Author Segal LLP

Is a Limited Partnership Right for You?

When you start a business, a key first step is to choose the form of business organization that most suits your business plan. Two of the structures you will likely consider are the corporation and the limited partnership.


Questions to Help You Decide

Deciding which type of business structure to use can be difficult.

Some questions to ask when choosing among various business structures include:

1. How easy and costly is the form of business structure to organize?

2. How much capital will the business need?

3. How much capital will come from owners and how much debt financing will be needed?

4. What are the tax implications of each business structure?

5. How much personal involvement should the owners have in controlling and managing the business?

6. How much risk and liability for the business should the owners assume?

Discuss these questions and other aspects of setting up a business with your accountant.

Both entities are alike in that they each can be owned by several people. But that is typically where the similarities end. Partners in a limited partnership face issues that are diametrically different from those shareholders of a corporation must deal with and the main reason many people choose that form of partnership is tax liability.

Limited partnerships are often used where investors want the special tax treatment without incurring personal liability for all the partnership’s debts.

Limited partnerships generally are taxed on a flow-through basis. That means the partnership doesn’t pay tax on its income and doesn’t file an income tax return. Instead, the partners file their own income tax returns to report their share of the partnership’s net income or loss.

Any income the limited partnership earns is directed to and taxed in the hands of the partners. As well, any losses are allocated among the partners and may become deductions for each partner.

Limited partners are restricted in their ability to deduct losses and in aggregate can’t deduct losses that exceed the amount they have invested. This restriction can be less than the amount invested if the partner bought their interest from a former partner and not the partnership.

This requirement for each partner to report his or her share of the partnership’s net income remains whether the share of income was received in cash or as a credit to a capital account in the partnership.

Limited partnerships are used, for the most part, as a method for structuring tax driven investment ventures. If the investment is tax driven, the limited partnership may have to register with the Canada Revenue Agency as a tax shelter.

In a corporate structure, on the other hand, the company is a separate taxable entity and pays its own taxes. Profits paid to shareholders as dividends are also taxable. This double taxation is one of the disadvantages of forming a corporation.

Other advantages of limited partnerships include:

Liability: When a limited partnership is formed, one of the partners (usually a corporation with no assets, formed and controlled by the promoter of the investment for this sole purpose) is designated as the general partner and all other investors are usually designated as limited partners. The partnership agreement then makes the general partner responsible for managing the business of the partnership. The limited partners are simply silent investors with little or no say in the business activities of the partnership.

In the event the limited partnership is unable to meet its obligations, only the general partner will be liable for the debts of the partnership. The liability of a limited partner would be limited to the amount of capital the limited partner invested in the partnership. However, if the limited partner participates in the management of the partnership, that partner would lose his or her limited liability and may become liable for the debts of the partnership, the same as the general partner.

In a corporation, shareholders can be held liable only for the amount that they invested in the company.

Management: In partnerships, the management structure is decided by the partners. Legally, a corporation must be managed by a board of directors elected by the shareholders.

Life Cycle: Limited partnerships depend on the active participation of the general partner and contributions from the others. As a result, the entities’ life cycles are limited. When the general partner dies, the partnership terminates.

Limited partnerships are usually created for one business reason or to invest in businesses. It is often difficult to transfer ownership because it is generally necessary to create a new partnership.

A corporation, on the other hand, has a virtually unlimited life cycle. Because ownership is spread among shareholders, it can be easily transferred. And if a manager dies or quits, the company can easily recruit a new one.

Record-keeping: A partnership typically isn’t required to keep records of its meetings and other administrative activities. A corporation must keep those records of these activities.

Structure: Limited partnerships must have at least one general and one limited partner. The general partners control the daily management while the limited partners generally have little control over management decisions and primarily finance the organization.

Corporations are separate legal entities usually owned by one or more people or other organizations. Typically the owners, or shareholders, elect a board of directors. That panel, in turn, hires a management team.

Essentially the board runs the organization in the interest of shareholders. To do this, it follows the company’s bylaws, which are the rules that govern how the business should be managed.

Consult with your advisor, who can help you decide the best business structure for your needs.

Take Advantage of the Super Tax Credit

If you haven’t claimed a donation tax credit since 2007 you may want to take full advantage of the First-time Donor’s Super Credit (FDSC).


Alternatives To Cash Gifts

Donations of Public Securities: If you have stocks or bonds, it is more efficient to donate the investment directly as this will eliminate the capital gain.

Flow-Through Tax Shelters:  If you entered into any flow-through agreement after March 21, 2011, the tax benefit relating to the capital gain is eliminated or reduced. Consult with your accountant to help ensure you don’t create an unwanted capital gain.

Estate Plan Donations: If you worry that you may at some point have to deal with medical costs or simply cover daily living expenses, you can make a bequest in your will. Donation bequests are deductible on your final tax return. For deaths that occur after 2015, donations made by will and designation donations will no longer be deemed to be made by an individual immediately before the individual’s death. Instead, these donations will be deemed to be made by the individual’s estate and where certain conditions are met, these donations will be deemed to be made by the individual’s graduated rate estate.

The nonrefundable credit is a one-time deal and adds 25% to the normal Charitable Donation Tax Credit (CDTC). To maximize this tax break you may want to avoid claiming smaller donations in the years you make them and instead carry them forward over the five years the temporary credit is available until they add up to a $1,000 threshold.

The super credit is available to you if neither you nor your spouse of common-law partner has claimed a charitable credit since 2007. You may have made charitable donations since 2007, but as long as you didn’t claim a credit for them, you remain eligible for the super credit.

The $1,000 limit applies to individuals and couples; there is no doubling of the credit. If you share your super credit in a particular year, the total amount claimed can’t exceed the maximum allowable credit. There is no age limit on eligibility.

Gifts of property don’t qualify for the super credit. Donations of property, including investments, will normally qualify for the charitable donation credit, but for donations to earn the super credit they must be made in cash only.

Also, the credit’s restricted to individual taxpayers. Corporations making donations for the first time won’t be eligible. They will be limited to the tax deduction typically available for corporate donations.

For income tax purposes, the first $200 of charitable donations qualify for the 15% CDTC and gifts over that amount qualify for a 29% credit. The super credit boosts those federal tax breaks by an additional 25% on all donations up to the $1,000 limit.

The super credit effectively adds 25% to the rates used to calculate the normal refundable tax credit for as much as $1,000 of monetary donations. That means first-time individual donors are allowed a 40% federal credit for donations of $200 or less, and a 54% on amounts exceeding $200 but not exceeding $1,000.

Example 1 – All cash: A taxpayer eligible for the credit claims $500 of charitable donations. All of the gifts are donations of money. The taxpayer’s federal super and normal charitable credits would be calculated as follows:

First $200 of donations claimed $200 times 15% = $30
Donations exceeding $200 $300 times 29%  = $87
First-Time Donor’s Super Credit $500 times 25%  = $125
Total of both credits     $2421

Example 2 – Mix of cash and investments: An eligible first-time donor claims $700 of charitable donations, but investments make up $400 of the total. Deducting that amount from the total leaves a cash donation of $300. The federal credits would be calculated as follows:

First $200 of $300 donations claimed  $200 times 15%  = $30
Donations exceeding $200 $500 times 29%  = $145
First-Time Donor’s Super Credit $300 times 25%  = $75
Total of both credits $2501

Consult with your advisor on how best to use this tax credit.

1. Provincial credits would increase these amounts.

Important Tax Figures for 2017

121516_thinkstock_587889772_thmb_kwThe following chart shows changes in important federal tax information for 2017 from 2016. Some of the figures are unchanged, some are indexed to inflation and others changed because of legislation.

Pension Contribution Limits 2017($) 2016($)
Registered Retirement Savings Plan 26,010 25,370
Money Purchase Registered Pension Plan 26,230 26,010
Deferred Profit Sharing Plan 13,115 13,005
Tax Free Savings Account (TFSA) unchanged 5,500
TFSA Cumulative Total 52,000 46,500
Canada and Quebec Pension Plan (CPP/QPP) 2017($) 2016($)
Maximum Pensionable Earnings 55,300 54,900
Employee/Employer Contribution Limit 2,564.10 2,544.30
Self-Employed Contribution Limit 5,128.20 5,088.60
Quebec Maximum Pensionable Earnings 55,300 54,900
Quebec Employee/Employer Maximum 2.797.20 2.737.05
Quebec Self-Employed Contribution Limit 5,594.40 5,474.10
Non-Refundable Tax Credits (Base Amount) 2017($) 2016($)
Personal/spousal/equivalent to spouse 11,635 11,474
Age Amount (65+ years of age) 7,225 7,124
Net Income Threshold 36,430 35,927
Disability Amount 8,113 8,002
Caregiver 4,723 4,668
Infirm Dependent 6,883 6,787
Medical Expense (3% of net income ceiling) 2,268 2,237
Eligible Adoption Expenses 15,669 15,453
Old Age Security Repayment Threshold 73,756 72,809
Children’s Fitness Maximum N/A  500
Children’s Art Maximum N/A 250
Employment Amount 1,178 1,161
Federal Dividend Gross Up (non-eligible payouts) Unchanged 17%
Employment Insurance Maximums 2017($) 2016($)
Employee Premium (Federal) 836.19 955.04
Employee Premium (Quebec) 651.51 772.16
Employer Premium (Federal) 1.170.67 1,337.06
Employer Premium (Quebec) 912.11 1,081.02
Maximum Insurable Earnings (Federal) 51,300 50,800
Maximum Insurable Earnings (Quebec) 51,300 50,800
General Federal Corporate Tax Rates

(after federal abatement and M&P rate reductions)

2017(%) 2016(%)
General M&P Income unchanged 15
General Active Income unchanged 15
Investment Income unchanged 15
CCPC Tax Rates (after federal abatement, small business and rate deduction and refundable tax) 2017 (%) 2016(%)
Income up to $500,000 unchanged 10.5
General Active Business Income unchanged 15
Investment Income unchanged 38.7
Marginal Federal Tax Bracket Thresholds 2017($) 2016($)
Taxable income above which the 20.5% bracket begins 45,916 45,282
Taxable income above which the 26% bracket begins 91,131 90,563
Taxable income above which the 29% bracket begins 142,353 140,388
Taxable income above which the 33.0% bracket begins 202,800 200,000

Get Up to Speed on Your Financial Status

Polls often suggest that many Canadians don’t have a firm understanding about their finances and maintain some misconceptions about credit.


The Low Down on Credit

To get a better handle on your debt, it helps to know how financial institutions calculate the charges on your monthly credit card statement.

If you always pay the amount owed by the due date, you pay no interest at all. But if you carry over balances, there are differences in charges for various transactions:

  • Cash advances and balance transfers carry interest from the moment you make the transaction. There is no interest-free period.
  • Old purchases are unpaid transactions from a previous statement. On these, you are charged interest either from the date of the transaction or the date the purchases are posted to your account, until they’re paid in full.
  • New purchases can be interest-free under certain conditions. The interest-free period has two parts: The time between the purchase and your statement date, and the time between your statement date and your payment due date. This grace period can vary from 19 to 26 days.

Read the fine print when you take out a new credit card, use the ones you have, or take advantage of low introductory offers.

Not knowing how your rates are calculated can cost you more than you realize.

To protect your credit rating, many financial specialists recommend making the highest payment you can on credit cards, make all payments on time, and avoid signing up for multiple credit cards.

Other information that is critical to maintaining a healthy credit standing includes knowing that:

  • You are responsible for joint accounts and co-signed loans. Activity on those accounts shows up on your credit report.
  • Paying off a negative record doesn’t completely remove it from your credit report. Collection accounts, late payments and bankruptcies can remain on your report for as long as ten years, even if the bills are paid off.
  • Checking your credit reports will not lower your credit score and is a good way both to monitor your credit, find errors, and reduce the chances of identity theft.
  • Changing old accounts can actually lower your credit score rather than improve it. When you close old accounts, you shorten your credit history and that can actually lower your credit score. If you want to close your accounts, start with the newer accounts to help preserve your long established credit history.

Among other things, surveys have shown that many Canadians don’t have a household budget and don’t know their credit rating, a key tool in managing finances and debt. Moreover, Canadians who have credit cards often lack such critical knowledge as the annual interest rate they pay on their most-used card and that credit reports contain information about every loan, credit card, line of credit, mortgage or fault of payment incurred. (Equifax Canada and TransUnion Canada will provide a free copy of your credit report by mail or online for a small fee.)

Moreover, sizable numbers of Canadians don’t consider the effect changing interest rates will have on their borrowing costs.

This lack of understanding along with certain misconceptions about credit can hurt your credit score, which determines your ability to borrow, cost you thousands of dollars in unnecessary extra payments, and hinder your ability to save (see right hand box for some of the common misconceptions).

Assessing Your Situation

Two tools are critical in helping you evaluate your current financial situation and, when prepared and reviewed annually, they can help keep you on track toward your financial goals.

With the help of your accountant, work up a net worth statement and a spending analysis. You may then also want to work out a budget.

The net worth statement lists your assets and liabilities. The difference between them is your net worth. The statement should include all assets including retirement plan balances, personal property, jewelry, and household items. Value the assets at the price they could fetch now.

Once the statement is prepared, review it with your accountant and discuss the following:

1. Your ratio of assets to liabilities: A ratio of less than one to one indicates you have more liabilities than assets and a negative net worth. If that is the case, talk to your accountant about steps to take to cut your liabilities. As your debt declines, the ratio should increase. Ideally, the ratio should be at least two to one or greater.

2. Net worth growth compared to inflation: Growth in your net worth should outpace inflation. If it isn’t, determine why and take steps. Otherwise inflation is just eating away at your net worth.

3. Good vs. bad debts: The amounts and types of debt you have weigh heavily on your financial health. Mortgages are typically used to purchase items appreciating in value and are generally considered “good” debt. Credit card balances and auto loans finance items that typically don’t appreciate and should be kept to a minimum.

4. Liquid vs. nonliquid assets:Nonliquid assets such as a home and other real estate, jewelry, and works of art may increase in value but be difficult to sell quickly at full market value. Liquid assets such as bank accounts and stocks are more easily converted to cash. You want enough of them to cover emergencies.

Once you have a handle on your net worth, analyze your spending patterns and identify ways to increase savings, if necessary.

Start with a cash flow statement that details all sources of income over the past year and all expenditures by category.

Divide the expenditures among:

1. Fixed and essential expenses (such as housing, insurance, taxes and savings),

2. Variable and essential expenses (such as food, medical care and utilities), and

3. Discretionary expenses (such as entertainment, clothing, and charitable contributions).

Cancelled cheques, credit card receipts, and tax returns can provide much of the needed information. If you are unable to account for large sums of money, keep a journal of all expenditures for a month or so.

The spending analysis could lead you to decide you need a budget to help guide you toward your financial goals. Points to consider include:

  • Make conscious spending decisions. Don’t just assume you’ll spend the same amount as last year.
  • Prepare a flexible budget. Unexpected expenditures are bound to happen and your budget should incorporate that possibility.
  • Budget for large, periodic expenditures, such as tuition or insurance premiums.
  • Don’t try to be too exact. All family members should have a reasonable personal allowance that can be spent without accounting for it.
  • Periodically compare actual expenditures to your budget to ensure you stay on track.

Prevent Data Leaks at Your Organization

Staunch Electronic Leaks


Just as soldiers and government employees can electronically download and distribute secret and confidential information, so can employees who have access to electronic data, in any workplace.

Today’s digital storage of information and electronic communication simply makes it easier and faster to disclose substantially more. Some individuals who transfer confidential, private and secret information for worldwide dissemination may be motivated by noble intentions. They believe in the best interest of everyone by blowing the whistle on a company. But the greater risk for private companies comes from disgruntled employees and those about to be fired.

Many of these employees are disengaged from their jobs. Think of them as the employees who are present in the workplace, but absent from their work. Employee disengagement is a major risk for theft and distribution of unauthorized data — especially among IT employees. The more access an employee has to information at your company, the greater the risk.

Warding off Data Theft

There is no absolute 100% secure way to prevent all possible breaches of, theft of, and accidentally unauthorized distribution of private, secret, personal, and confidential information. However, there are many steps that businesses and organizations can take to defend against leaking and other types of data theft and unauthorized information distribution.

Here are ten steps to secure private, personal, confidential and valuable data:

1. Establish and nurture a culture of trust and fairness among employees.

2. Develop hiring procedures that:

  • Attract the kinds of people who want to work for you and who want to perform well in their jobs.
  • Place the people in the jobs they are most qualified to do. By matching the right applicants (those with values and expectations that fit your culture) to the right jobs (that make use of their talents), you increase the chances employees are engaged in their work and loyal to your organization.

3. Tighten internal electronic data access control. Information should be provided to employees only on the basis of need.

4. Destroy, on a regular maintenance schedule, older stored data that is no longer deemed necessary. Consult with your attorney and your accountant to develop guidelines and a schedule so that deletions conform to legal and accounting requirements.

5. Monitor employees’ electronic activity and investigate abnormal behavior. Look for access during non-work hours, large downloads and employees who obtain information that may not be required.

6. Proactively track who is accessing what information on the network. Compare the activity to what individuals should be accessing. Many organizations also scan outgoing and incoming e-mail. Audit the information employees are accessing remotely and the data being turned over to outsiders, third-party individuals, companies and contractors.

7. Overlap the responsibilities of multiple employees, who work with (or have access to) sensitive data, so they can observe each others activities. This would be similar to having two or more employees overlapping in dealing with financial recordkeeping to decrease the opportunities for embezzlement.

Having multiple employees overlapping duties is a must for any organization committed to data security. No one person in the IT team should have sole responsibility for a given system, platform or application. This requires cross-training of individuals and ensuring that the individuals regularly rotate responsibilities.

8. Adopt written policies and procedures about use of, and access to, your electronic and digital equipment and systems. The policies and procedures need to deal with what is allowed, what is prohibited, and the consequences if an employee misuses or wrongfully distributes information, records, and documents. Distribute the policies and procedures to all employees and obtain their signatures verifying they received, read, and understand the policies.

9. State clearly in the policies that former employees will no longer have access to private, sensitive, and confidential information. This especially means that former employees are not given access to employer-issued or employer-owned computers, laptops, other data-bearing devices, or paper documents.

10. Communicate regularly, at least once a year, these policies and procedures to all employees.