The Benefits of Limited Partnerships (LPs) for Non-Residents of Canada
If you’re a foreign investor looking to do business in Canada, you might want to consider setting up a Limited Partnership (LP). LPs offer several benefits that make them a popular investment vehicle for non-residents. Not only do they provide a prestigious business structure, but they also come with significant tax advantages and can help minimize Canadian tax obligations. Here’s a breakdown of what you need to know about LPs in Canada.
What Is a Limited Partnership (LP)?
A Limited Partnership (LP) in Canada consists of at least one general partner and one limited partner. The key feature of an LP is that the general partner holds unlimited liability for the partnership’s obligations, while limited partners’ liability is confined to the amount they’ve contributed or committed to the partnership. This structure allows non-resident partners to invest in Canadian ventures with a reduced level of risk.
In Ontario, an LP is formed by filing a prescribed declaration according to the Limited Partnerships Act. Many non-residents choose to establish their LPs in Ontario because it offers a combination of business prestige and favorable tax treatment.
Why Choose an LP in Ontario?
- Prestige and Business Credibility
Creating an LP in Ontario can lend your business a respected Canadian identity, which can open doors to more opportunities both locally and internationally. - Tax Benefits
LPs offer considerable tax advantages for non-residents, especially when the partnership isn’t engaged in business activities in Canada. This means that LPs that don’t operate in Canada won’t have to file Canadian tax returns or pay Canadian income tax.Â
- Minimized Tax Liabilities
Non-residents can avoid paying taxes in Canada (except on profits derived from specific Canadian sources) while maintaining a flexible business structure. Moreover, there are no withholding taxes on amounts distributed to non-resident partners.
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How Does an LP Work?
Unlike other types of business structures, an LP isn’t considered a separate legal entity, so it’s not taxed directly. Instead, the profits made by the LP “flow through” to the individual partners, who then report and pay taxes according to their country of residence.
For non-residents, the most important point is that if an LP doesn’t carry on business in Canada, there’s generally no tax filing or income tax obligations in Canada. However, if the LP is involved in Canadian business, it may need to file an information return (T5013).
Are There Any Canadian Taxes for Non-Residents?
While non-resident LP partners don’t face income tax in Canada, payments made by Canadian sources (such as rents, royalties, or dividends) may trigger a withholding tax. In such cases, the third party making the payment to the LP must usually withhold the appropriate tax under Part XIII of Canada’s Income Tax Act. Importantly, even if some of the LP’s partners are residents of Ontario, a single non-resident partner will still activate the withholding tax requirements.
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Who Uses LPs?
LPs are commonly used for a wide variety of business purposes, including:
- Venture capital and private equity investments
- Online businesses, such as website developers and e-commerce platforms
- IT and software companies, including service providers and computer specialists
The LP structure is also an attractive option for those looking for privacy. Partners in an LP can maintain confidentiality about their contributions and identities.
How to Register an LP in Ontario
If you’re thinking of creating an LP in Ontario, there are a few simple steps to follow:
1. Provide a mailing address for your LP’s principal place of business in Ontario.
2. Maintain key records at that address, including:
– A list of partners
– Your partnership agreement
– All partnership minutes and supporting documentation
If your LP doesn’t have a physical office in Ontario, you can designate a representative or agent to handle these records.
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Why You Should Work with a Professional
Setting up an LP in Ontario can seem complex, especially if you’re not familiar with Canadian business laws. That’s why it’s a good idea to consult with legal experts who can guide you through the process and ensure everything is done properly. M7 is specializes in assisting non-residents with creating and registering LPs in Ontario.
By considering an LP, non-residents can access a prestigious Canadian business structure while benefiting from flexible taxation rules and limited liability. If you’re looking to expand your business into Canada, this could be the ideal structure for your needs.
Meet the M7 experts: Adnan Khan, CPA; Matthew Lopes; and Marcos Lopes, PCP — a dedicated team helping businesses navigate complex tax landscapes across North America. Let’s build a future where taxes work for you, not against you. Contact us today to take the first step toward smarter, more profitable tax planning.Â
