Limited Partnerships and SR&ED

Proposals by the US government have called for a reduction of the corporate tax to 15 percent. This includes pass-through businesses that are small/medium size, where businesses pass earnings to their owners who then pay tax at individual rates. In the United States, the availability of multiple types of pass-through business structures are not actively present in Canada.

The only business vehicle that is present (excluding the resource sector) that offers both pass-through tax treatment and limited liability is the Limited Partnership (LP), however, the limited liability of a partner is forfeited by default if he takes control of the business. As a result of this shortcoming, few Canadian startups and firms are willing to use this type of structure, regardless of the tax benefits.

Another limitation of the LP structure is that while many Canadian startups depend on the SR&ED tax credit as a lifeline, this tax credit is usually not available to Limited Partnerships, making it hard for the LP’s in Canada to get adequate funding.

The partnership rule limits many Canadian startups, compared to their American counterparts in respect to the cost and the availability of risk capital. There is a solution for this, although it is yet to be implemented. The Limited Partnerships Act should be amended so as to eliminate the loss of limited liability for the active partners. This would enable the LP’s to develop as legitimate business structures, reducing the competitive advantage of US startups. These amendments would allow more startups, who are integral to growing the economy, to have the necessary resources at the end of the day.