Ontario Limited Partnerships (Part 17): Foreign Persons creating an Ontario LP
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 thought I would blog about certain nuances when it comes to limited partnerships formed by extra-provincial persons. These are often referred to as extra-provincial limited partnerships, but I don’t think this is always the case (as discussed below). But before we get into this discussion, lets start off with the basics, shall we?
What is an Extra-Provincial Limited Partnership?
An Extra-Provincial Limited Partnership is a few things. First, it is a general partnership that is already is in existence. A general partnership is the relationship that exists between two or more parties doing business in common with a view to making profit. So, just to recap, if two individuals living in Mexico or the U.S. wanted to form an Ontario limited partnership, they would first have to have a general partnership between themselves. Remember: an Ontario limited partnership is simply a designation granted by the Ontario statute. Now, after being organized as a general partnership, it becomes a limited partnership – just not in Ontario. A general partnership in Ontario becomes a limited partnership by filing and being issued a Form 3 Declaration from the Ontario government. So the idea is that Ontario is willing to recognize limited partnerships from other jurisdictions. That recognition is done when the Limited Partnership files a Declaration Form 3.
Now it’s important to note that I’ve generally come across two situations that involve limited partnerships formed by foreign entities: (1) a limited partnership organized outside of Ontario wishes to do business in Ontario and (2) extra-provincial persons wish to create and use an Ontario limited partnership as a legal structure but do not wish to do business in Ontario. For the purposes of this blog, I’ll be discussing the second scenario.
What’s so special about the second scenario? Well, it’s interesting because it is not the case that a limited partnership is formed outside of Ontario and which simply needs to register as an extra-provincial limited partnership. The reality is that the limited partnership is being formed in ONTARIO under the Limited Partnerships Act, but it is done so by persons who are not resident or doing business in Ontario. This can get a big confusing: it’s not an extra-provincial limited partnership, it’s just a plain old regular Ontario limited partnership. The only difference is who is forming it. So, just to recap, I’m going to be talking about how foreign persons (i.e. an extra-provincial corporation, such as a U.S. or Mexican company) can form an Ontario limited partnership.
Extra-Provincial License for the Corporation
OK, so here’s the situation. A corporation is set up to be the general partner. Lets assume, for simplicity’s sake, that this corporation is not an Ontario or even Canadian corporation (if it is, then there would need to be compliance with Ontario or Canadian corporate, tax, and securities laws with respect to that corporation). For their part, limited partners are ready to partner up with the general partner. How does it all fit together such that they form an “Ontario Limited Partnership”?
Well, the Ontario government will only allow an extra-provincial corporation to be a general partner if it has obtained a license under the Extra-Provincial Corporations Act. Even if it’s not doing business in Ontario, the government here wants to know who this extra-provincial corporation is. So they’ll want to see (among other things) information about the corporate name, head office, jurisdiction which it is created and subject to, its proposed business in Ontario, etc. They will also need to see how is the Agent for Service in Ontario. The idea is that someone over 18 years old who is resident in Ontario or a corporation with a head office in Ontario must act as the Agent for Service of the extra-provincial corporation for the purpose of receiving service of process, notices, or other proceedings (so that service on the Agent is deemed to be service on the extra provincial corporation). In certain situations, the Ontario government will also want an ORIGINAL Certificate of Status issued under the seal of the incorporating jurisdiction, signed by the proper person, and showing:
- The name of the corporation;
- The date of incorporation;
- The jurisdiction to which the corporation is subject; and
- That the corporation is valid and existing.
Some jurisdictions (e.g. Netherlands) do not provide these kinds of certificates, but the Ontario government still allow corporations from these jurisdictions to be registered. Finally, the Ontario government will want to see an original NUANS name search report to make sure that there is no conflicting or confusingly similar name of the corporation which is currently in existence. It generally takes about 3 weeks for the paperwork to be processed once the Ontario government has received it. There are also government fees (i.e. $330) which must be paid to obtain this extra-provincial corporate license.
Registering the Limited Partnership
Now that you’ve got your extra-provincial corporate license in hand for the general partner, it’s time to register the Limited Partnership. Now, as I said above, in the situation I’m describing, the limited partnership has not been formed elsewhere; there is no other organizing statute; so there is no extra-provincial limited partnership. All that’s happening is the formation of a plain and simply limited partnership in Ontario by a general partner who is not a resident in Ontario (it’s a corporation formed outside of Ontario but with a license to conduct business here). And, to simplify matters, I’m also assuming that the limited partnership is not doing business in Ontario. So you fill out the Declaration Form 3 and pay the $220 government filing fee. Once registered, you will need to file a renewal every 5 years. Note: the Ontario government will not send notices out, so you better just keep your eye on the date when the limited partnership must be renewed!
Now, I’ve personally gotten into some debates with government staff as to how to go about filling out this declaration for the situation I’ve described. I’ve spoken with managers in the government office because they seem to believe that the form should be filled out in a certain way. I would strongly urge you to contact me to deal directly with government staff to prevent delays with respect to registering the LP. They may not understand the intricacies of the Limited Partnerships Act and may simply demand documentation which is not needed. It’s quite easy to make mistakes, given that the laws concerning limited partnerships are not always clear.
Carrying on the business of the partnership
Now that the limited partnership has been established, business can be conducted. As I’ve previously blogged about, in Ontario, the limited partnership is not a legal entity capable of holding or dealing with limited partnership property. Rather, it is the general partnership, which has been entrusted with managing the affairs of the limited partnership, which does so on its behalf.
Taxes!
So finally, we come to the issue of taxes. In Canada, a Ontario limited partnership is not a separate legal entity (unlike a corporation) or a”person”. I have previously blogged about this here. As such, they are not considered to be taxpayers (i.e. who are, indeed, “persons”) under the Canada Income Tax Act. Rather, partnership income, losses, assets, and liabilities are all attributable to the partners as per the limited partnership agreement. 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).
Now, if the partners (e.g. extra provincial general partner and the limited partners) of the limited partnership are resident of some country other than Canada, the issue comes up as to whether any tax is owing in Canada. Generally, under the Income Tax Act, RESIDENTS of Canada at any time in the year are required to pay tax on their worldwide income: section 2(1). Now, if an individual is a non-resident, then they may still have to pay Canadian income tax if they received certain kinds of income from Canadian sources – such as employment income, business income, or income derived from the sale of taxable Canadian property. Now this stuff is somewhat complicated and long-winded, so I think I’ll dedicate another blog to the topic of taxation of partners of a limited partnership if they are resident or non-resident in Canada.
