Amicorp offers the Canadian Limited Partnership
A case study into this effective solution for Mexican clients
Amicorp has considerable experience in offering the Canadian Limited Partnership (LP), a highly prestigious Canadian entity well-regarded internationally. For example, we have found that the Canadian LP is particularly popular among our clientele in Mexico, Brazil and other Latin American jurisdictions, offering tax optimization, as well as other significant advantages which are further explained in this Aminews.
What are Limited Partnerships?
Limited Partnerships are a simple form of business registration in Canada, which creates a Canadian entity. A Canadian LP with foreign members, which does not carry on business in Canada, derives no income on Canadian territory, and are managed and controlled outside of Canada, are exempt from Canadian Federal and Provincial corporation taxes.
The LP, under Canadian law, does not have an existence separate and apart from its partners. They are not considered as a taxable entity and therefore are not required to file corporate tax returns and pay income taxes. It is the founders (“Partners”) who are required to pay taxes from the profits received by the LP in their respective place of residence, in proportions according to the shares of interests belonging to them in the partnership.
For these reasons, the Canadian LP is a useful holding entity for foreign investors investing in non-Canadian properties and businesses because of its Canadian tax transparency.
Canadian LP Key Characteristics
|Registered Office||The Canadian LP will typically have a Registered Office address at a Law firm in Canada.|
|General Partner||Stand-alone Canadian LP: The structure must include a General Partner and a Limited Partner. Please note that at this time, Amicorp will not be offering the services of General Partner.|
|CRS||For CRS purposes, the General Partner may be under a reporting obligation in the jurisdiction where it resides.|
|Supervision by Canada’s Central Bank||Registration of an LP in Canada would trigger little or no supervision from the Central Bank of Canada.|
General Benefits of a Canadian LP
- The general partner has unlimited liability for the liabilities of the LP. Whereas, the limited partner’s liability is limited to the amount of property that it contributes or that it agrees to contribute toward the capital of the LP;
- All profit received by LPs passes through the entity to its partners. Partners, who are not Canadian residents do not have tax liabilities in Canada. If a partner is a Canadian resident, he is required to include his part of profit received through his Limited Partnership into his personal tax return and pay personal income tax;
- There is no withholding tax on the profit passed to partners, who are non-Canadian residents;
- FATCA: Full pack of classification and sponsoring available;
- CRS: reporting is subject to LP’s General Partner’s tax residency.
Other advantages of a Canadian Limited Partnership
- No restrictions on the residency of partners;
- Availability of one-man LP, when one person is a sole general and limited partner; a person may be a general partner and a limited partner at the same time in the same LP. Therefore, just one person is needed for registration of limited partnership;
- There is no minimum authorized capital. Partners can make any contribution to the limited partnership;
- No requirements to file corporate tax returns; and
- There are no audit requirements for LPs.
The standard and prudent practice is to first have the partners enter into a limited partnership agreement. Initially, the limited partnership agreement can be in short-form and subsequently amended and restated when the limited partnership is fully capitalized. After the partners have entered into the limited partnership agreement, a declaration is completed and signed by the general partner who then files it with the Registrar. The information that is disclosed in the declaration is available to the public. The declaration must contain the following information:
- The name of the limited partnership which must include a legal element, such as "Limited Partnership”;
- A description of the general nature of the business;
- The names of the general partners, including the residential address and address for service;
- The principal place of business in the province of the limited partnership;
- The Canadian authorities will proceed to issue a Certificate of Incorporation having been satisfied with the documents submitted. A Limited Partnership effectively comes into existence on the date shown on its Certificate of Incorporation;
- Authorized capital requirements: No minimum capital requirements, however, the standard authorized capital is CAD 1,000 which may be contributed as property but not services.
Financial statements and Reporting obligations
Each Canadian LP must keep appropriate accounting records, and prepare a Financial Statement annually.
Restrictions: Canadian LPs are not regarded as resident for tax purposes in Canada, and therefore are not entitled to take advantage of Double Tax treaties concluded by Canada with other countries.
Reporting Obligations: whilst there are no filing requirements for non-resident partners in Canada, each partner must ensure that any profits received from the LP are disclosed in his or her place of residence in line with the Common Reporting Standards regime as well as, FATCA, should US Indicia be present.
FATCA, IGA’s and Common Reporting Standard (CRS)
Canada and more than 100 countries have signed an IGA with the USA to implement FATCA in domestic legislation, and have committed to implement the Common Reporting Standard (CRS). CRS is resulting in automatic exchange of information between all CRS Participating Jurisdictions on financial accounts held by tax residents in CRS participating jurisdictions. Automatic exchange of information by September 2017; late adopter countries will start CRS per 1 January 2017 with first automatic information exchange by September 2018.
A Canadian LP is considered an entity for CRS purposes. Based on activities and the residence of its partners, the tax residence of the LP needs to be determined in order to identify the applicable CRS jurisdiction. Subsequently, depending upon the CRS Classification, this may require the Canadian LP either to report its account holders (debt and equity owners) to local tax authorities or may require to disclose its controlling persons to banking and other Financial Institutions where it holds an account.
Place of Effective Management (“POEM”) of a Canadian LP
Co-ordination by Amicorp Barbados in setting up the Canadian LP is not determinative that the Canadian LP’s POEM is Barbados. Common law suggests that the POEM of a Canadian LP would typically be deemed to be:
- Where the GP resides; and
- Where business decisions are usually taken. Therefore, as stated above the GP of a Canadian LP must be resident in a non-black listed jurisdiction.
Be cognizant of where the LP resides and evaluate the facts, on a case by case basis based on the structure and business activities of the LP.
The Canadian LP and Mexican Clients
We recognize that the establishment of a Canadian LP in the province of Ontario is preferred for our Mexican clients. Currently, any Canadian LP established in the province of Ontario will have its registered address at a Law Firm based in Ontario. Moreover, it is the preference to appoint a Mexican Company as the General Partner.
As mentioned above, because a Canadian LP is an entity without legal or tax personality, it has fiscal transparency for Mexican tax purposes. Thus, a Mexican resident shall consider as its own, the income acquired by the Canadian LP in the same taxable year in which the income is generated, and shall include said income in their annual tax return.
- There might be no reporting obligations by the UBO in the structure if the General Partner is a Mexican Company and holds the control effect.
- Where there is a tax withholding at the source of the investment that was carried out on behalf of the investor (e.g. the Limited Partner who provides a direct investment to the Canadian LP), the withheld tax could be credited by the investor in their annual tax return.
- No minimum value or limited choice of assets
Further benefits for Mexican clients:
- Under Mexican income tax law a Canadian LP is an entity without legal or tax personality, therefore it has fiscal transparency for Mexican tax purposes. Thus, a Mexican resident shall consider as its own, the income acquired by the Canadian LP in the same taxable year in which the income is generated, and shall include said income in their annual tax return;
- There might be no reporting obligations by the UBO in the structure if the General Partner is a Mexican Company and holds the control effect;
- The Canadian LP allows for tax deferral. Tax will be triggered once the beneficiaries receive the assets/money;
- Gift tax is not applicable for Mexican residents;
- In the case of certain types of assets, the investor could access a reduce interest rate in Mexico (as if they were held under personal title);
- No minimum value or limited choice of assets
POEM and Mexican Clients
Mexican tax law does not give any guidance as to the interpretation of tax residency of foreign entities when those entities do not have their effective place of management in Mexico.