Limited partnerships are widely used in Ontario (and other Canadian jurisdictions) and have many benefits, including limited liability for limited partners.
However, this benefit is conditional: the Ontario Limited Partnerships Act (the Ontario Act) provides that a limited partner will lose its limited liability status if “the limited partner takes part in the control of the business”. Most other Canadian jurisdictions have legislation governing limited partnerships that contains an analogous provision. Notably, jurisprudence in Ontario and elsewhere in Canada has not yet provided clarity as to what constitutes active control by a limited partner.
Manitoba’s Partnership Act (the Manitoba Act) differs in this respect.1 It provides that a limited partner that takes an active role in the limited partnership’s business will only lose its limited liability status if third parties dealing with the limited partnership are unaware that they are dealing with a limited partner. In such a situation, the limited partner will be liable as a general partner only between the time of first dealing and when the third party becomes aware that it is dealing with a limited partner and not a general partner.
This creates a key benefit to organizing a limited partnership in Manitoba. It means that under the Manitoba Act, in a limited partnership where there is a concern that a limited partner is, or will be, potentially taking part in the control of the business of the limited partnership, the applicable limited partner is able to protect its limited liability status by ensuring that third parties know that they are dealing with a limited partner and not the general partner of the limited partnership, when applicable. This protection extends to limited partners of a limited partnership formed in Manitoba but operating extra-provincially in Ontario since the Ontario Act states that the liability of limited partners in an extra-provincial limited partnership is governed by the laws of the jurisdiction under which the limited partnership is organized.
Industry experts have highlighted for the Ontario government the discrepancy in the scope of limited liability in Ontario as compared to Manitoba. In a June 2015 report, the Business Law Agenda Stakeholder Panel (the Panel) – a volunteer panel of expert corporate and commercial lawyers and academics – delineated areas of Ontario’s corporate and commercial laws that could be modernized. Among the recommended areas of review were the limited liability provisions in the Ontario Act. The Panel recommended to reduce the risk faced by limited partners of losing their limited liability if they take part in “control” of the business.
In March 2016, the Ontario government created a Business Law Advisory Council (the Advisory Council) to review Ontario’s corporate and commercial laws and to make recommendations for modernization based on the Panel’s June 2015 report. The Advisory Council came out with its most recent report in Fall 2016, published in March 2017. That report did not review the Ontario Act. For the time being, the difference in the limited liability provisions in the Ontario Act and the Manitoba Act still stands.
Despite the benefit in terms of protection of limited liability in Manitoba, there are potential drawbacks associated with forming a limited partnership in Manitoba instead of Ontario.
- Increased costs: Forming a limited partnership in Manitoba to operate as an extra-provincial limited partnership in Ontario has additional costs. For example, there are costs associated with extra-provincial registration (if the general partner is not a Manitoba corporation) and maintenance of the filings in both provinces, as well as costs for the involvement of Manitoba counsel.
- Public disclosure: There is a requirement in Manitoba that the identity and amount of capital contributed by limited partners be publicly disclosed. There is no corresponding requirement in the Ontario Act.
- Liability for false or misleading statements: The Ontario Act stipulates that limited partners will be liable for false or misleading statements in a certificate or declaration only if they made the statement or became aware that the statement was false and misleading and failed to change it within a reasonable amount of time. In contrast, the Manitoba Act states that both general partners and limited partners are liable to any person who suffers loss as a result of a false statement in a partnership declaration.
- Liability if the limited partnership’s name includes a limited partner’s name: While the Ontario Act allows part of a limited partner’s name to be used in the name of the limited partnership if it is also found in the name of the general partner, the Manitoba Act imposes unlimited liability on a limited partner whose name appears in the name of the limited partnership.
- Priority of creditors: In the event of bankruptcy or insolvency of a Manitoba limited partnership, creditors have priority over limited partners. Subject to certain restrictions regarding collateral security and preferential treatment of persons who are not partners of the limited partnership, the Ontario Act states that a limited partner that is a creditor of the limited partnership may receive a prorated share of the assets along with general creditors.
- Dissolution: In the event of dissolution, the requirements for a Manitoba limited partnership are more onerous than those in Ontario. In Ontario, the only requirement is that a declaration of dissolution be filed. In Manitoba, it is also necessary to publish a notice of intention to dissolve the limited partnership in the newspaper.
While there is a benefit associated with forming a limited partnership in Manitoba to operate as an extra-provincial limited partnership in Ontario, this benefit must be considered in light of the costs and implications discussed above.2
1 McCarthy Tétrault LLP lawyers do not practise Manitoba law and the observations presented herein are based on their research and understanding from structuring inter-provincial deals.
2 The foregoing does not constitute legal advice. In order to obtain specific legal advice, please contact Matthew Cumming, Nicole Rumble or another member of McCarthy Tétrault LLP’s Business Law Group.