Limited Partnership in Canada: A Comprehensive Overview

A limited partnership (LP) in Canada is a partnership with at least one general partner, who manages the business and is personally liable for all its debts, and at least one limited partner, whose liability is limited to what they contributed or agreed to contribute. A limited partner keeps that protection only while staying out of control of the business. An LP comes into existence only once a declaration is filed with a provincial registry. In Ontario that costs $210 and must be renewed every five years. An LP is not a separate legal person the way a corporation is, and its income is taxed in the partners' hands. LPs are common for real estate, investment funds and projects that bring in passive investors.

Limited partnership at a glance (Ontario)

Ready to register? See our limited partnership registration service, or the Ontario LP for non-residents if the partners live outside Canada.

General partners vs. limited partners

General partners

The general partner runs the business: signs contracts, hires and makes decisions. In exchange it has unlimited liability for the partnership's debts and obligations. For that reason the general partner is often a corporation formed only for this role. The corporation is liable without limit, but the people behind it are protected by the corporate shield, subject to personal guarantees they sign.

Limited partners

Under Ontario's LPA (s. 9), a limited partner is liable for the LP's obligations only up to the money and other property they contributed or agreed to contribute. Limited partners:

• share in profits and can have their contribution returned, but not if the payment would leave the LP unable to pay its outside creditors;
• can inspect the books and get full information about the partnership;
• can contribute money and property, but not services (s. 7);
• can advise on management, lend money to the LP, or work for it as an employee, agent or contractor without losing protection (s. 12).

How a limited partner loses protection

A limited partner becomes liable as a general partner if they take part in the control of the business (LPA s. 13). There's a second trap too: if a limited partner's name appears in the LP's firm name, that partner can be liable as a general partner to creditors who didn't know otherwise (s. 6). Keep investors out of management decisions and out of the name.

Is a limited partnership a separate legal entity?

No. Under Canadian partnership law, a partnership, including an LP, is not a legal person separate from its partners. It is a relationship between the partners. The CRA treats a partnership as a separate person only for specific purposes, such as GST/HST. In practice the LP can carry on business and hold property under its firm name, but legal responsibility ultimately rests with the partners, mainly the general partner. If you need a true separate entity, a corporation is the structure that provides it.

Advantages and drawbacks

Advantages

• Liability protection for investors: passive investors can put money in without risking more than their contribution.
• Clear roles: the general partner manages and limited partners invest. That suits funds, real estate syndications and joint ventures.
• Flow-through taxation: income and losses go to the partners.
• Light filings: in Ontario there is no annual return, only a renewal every five years.

Drawbacks

• Unlimited liability for the general partner, unless it is a corporation.
• Limited partners have no say in management without risking their protection.
• More complex than a general partnership: you need a registered declaration, a record of limited partners and a solid partnership agreement.
• Changes in the general partner can end the LP. In Ontario, a general partner's retirement, death or incapacity, or the dissolution of a corporate general partner, dissolves the LP. The exception is when the remaining general partners continue the business under a right in the partnership agreement and with the consent of all remaining partners (s. 21).

How to form a limited partnership in Ontario

Step 1: Choose the partners

Decide who will be the general partner (often a new corporation) and who will be limited partners. A person can be both a general and a limited partner in the same LP. Partners can be individuals or corporations, and they don't need to live in Canada.

Step 2: Choose a name

The word "Limited" may appear in an Ontario LP's name only as part of "Limited Partnership". Don't use a limited partner's name unless it is also a general partner's name.

Step 3: Write the limited partnership agreement

The agreement sets out contributions, profit and loss sharing, the general partner's powers and fees, how partners join and leave, and how the general partner can be replaced, which matters because of the dissolution rule above. Have a lawyer draft it.

Step 4: File the declaration

File a declaration with the Ontario Business Registry, signed by all general partners. The LP is formed when the declaration is accepted. The fee is $210, and online filings are processed immediately.

Step 5: Set up records and tax accounts

• Keep a current record of limited partners at the LP's principal place of business in Ontario. Anyone may inspect it on request (s. 4).
• Get a CRA Business Number and register for GST/HST and payroll accounts as needed.
• Open a bank account in the LP's name.

Step 6: Keep it current

• File a declaration of change when registered information changes. Changes take effect only once filed.
• Renew the declaration before it expires 5 years after filing. A lapsed declaration does not dissolve the LP, but the late renewal costs $360 instead of $210.

Rules differ in other provinces. For example, ongoing filing requirements and renewal periods vary, so check the registry where you file.

Operating an LP from another province in Ontario

An LP formed elsewhere that carries on business in Ontario, for example by soliciting business, having an office or representative, or owning real property there, must file an extra-provincial declaration. It must also appoint, by power of attorney, an Ontario resident or a corporation with its head or registered office in Ontario as its attorney and representative (LPA s. 25).

How limited partnerships are taxed

An LP doesn't pay income tax itself. Its income or loss is calculated at the partnership level and allocated to the partners, who report it on their own returns: a T1 for individuals or a T2 for corporate partners. That is why it's more accurate to say income is taxed "in the partners' hands" than "at the personal level".

• T5013 Partnership Information Return: required if, at the end of the fiscal period, the partnership's absolute revenues plus absolute expenses are more than $2 million or its assets are more than $5 million, or if other CRA conditions apply.
• Non-resident partners: payments to a partnership with non-resident members can attract Canadian withholding tax, and the partners may have to file Canadian returns. Get cross-border tax advice before setting up.
• GST/HST: the LP registers for and collects GST/HST in its own name.

This is general information, not tax advice.

Can an LP become a corporation?

An LP can't "incorporate" itself, because it isn't a separate legal person. Instead, the partners transfer the business and its assets to a new corporation, often using a tax-deferred rollover. Plan this with an accountant. If you're starting from scratch and want limited liability for everyone, compare our guides to incorporating in Ontario and to general partnerships, or read about LLPs.