Category Archives: Cross-border transactions

TAX CONSIDERATIONS FOR NON-RESIDENTS USING CANADIAN LPs

In the past year, I have had a number of inquiries from non-residents looking to register a Limited Partnership (“LP”) in a Canadian province-generally Ontario.

The motivation for doing that is to have an entity that they can use for banking or credit card processing purposes that benefits from the “clean” reputation of Canada.

One firm that is in the business of forming various entities mentioned the following possible uses as well:

  • Regular trading company for doing business in Canada, US, EU and other highly regulated jurisdictions
  • Agent working under Sales Agency Agreement. Principal may be any legal entity including companies registered in low and zero tax jurisdictions
  • Software development and IT support services, when major customers are located in Canada, US and EU
  • Online based businesses (website development, marketing services, auctions, webstores, etc.)

The people who contacted me were not actually interested in doing business in Canada. In effect, the LP would be just a “front” or “façade”.

I am always happy to advise them that, in such situations, they would not be subject to Canadian tax nor would they even have any filing obligations in Canada. This assumes that none of the business is actually carried on in Canada. This is because a LP is not a taxable entity in Canada-all income flow-through to its members. Hence, as long as the LP is not carrying on business in Canada, the members are not, and, this have no tax obligations in Canada.

I might add that I often question whether what they envision would truly be, from a legal perspective, a LP. Although they can register a LP, would it really be one? I am no lawyer, but my understanding is that a partnership is the relation between two or more persons who are carrying on business. If no actual business is being carried on by the LP, I don’t see how it can really be one.

As one Ontario law firm stated in its website:

“Also worth mentioning is that you need to have a partnership before you can have a limited partnership. This means that the basic test for forming a partnership must exist at all times – namely, that one or more parties carry on business in common with a view to profit (see s. 3 of the Ontario Partnerships Act). In Backman v. R., [1997] T.C.J. No. 728, the Tax Court of Canada cited Pooley v, Driver (1876), 5 Ch. D. 460 and Stekel v. Ellice, [1973] 1 W.L.R. 191 to support the proposition that a “partnership” must exist under the Act in order to create a limited partnership in Ontario:

Therefore, the mere act of registration does not create a limited partnership. As one commentator has noted in the context of the Ontario Limited Partnerships Act:

While the Ontario legislation provides that a limited partnership is formed when a declaration is filed with the registrar in accordance with the legislation, this provision does not appear to dispense with underlying requirement that there be a partnership embodying a relationship between persons carrying on business with a view to profit. In other words, registration of a limited partnership will not of itself create the relationship of partnership. Registration simply confers limited liability in respect of the limited partners and renders the partnership subject to the additional provisions of the Act.

Members of a purported limited partnership must share a view to profit in order for their arrangement or relationship to be considered a partnership for the purposes of the Act.

When that case was appealed, the Federal Court of Appeal made the following comments about Alberta Limited Partnerships Act (which is akin to the Ontario Limited Partnerships Act):

‘However, I do not read these provisions as giving the limited partnership some type of existence independent of the requirement to comply with the definition of partnership.

I see nothing in the limited partnership provisions of Part 2 [of the Alberta Limited Partnerships Act] that renders the definition of partnership inapplicable to limited partnerships…’

The firm I quoted above, which offers to form LPs online, even suggested that a “one man” LP could be formed. For the legal reasons discussed above, I seriously doubt that this would actually be the case.

However, with all that said, if the purported LP is just being used for the purposes of created a façade, as indicated, one might say “so what”? Even if it is not legally a LP, it should not really matter.

It would just mean that it is the member(s) of the purported LP that has the account, etc. There still would not be any exposure to Canadian tax.

JULY 18 TAX PROPOSALS WILL ENCOURAGE FOREIGN OWNERSHIP OF CANADIAN CORPORATIONS

On January 15 of this year, I published an article, as part of this Blog, entitled “Wealthy Immigrants to Canada Should Consider Foreign Ownership of Cancos” (see http://taxca.com/blog-2017-1/). The thrust of that article was that better tax treatment of dividends and capital gains might result if family members, who were resident outside of Canada, held shares… Continue Reading

CANADIANS SHOULD THINK TWICE BEFORE USING U.S. 1031 EXCHANGES

Just about everyone who deals with U.S. real estate investments hears about “1031 exchanges” at one time or another. For the few who have not, it is, essentially, a mechanism whereby a gain on the sale of real estate may be deferred for tax purposes by acquiring a new property. Canadians investing in U.S. real… Continue Reading

INTERNATIONAL TAX ASPECTS OF CANADIAN TAX PROPOSALS RE PRIVATE CORPORATIONS

On July 18, 2017, Canada’s Finance Minister Bill Morneau released a document entitled Next Steps in Improving Fairness in the Tax System by Closing Loopholes and Addressing Tax Planning Strategies. This was no surprise-the Minister had hinted at this some months ago at a tax conference. In a nutshell, the Minister, and his many left-leaning… Continue Reading

CANADIANS MOVING TO U.S. WITH CANCOS SHOULD CONSIDER “S CORP. BAILOUT”

Many Canadians who move to the U.S. are the sole shareholders of a Canadian corporation (“Canco”) that is either used for investment purposes, or which has substantial retained earnings generated from an active business. In such cases, they will generally face a Canadian tax hit when they leave (“departure tax”) in the form of a… Continue Reading

CANADIAN EXPATS CAN RECEIVE SALARIES FROM CANADA TAX FREE

Often, a Canadian expat will continue to receive salary payments from a Canadian corporation (“Canco”) after he or she ceases to be a Canadian resident for tax purposes. This can apply to a situation where the sole shareholder of Canco emigrates and still continues to operate Canco. It can also apply to a situation where… Continue Reading

TRUMP CORPORATE TAX CUTS COULD TRIGGER CANADIAN TAX ON DIVIDENDS FROM U.S. SUBS

Shhhh! There is a dirty little secret that not many people know or talk about. A large percentage of U.S. subsidiaries (“Usco”) of Canadian companies (“Canco”) are actually resident in Canada based on traditional rules for determination corporate residency that are mainly derived from UK tax cases. This is because their “central management and control”… Continue Reading

HOW CANADIAN COMPANIES CAN USE EXEMPT SURPLUS TO REDUCE TAXABLE GAINS ON SALE OF FOREIGN SUBSIDIARIES

Envision the following situation: Canco, a private corporate based in Ontario, has just gotten an offer to buy its wholly-owned U.S. subsidiary (“Usco”) for $10 million US. This is far more that the management of Canco thought it was really worth, so they jump at the offer. They ask Joe Numbers, their VP Finance to… Continue Reading

TRUMP’S CORPORATE TAX PROPOSAL MAY HAVE FAPI CONSEQUENCES FOR CANADIANS

Donald Trump’s proposal to lower U.S. federal corporate tax rates to 15% will be welcome news for Canadians who are shareholders of a profitable U.S. corporation (“Usco”). However, in certain cases, the Canada Revenue Agency will have its hands outstretched for a piece of the tax savings. In cases where Usco is a “controlled foreign… Continue Reading

NEW TAX TREATY BETWEEN CANADA AND ISRAEL CLOSES LITTLE-KNOWN LOOPHOLE

On September 23, 2016, I got an email from the Ministry of Finance announcing a new tax treaty between Canada and Israel. The actual posting on the Ministry’s website contained the following statement: “A new Convention between the Government of Canada and the Government of the State of Israel for the Avoidance of Double Taxation… Continue Reading