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:

1. The name of the corporation;
2. The date of incorporation;
3. The jurisdiction to which the corporation is subject; and
4. 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.

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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!

written by admin \\ tags: general partner, general partners, legal advice, limited liability, limited partners, limited partnership agreements, limited partnerships, mississauga, ontario business, ontario limited partnership, ottawa, professional assistance, toronto, unlimited liability

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 incorporating (e.g. registering articles of incorporation, drafting by-laws, director / shareholder resolutions, registries), you should seek professional assistance (e.g. make a post on Dynamic Lawyers). We have Toronto, Ottawa, Hamilton, Brampton, Mississauga and other Ontario lawyers registered to help you.  You can also contact me directly (I am a Toronto business lawyer).

Corporate Shares: Ontario Corporation
So for the purposes of this blog post, I’m going to be talking about corporate shares for Ontario corporations.  Remember: corporations are creatures of statutes and are governed by the jurisdiction in which they were incorporated or operate.  For example, an Ontario corporation is governed by the Ontario Business Corporations Act, whereas a federal corporation is governed by the Canada Business Corporations Act.

Shareholders: Voting and Non-Voting
Ontario corporations are owned by shareholders.  A shareholder is a person (which include individuals, sole proprietorships, partnerships, trusts, joint ventures, not-for profit corporations, and other corporations) who owns the corporation’s shares.  Each corporation, through its articles of incorporation, can designate different classes of shares (i.e. shares with different characteristics).  At a minimum, section 22(3) the Act requires that a corporation have at least one class of shares.  That class of shares are called voting shares because they allow the holders to vote at any shareholder meetings.  They also allow the shareholders to receive dividends as declared from time to time and in the discretion of the board of directors (recall that the shareholders vote in the board of directors through an election).  Finally, the voting shares give their holders the right to receive the remaining property of the corporation on dissolution.   Remember that creditors (secured and unsecured) are entitled to be repaid before shareholders upon dissolution.

Classes of Shares
If the articles of incorporation provide for more than one class of share, then things can get interesting.  For example, a corporation can have 3 classes of shares (call them Class A, B, and C), all of which carry different rights with respect to voting (voting vs. non-voting), dividends (variable vs. fixed), and priority upon dissolution.  For example, Class C shares may be non-voting, having a right to regular dividends, and have priority over Class A shares.  This puts the Class A shareholders at risk of not getting anything if the corporation goes into dissolution – particularly if there isn’t enough assets to pay out creditors and priority shareholders.

Valuing Shares
Whenever shares are issued (i.e. sold/transferred to a shareholder in exchange for money, property, or past services rendered – see s. 23(3)), their value fluctuates depending on (1) the value of the company and (2) the total number of issued and outstanding shares.  With respect to the latter, if the corporation continues issuing more shares to different parties, then the original shareholders’ shares will be diluted in value.  In privately-held companies, valuing the shares is much more difficult.  Sometimes, shareholders value the shares as a multiple of something (e.g. book value) instead of potential earnings discounted to today. The value of the shares is typically pre-determined according to some formula set out in a Shareholders Agreement.  If a Shareholder Agreement doesn’t exist, the parties can seek help through a lawyer, consultant, business valuator, accountant, etc.  At the end of the day, the fair market value of the shares is typically described as the price that two arms length individuals would be willing to buy/sell the shares if they didn’t have to (i.e. if they weren’t forced to).

Restrictions on Share Transfers
Worth mentioning is that the ability to transfer shares may be restricted in the Articles of Incorporation or a Shareholders Agreement.  Furthermore, private corporations (unlike public ones) are restricted in terms of the number of shares they can have issued and outstanding.  Specifically, private corporations can only have 50 different shareholders or less.

Class A vs. Class B; Common vs. Preferred; Voting vs. Non-Voting, etc.
What you find in a typical corporation is 2 classes of shares.  These can be called Class A and Class B, Common and Preferred, Voting and Non-Voting.  The name of the shares isn’t terribly important.  What’s important is the duties, privileges, and rights of the holders of those shares.  Those things are described in the articles of incorporation.  So we already know that at least ONE of the class of shares that exist must:

• entitle the holders to vote at all shareholder meetings; and
• entitle the holders to receive the remaining property upon dissolution.

So we can call this Class A, Common, or Voting Shares (or even a combination of those terms, such as Class A Voting Shares, or Common Voting Shares, etc.).  The next class of shares can be characterized as Non-Voting shares, Preferred Shares, Class B shares (or a combination thereof).  These shares typically:

• DO NOT allow the holders to vote at ALL shareholder meetings (i.e. they can’t vote in the board of directors);
• give the holders the right to a dividend in advance of a dividend to the holders of the Class A, Voting, or Common shareholders; and
• give the holders the right to receive the corporation’s remaining property in advance of the Class A, Voting,  or Common shareholders.

In the next blog, I’ll be discussing dividends (which are after-tax earnings paid to shareholders)….

written by admin \\ tags: articles of incorporation, brampton, business corporations, business lawyer, canada business corporations act, corporate shares, corporations act ontario, dissolution, joint ventures, mississauga, ontario business, ontario corporation, ontario corporations, ontario lawyers, professional assistance, profit corporations, shareholder meetings, shareholder resolutions, sole proprietorships, toronto business

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.

written by admin \\ tags: articles of incorporation, business corporations act, business lawyers, canada business corporations act, dental health, health profession, health professions act, ontario business, ontario regulation, professional assistance, professional corporation, regulated health professions, regulated health professions act, shareholder resolution, valid certificate

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!

written by admin \\ tags: brampton, business lawyers, general partner, general partnerships, liability issues, limited partners, limited partnership agreement, limited partnership agreements, limited partnerships, lps, ontario business, ontario limited, partnerships act, professional assistance, silent partner, value of money