partner (s.12(2)(b));
• the right to act as a surety for the limited partnership (s.12(2)(c)).

Now here’s the kicker: (as previously blogged about) if the surname or a distinctive part of a corporate name of a limited partner is used in the limited partnership’s name, then “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”: s. 6(2) of the Ontario Limited Partnerships Act.

Even more importantly: if a limited partners “takes part in the control of the business” of the limited partnership, then they shall be fixed with the same UNLIMITED LIABILITY as a general partner: s. 13(1).  Keep in mind that a limited partner, simply by exercising their other rights and powers granted to them under the Act (i.e. above), will not assume the liability of a general partner.  Such liability only attaches to them exercising control beyond the scope of what they are allowed to under the Act.

So what have the Ontario courts said about this whole “takes part in the control of the business” situation?

Well, at present, the leading case in Ontario is Haughton Graphic Ltd. v. Zivot,33 B.L.R. 125 (Ont. H.C.J.), aff’d 38 B.L.R. xxxiii (Ont. C.A.), leave to appeal denied 38 B.L.R. xxxiii (S.C.C.).  Here are the facts of the case:

• The Defendants wanted to launch a magazine to be published in the U.S.
• They represented to a printing company that they were the president and vice-president of a limited partnership under Alberta Law.
• A deal was struck for the printing company to print the Toronto magazine.  In late 1982, it printed the first five issues.
  
• The limited partnership went into bankruptcy, leaving the printing company unpaid for the printing of three issues.
• The printing company decided to sue the limited partners personally to get its money back.
• Importantly: one of the defendants had incorporated a business and made it the general partner of the limited partnership. That defendant controlled the corporation.  That corporation employed both defendants.

So the question in that case came up: should the limited partners – in their personal capacity – be held liable for debts owed by the limited partnership on the basis that they took part in the control of the business? The court was looking at Alberta laws of limited partnership, which were akin to s. 13 of the Ontario Limited Partnerships Act.

The Ontario High Court of Justice essentially said: “Yes, they’re liable”.   Eberle J. said that the defendants were “in complete control of the limited partnership”: one defendant was the directing mind of the limited partnership, was responsible for it, and managed it.  He signed cheques on behalf of the limited partnership (the other defendant had authority to do so).  The fact that they were both employees of the general partner did not save them.

What’s also important in this case is that the Court rejected the defendant’s arguments that they shouldn’t be liable on the basis that the printing company knew it was dealing with a limited partnership.  The idea here is that a limited partner who takes part in controlling the business shouldn’t be liable if the creditor believes that the limited partner was a general partner.  But the court rejected that argument.  Eberle J. stated that that: “If reliance was a necessary precondition to unlimited liability for a limited partner, appropriate words should be in the statute”.

So what’s the moral of the story?  Be cautioned: if you’re both a limited partner and an officer or director of a general partner, your liability will be unlimited if you take part in the control of the business – even if you claim you did so in your capacity as an officer or director of a general partner and not as a limited partner!

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