Canadian limited partnerships as a trading solution

A Canadian Limited Partnership is one of the individualised corporate solutions offered by Confidus Solutions. Canadian LP company is a flexible legal vehicle, used in number of classical corporate structures. One of the most efficient ways to utilize Canadian LP - is creating a trading company structure, this would allow for tax and cost minimization, while not being considered an offsopre jurisdiction.

Limited partnerships in general

The popularity of limited partnerships is easy to understand in today’s business environment. In many jurisdictions, limited partnership structures are designed to be tax transparent. The general partner is responsible for the management of the company and is the only partner with unlimited liability. Each limited partner’s liability is restricted to his or her capital contribution and any undrawn profit. Partnerships can be formed by verbal or written agreement, although written agreements are always preferable.

The most popular jurisdictions for forming limited partnerships are Scotland (under the Limited Partnership Act 1907) and Canada (under the Partnership Act of each of the country’s provinces: Alberta, British Columbia, New Brunswick, Ontario and Saskatchewan).

The Canadian LP as a trading solution

Both Scottish LPs and Canadian LPs are widely used for intermediate trading. Both have advantages and disadvantages that must be considered individually for each type of business.

canadian flag with a city landscape in background

Theoretically, Scottish LPs can be registered for VAT and treated in the same way as any EU company for VAT purposes. However, Scottish limited partnerships are typically designed for carrying out activities outside the UK. Moreover, if they have partners who are domiciled offshore, such structures are unlikely to receive a UK VAT number.

On the other hand, as Canada is located outside the EU, Canadian LPs can basically bypass the question of VAT registration.

Tax-transparent entities in Scotland and Canada presume that no business activities are carried out in the UK or Canada respectively. Therefore, a Scottish LP cannot enter into an agreement with another UK-registered entity. At a time when Scottish and UK structures are clearly being overused, a Canadian LP offers a fresh alternative for business owners. Sales agreements between Canadian LPs and UK entities are permitted; however, we should stress again that tax-transparent Canadian LPs cannot sign contracts with other Canadian companies.

Other differences to consider between Scottish and Canadian LPs:

Legally, the Scottish LP is a distinct legal entity, separate from all its members (by definition, those who have entered into a partnership are a firm). The Limited Partnership Act 1907 states this fact very clearly. On the other hand, the Canadian Partnerships Act for the relevant province must be reviewed thoroughly to check the legal personality status of your Canadian LP.
Scottish LPs are generally easier to set up, less time consuming and more flexible in terms of incorporation and administration.
As your business will most likely involve international agreements, customs and banks in different countries, remember that Canada is not a signatory to the Hague Convention, also known as the Apostille Convention. This means that you might need to go through inconvenient procedures involving notarial acts and have public documents legalised by the Canadian Ministry of Foreign Affairs and subsequently by the consulate of the receiving jurisdiction.
Note that neither Scottish nor Canadian LPs formed of non-resident partners can obtain a certificate of tax residence or benefit under any double taxation agreement.

Advantages of trading through a Canadian LP

Once the above challenges have been overcome, the ease of trading through a Canadian limited partnership becomes obvious:

A Canadian LP is not subject to corporation tax, because it is not a body corporate for Canadian tax purposes.
The LP itself is not subject to Canadian taxation; partners are instead assessed based on their share of the profits. Therefore, if the partners are not Canadian residents, there is no Canadian source income and no Canadian income tax is payable.
There is no obligation to file an annual financial statement.

Summary

A Canadian limited partnership is a cost-effective, tax-free entity that can be used tax efficiently in trading structures, especially where all activities take place outside of Canada. In summary, a Canadian limited partnership lends a reputable and prestigious image to international structures without incurring Canadian taxes.