Category Archives: Foreign investment in Canada

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

WEALTHY IMMIGRANTS TO CANADA SHOULD CONSIDER FOREIGN OWNERSHIP OF CANCOS

Many wealthy (as well as not so wealthy) immigrants to Canada will establish very successful Canadian corporations (“Cancos”) that will ultimately become extremely valuable. In many cases, those immigrants to Canada will still have family abroad, and might be happy to have equity interests in Canco owned by those family members. In such cases, there… Continue Reading

NON-RESIDENTS INVESTING IN CANADIAN REAL ESTATE CAN CUT TAXES ON CAPITAL GAINS BY PROPER USE OF FORCO

In this troubled, chaotic world we are living in, Canada remains a politically and financially stable locale that is an attractive destination for foreign investment. I have little doubt that, in the years ahead, investment in Canadian real estate by non-residents will continue to be quite substantial. Over the years, I have found that most… Continue Reading

MARCH 22, 2016 CANADIAN FEDERAL BUDGET TARGETS TREATY SHOPPING AND OTHER PERCEIVED ABUSES

For many years now, the Canada Revenue Agency (“CRA”) and the Ministry of Finance seem to have been fighting a losing battle to combat what they perceive to be the abusive use of tax treaties to reduce Canadian taxes. In recognition of the concern regarding this area, the “General Anti-Avoidance Rule” (“GAAR”), found in section… Continue Reading

CANADA’S “BRANCH” TAX ON FOREIGN CORPORATIONS-AN OVERVIEW

A corporation that is not resident in Canada may still be subject to corporate income tax in Canada if it has income from carrying on business in Canada. Such tax is levied under Part I of the Income Tax Act (“the Act”) and if the corporation’s profits are attributable to a permanent establishment (“PE”) in… Continue Reading

CANADIAN TAX ISSUES WITH CROSS-BORDER SHARE EXCHANGES

As a general rule, where a Canadian resident exchanges shares of a corporation for shares of another corporation, that exchange will constitute a “disposition” of the original shares for the purposes of the Income Tax Act (“the Act”), and the “proceeds of disposition” will be equal to the fair market value of the shares received… Continue Reading

HOLDING CANADIAN VACATION PROPERTIES IN A US ENTITY AVOIDS EXPOSURE TO CANADIAN TAXES ON DEATH

Many Americans hold interests in vacation or recreational properties in Canada. Often such properties are intended to be passed on from generation to generation. Canada taxes U.S. residents on capital gains from the sale or other disposition of Canadian real estate, even if such real estate is held for recreational or vacation purposes. Canada’s ability… Continue Reading

HOW CANADA TAXES REAL ESTATE GAINS OF NON-RESIDENTS

  Like many countries. Canada taxes non-residents who realize gains on real estate located within its borders[1]. This will be true whether the real estate is capital property that is held for the purposes of earning from rental or a business; capital property held for personal use; or inventory of a business (e.g. where it… Continue Reading

THE TAX-EFFICIENT WAY FOR FOREIGN BUYERS TO ACQUIRE CANADIAN CORPORATIONS

Envision a situation where a foreign corporation (“Forco”) buys all of the shares of a private Canadian corporation (“Canco”) for $10 million. What happens if Canco generates profits, and Forco would like to use those profits to recover the $10 million cost of its investment in Canco? Can Forco just take funds from Canco up… Continue Reading