Limited Partnerships in Canada
Limited Partnerships (LPs) are a flexible business structure in Canada, often chosen by investors, real estate developers, or startups that want to share profits without forming a corporation.
But how are LPs taxed? And what are the real pros and cons? Let’s break it down.
What Is a Limited Partnership (LP)?
An LP combines two types of partners:
A general partner, who manages the business and bears unlimited liability.
One or more limited partners, who invest money but don’t participate in management,their liability is capped at their investment.
This setup allows entrepreneurs to run the business while giving outside investors (often individuals or corporations) a way to share in the profits with limited risk.
How Are LPs Taxed?
Unlike corporations, LPs are not separate taxable entities.
They are “flow-through” structures, meaning the LP itself doesn’t pay income tax.
Instead, all income, losses, and capital gains are reported directly by each partner on their personal or corporate tax returns.
This creates two key advantages:
Tax flexibility: Losses can often be used to offset other income (subject to CRA limits).
Character preservation: The nature of income — e.g., business income, capital gains, or interest — flows through unchanged to the partner.
However, there’s a catch:
“At-risk” rules (ITA 96(2.1) – (2.2)) limit the losses a limited partner can claim.
You can’t deduct losses greater than your investment, and any excess is deferred until you reinvest or the “at-risk” amount increases.
Cross-Border & Non-Resident Considerations
If your LP has no Canadian-source income, no Canadian-resident partners, and doesn’t operate in Canada, it generally doesn’t need to file a Canadian return.
But if the LP:
Earns Canadian-source income,
Has assets or revenue over $2 million / $5 million, or
Includes a corporation, trust, or another partnership as a partner,
then it must file Form T5013 — Statement of Partnership Income.
For non-resident partners:
Income earned in Canada may be subject to Part XIII withholding tax (usually 25%, possibly reduced by tax treaty).
It’s crucial that the LP remits any withholding correctly, otherwise, CRA may assess penalties on the partnership itself.
Advantages of a Limited Partnership
Flow-through taxation → profits (and losses) taxed only once.
Limited liability for investors.
Flexible structure for real estate, film, or resource projects.
Loss utilization → early-stage investors can offset other taxable income.
No double taxation → unlike corporations distributing dividends.
Drawbacks & Risks
While LPs offer tax efficiency, they also come with risks:
The general partner bears unlimited liability, unless that role is filled by a corporation.
Limited partners lose protection if they “take part in management.”
CRA can deny partnership losses if the LP resembles a tax shelter or personal venture.
“Phantom income” risk: partners may owe tax on allocated profit even before cash is distributed.
Tip: If you have family or offshore partners, or plan to allocate profits unevenly, make sure your partnership agreement clearly defines capital, loss sharing, and management rights.
GST/HST Rules for LPs
For GST/HST purposes, LPs are treated as separate “persons.”
If annual taxable supplies exceed $30,000, the LP must:
Register for a GST/HST number, and
File GST34 returns (monthly, quarterly, or annually).
Pantax Insight: When to Use an LP
Limited Partnerships are not for everyone, but for the right case, they’re powerful.
They work best when:
You want investors to share in profits without taking control.
The business expects early losses (real estate, resource, or tech startups).
You want to avoid double taxation while keeping flexibility for future growth.
However, if you have non-resident partners, or plan to raise outside capital, consult a tax professional early to structure it right.
Disclaimer
This article provides general information and does not constitute accounting or legal advice.