Limited partnerships (LPs) are a flexible form
of business entity commonly used in complex transactions. They
allow an acquirer of an existing business, or developer of a new
project, to seek financing from passive investors and create a
custom structure to run the business. This can be attractive to
passive investors, because they gain access to the financial upside
of the investment, obtain some degree of certainty regarding their
maximum downside, and enjoy the benefits of flow-through profits
Generally speaking, LPs are managed by the general partner, who:
(1) will not share directly in the profits of the LP; (2) is
responsible for managing the business; and (3) transacts on behalf
of the LP (including holding property and signing contracts). Tax
obligations (in respect of income) and tax deductions (in respect
of losses) are flowed-through to the limited partners and not taxed
at the partnership level, which is particularly attractive for
companies in industries where significant write-offs are normal
(such as oil and gas, mining, research and development). However,
limited partners' tax deductions are generally capped to the
extent of their "at-risk-amount" (as governed by the
Income Tax Act (Canada)). In terms of liability, the
general partner has unlimited liability for the debts and
obligations of the LP, while each limited partner's liability
is limited to its capital contribution. These features are
typically further refined by way of a Limited Partnership
Agreement, and in all cases are subject to the partnership laws of
One important qualification is that limited partners cannot
participate in management or control of the business. If they do,
they will gain unlimited liability as if they were a general
partner. The exact wording of this limitation varies in the
partnership statutes of each Canadian jurisdiction, but ultimately
is a factual matter and may not be entirely clear ahead of time.
This can be a major concern for investors, as loss of limited
liability status would fundamentally change the value of the
position they invested in.
An exception to this general rule in Canadian jurisdictions is
Manitoba. The Partnership Act (Manitoba) provides that
where a limited partner takes an active part in the business of the
LP, they only lose their limited liability status if dealing on
behalf of the LP, and only if the other party was not aware that
the limited partner was in fact only a limited partner. In such
case, the limited partner would only be liable for the period of
time starting when they began dealing with the other party and
ending when the other party actually became aware that they were
dealing with a limited partner.
Although these exceptions are technical in nature, a Manitoba LP
reduces the risk that limited partners who play a role beyond that
of a purely passive investor will lose their limited liability
status and become responsible for the debts and liabilities of the
LP. Depending on the nature of your proposed acquisition,
development or other investment, it could be worthwhile to consider
using a Manitoba LP. However, please note that other aspects of
Manitoba LP law are less favourable; for example, the liability of
limited partners for false statements in partnership declarations
and the lower priority of limited partners who are creditors of the
LP. In all cases, expert tax and legal advice should be obtained
based on your specific situation, as the foregoing is a summary of
basic principles only.
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general guide to the subject matter. Specialist advice should be
sought about your specific circumstances.
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Under the Income Tax Act, the Employment Insurance Act, and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions or GST.
Under the Income Tax Act, the Employment Insurance Act, the Canada Pension Plan Act and the Excise Tax Act, a director of a corporation is jointly and severally liable for a corporation's failure to deduct and remit source deductions.
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