Ontario Limited Partnership Agreement Lawyer: Using Limited Partnerships to Invest
Please keep in mind that this is not legal advice. The information provided herein is for educational purposes only. If you would like to get in touch with a lawyer to help you draft, interpret, negotiate or resolve a dispute about an Ontario limited partnership agreement, then you are encouraged to seek a professional (e.g. make a post on Dynamic Lawyers). We have Ontario lawyers who can assist you in this regard (I would know, I’m one of them!). If you want to get in touch with me directly, feel free to email me directly to discuss all your limited partnership agreement needs!
So in this blog,I’ll be talking about how a Limited Partnership can be used as an investment vehicle. So we start off with the idea that a Limited Partnership is a regular partnership (called a general partnership) that has filed a declaration with the Ontario government (and complied with other rules) in order to become a LIMITED PARTNERSHIP. What’s the big deal about having a limited partnership, you ask? Well, the biggest benefit is that the limited partners (i.e. the passive investors) will generally have limited liability – akin to shareholders of a corporation! That’s great news. I say “generally have limited liability” because there are ways in which they can lose it – specifically if they take part in the control of the business of the limited partnership (which I previously blogged about here). But assuming they’re passive, it’s all good.
So the limited partners sign onto the limited partnership agreement and contribute money, property, services, etc. in exchange for an interest in the limited partnership. Now the general partner is the one running the show. They have all the powers, duties, and responsibilities to act on behalf of the limited partnership. They have unlimited liability and are typically a corporation for this purpose.
Now here are a few things to keep in mind when thinking about using a limited partnership as an investment vehicle.
For starters, let’s talk a little bit about TAX. Yes, that’s right: TAX! Unlike a corporation, there is no double taxation when you’re using a limited partnership. The limited partnership is a flow-through entity (because it’s a partnership first and foremost). This means that the income or loss of the partners is computed at the partnership level as if the partnership were a separate person. Income and losses are then allocated to the partners. Now there are a few nuances you should know about that apply specifically to limited partnerships when it comes to tax and you can read about them here in a previous blog I wrote. So the bottom line is that a limited partnership is not required to pay tax under the Income Tax Act; it merely computes its profit or loss for each fiscal year as if it were a legal person and then allocates the income or loss to the partners.
OK, now what about securities laws implications? As I’ve previously blogged about here and here, a Unit from a Limited Partnership held by a Limited Partner is likely considered to be a “security”; therefore, Ontario’s securities laws will kick in and govern the Limited Partnership and the Limited Partners’ dealings. Failure to comply could lead to a prosecution under the Ontario Securities Act! Specifically, “trading” in a “security” requires the issuer (the Limited Partnership) to be registered and, if the trade amounts to a “distribution”, then the Limited Partnership will be required to issue a prospectus and follow all sorts of other securities laws. It’s all very complicated and expensive! To avoid these results, the Limited Partnership will need to find an exemption to the registration and prospectus requirements. I’ve previously spoken about some, and will mention 2 of the here: (1) accredited investor exemption and (2) private investment club exemption.
Accredited investor exemption: Basically, if you issue Limited Partnership Units to certain wealthy / sophisticated / resourceful persons, you can avoid having to register or issue a prospectus. Accredited investors include (but are not limited to):
- an individual (i.e. human being) who, either alone or with a spouse, beneficially owns financial assets having an aggregate realizable value that before taxes, but net of any related liabilities, exceeds $1,000,000;
- an individual (i.e. human being) whose net income before taxes exceeded $200,000 in each of the 2 most recent calendar years or whose net income before taxes combined with that of a spouse exceeded $300,000 in each of the 2 most recent calendar years and who, in either case, reasonably expects to exceed that net income level in the current calendar year;
- an individual who, either alone or with a spouse, has net assets of at least $5,000,000; or
- a person, other than an individual or investment fund, that has net assets of at least $5,000,000 as shown on its most recently prepared financial statements.
Private investment club exemption: In this situation, the Limited Partnership would have less than 50 partners, would not seek to borrow money from the public, would not distribute its Units to the public, would not pay or give any money for investment management or administration advice in respect of trades in securities (except normal brokerage fees), and would require its Unit holders to make contributions in proportion to the value of their securities for financing purposes.
Overall, assuming you comply with securities, tax, and partnership laws concerning establishing and maintaining your Limited Partnership, you may have found a great structure to use to raise money and invest. Again, if you need help in this regard, give me a shout!











