Limited Partnership

A limited partnership (LP) is a hybrid business structure that combines elements of a general partnership and a corporation. Like a general partnership, it is governed by partnership principles and its income flows through to partners for tax purposes. Like a corporation, it offers limited liability — but only to a defined class of passive investors known as limited partners.

Ontario limited partnerships are created under the Limited Partnerships Act, RSO 1990, c L.16 (LPA). Unlike general partnerships, which arise automatically by conduct, a limited partnership can only be formed by registering a declaration under the LPA.

The LP structure has two classes of partners:

General partner (GP): Bears unlimited personal liability for the debts and obligations of the LP. The GP manages the business and makes all operational decisions. The GP is typically a corporation (incorporated for the sole purpose of serving as GP) to limit the ultimate liability exposure.

Limited partners (LPs): Passive investors whose liability is limited to the amount of their capital contribution. They do not participate in management. If a limited partner becomes involved in managing the LP's business, they lose their limited liability protection (the "control test" under Section 13 of the LPA).

Unlike a general partnership, a limited partnership cannot arise informally — it must be created through a formal registration process.

Under Section 3 of the LPA, a limited partnership is formed by filing a Declaration with the Registrar. The Declaration must include:

• The name of the limited partnership (which must include "Limited Partnership" or "LP")
• The general nature of the business
• The name and address of each general partner
• The amount of cash and the nature of other property contributed (or agreed to be contributed) by each limited partner
• When the contribution is to be made
• The share of the profits that each limited partner is entitled to receive
• The time the LP is to commence and the duration (or if it is for an indefinite period)
• The right of a limited partner to substitute an assignee as a limited partner
• The right to admit additional limited partners
• The right of one or more limited partners to withdraw their capital

The Declaration is filed with the Ontario Ministry of Public and Business Service Delivery. The filing fee is $210. The LP comes into existence upon the issuance of the Certificate of Limited Partnership.

Any changes to the above information must be registered by filing a Declaration of Change within 15 days of the change (LPA, s. 3(4)).

The distinction between general and limited partners is fundamental to the LP structure:

General Partner: - Has unlimited personal liability for all LP debts and obligations - Manages the LP's business and has actual authority to bind the LP - Owes fiduciary duties to the LP and its limited partners - In practice, the GP is almost always a corporation (e.g., "XYZ GP Corp.") to insulate the controlling individuals from personal liability. The corporation itself is then the unlimited liability entity, but its shareholders are protected by corporate limited liability.

Limited Partners: - Liability is limited to the amount of their capital contribution (LPA, s. 9) — they cannot lose more than they put in - Cannot participate in management — this is the cardinal rule of the LP structure - The LPA provides a list of activities a limited partner may engage in without being considered to be taking part in the management of the LP's business (LPA, s. 13(3)), including: voting on fundamental changes, reviewing partnership accounts, being a contractor for the LP, advising the GP, and attending meetings - If a limited partner participates in management beyond the permitted activities, they become personally liable for LP obligations to the extent they were involved in management (LPA, s. 13(1))

The control test: Whether a limited partner has crossed into management is fact-specific. Courts look at the substance of the involvement — a limited partner who is effectively running the business will not be protected by the LP label.

The limited partnership structure is particularly well-suited to investment vehicles where passive investors provide capital and a sophisticated manager operates the business. Common Ontario applications include:

Real estate syndications: A developer (or developer's GP corporation) acquires and manages a property portfolio. Investors contribute capital as limited partners. The LP structure provides flow-through tax treatment (depreciation and losses pass to investors personally) and liability protection for passive investors.

Private equity and venture capital funds: PE and VC funds in Canada are almost universally structured as limited partnerships. The fund manager is the general partner (typically through a management company). Pension funds, endowments, and high-net-worth individuals invest as limited partners. This structure provides: flow-through tax treatment to investors (important for tax-exempt investors like pension funds who want to avoid UBTI-equivalent issues), liability protection for LPs, management control for the GP, and flexibility in profit-sharing through the limited partnership agreement.

Oil and gas exploration: Resource exploration programs frequently use LP structures to pass exploration expenses (Canadian Exploration Expenses and Canadian Development Expenses) through to investors who can apply them against their personal income.

Film and entertainment: Film tax credit programs and content production vehicles often use LPs to flow financing losses and tax credits to investors.

Family investment structures: High-net-worth families sometimes use LPs to hold investment assets, facilitating estate freeze strategies and income splitting (subject to TOSI rules).

Like general partnerships, limited partnerships are not separate taxpayers — the LP files an information return (T5013) but does not pay income tax. Each partner's allocated share of the LP's income, loss, deductions, and credits flows through to their own tax return.

Flow-through losses: This is often the most commercially significant tax feature of LPs used as investment vehicles. Losses, deductions (such as CCA on real property or resource deductions), and tax credits generated at the LP level flow through to limited partners in proportion to their LP interest. Limited partners can apply these losses against other income on their personal returns, creating an immediate tax benefit.

At-risk rules: The Income Tax Act limits the losses a limited partner can deduct to their "at-risk amount" — broadly, the amount of capital actually at risk (ITA, s. 96(2.1)-(2.7)). A limited partner cannot deduct losses in excess of the amount they could actually lose. This prevents artificial loss creation through LP structures.

Passive activity: For limited partners who are corporations, LP income may be characterized as "passive" income, potentially affecting access to the small business deduction.

Allocation of income: The LP agreement governs how income, losses, and distributions are allocated among partners. Allocations need not be proportional to capital contributions — the agreement can create preferred returns, carried interests, and other economic arrangements, subject to the ITA's allocation rules.

While the LPA and the filed Declaration establish the LP's legal existence, the limited partnership agreement is the governing document that defines the rights and obligations of the partners.

Key provisions in a limited partnership agreement include:

Capital commitments and drawdowns: How much each LP commits to invest, and when capital is called.

Profit distribution (waterfall): The order in which cash distributions are made — typically: return of capital to LPs first, then preferred return to LPs, then carried interest (performance fee) to the GP, then remaining profits split between GP and LPs.

Carried interest: The GP's share of profits above the preferred return threshold — typically 20% in private equity and VC, 10-20% in real estate funds.

Preferred return (hurdle rate): The minimum return LPs receive before the GP earns carried interest — typically 6-8% in real estate, 8% in PE.

Management fees: Annual fee paid to the GP for managing the fund — typically 1.5-2% of committed capital in PE.

GP removal: Limited partners typically have the right to remove the GP for cause (fraud, gross negligence, material breach) and sometimes without cause (by supermajority vote).

Transfer restrictions: LP interests are typically not freely transferable — GP consent is required, and the LP agreement specifies the transfer process.

Term: Investment LPs typically have a defined 7-10 year term with optional extension periods.

Priya is a real estate developer who wants to acquire a $10 million apartment building in Hamilton. She incorporates Priya GP Corp. as the general partner and forms "Hamilton Residential LP" by filing a Declaration under the LPA.

Priya raises $4 million from 20 investors, each contributing $200,000 as limited partners. The LP borrows the remaining $6 million from a bank (with Priya providing a personal guarantee as the GP's principal).

The LP agreement provides: - 8% preferred return to limited partners on their contributed capital - After preferred return, 80% to LPs / 20% to GP (Priya's carried interest) - Annual management fee of 1.5% of invested capital to Priya GP Corp.

The limited partners enjoy limited liability — their maximum loss is their $200,000 investment. CCA deductions on the building and interest expenses flow through to each LP's personal tax return. Priya retains full control through Priya GP Corp., and her personal exposure is managed through the corporate GP structure.