The Canadian Limited Partnership for digital nomads is a structure that could help you with your tax structuring. In a previous article, we already discussed the option to set up a US Limited Liability Company and the potential benefits for digital nomads. The Canadian Limited Partnership for digital nomads works similar to a US LLC. Therefore, I decided to dedicate a specific article to it.
Canadian Limited Partnership for digital nomads: what is it?
As the name suggests, we are talking about a partnership here. For a partnership you at least need two parties involved. For the Canadian Limited Partnership for digital nomads this means you need at least one general partner and one limited partner.
The general partner runs the partnership on a day to day basis and operates the business. Furthermore, unlike the US LLC, the limited partnership isn’t seen as a separate legal entity. Therefore, any liabilities from the business fall back onto the general partner. Basically, the general partner is accountable with his private estate for the liabilities of the partnership. Of course, it depends on the nature of your business what this actually entails. For example, as a freelance marketing consultant, your liability might be rather limited to start with. From a liability perspective, for the general partner, you can compare it with setting yourself up as a sole trader.
The limited partner, as the name suggests, his liability is limited to what he contributed to the partnership. So, the private estate of the limited partner can’t be held accountable for any liabilities of the partnership. Therefore, in a traditional setup, the limited partner mostly operates as a more passive investor.
The law does not require that the general partner and the limited partner need to be separate persons. Therefore, one and the same person can take on both roles. This is ideal for digital nomads who don’t want to involve any other person in their business.
Canadian Limited Partnership: taxes
In the end, we are talking about taxes. So, let’s have a look at the tax implications of using a Canadian Limited Partnership.
Canadian taxes on Canadian Limited Partnership for digital nomads
In Canada the Limited Partnership is a pass-through or tax transparent entity. This means that Canadian Limited Partnership will not pay any (corporate) income taxes itself.
When the Canadian Limited Partnership for digital nomads doesn’t receive Canadian source income and the partners aren’t tax residents of Canada, you don’t need to file any tax returns. And, consequently, not pay any taxes in Canada.
On the contrary, if you do receive income from within Canada, you do need to do some filings. The same applies when you yourself are a tax resident of Canada.
Taxes abroad on Canadian Limited Partnership for digital nomads
Although we established that you might not pay any taxes in Canada, this isn’t the full story. We still need to look at the tax qualification of the income of the Canadian Limited Partnership for digital nomads in the country where you have your personal tax residence. The rules of this country will eventually determine whether or not this will be a tax efficient setup for you. As the rules differ from country to country it is important to assess your situation on a personal level. Feel free to reach out if you want to discuss your personal situation.
Canadian Limited Partnership: process & obligations
Incorporation Canadian Limited Partnership for digital nomads
During the incorporation, you will also need to appoint at least one general partner and one limited partner. As discussed, the same person could act in both capacities. Another option is to register a company as (general) partner. If this is a foreign entity, you will first need to register (not to be confused with incorporating) this entity in Canada as well.
When you incorporate a Canadian Limited Partnership, you will also need to draft a partnership agreement. This sets out the rules on how the partnership will operate and conduct business. This is a private document only shared between the partners. Therefore, it’s not publicly available.
The Canadian Limited Partnership for digital nomads should also keep a partnership register in which it registers its current partners.
To actually start functioning you will also need a bank account to receive payments from your clients and to pay your invoices. You can open a bank account for your Canadian Limited Partnership for digital nomads with a traditional Canadian bank. However, they will require you to visit one of their branches in person. If you’re not able to visit Canada, you can always opt for a bank account with an online bank like Wise or Revolut.
The partnership incorporation will in principle be valid for five years. After that, it doesn’t automatically dissolve but you will need to pay a government fee to renew for another five years.
Canadian Limited Partnership for digital nomads: conclusion
The Canadian Limited Partnership for digital nomads is a valid alternative for the US LLC. From a tax perspective, both are tax transparent in their home country. The difference is, however, that the general partner of the Canadian Limited Partnership carries more liability. On the contrary, a Canadian Limited Partnership requires less maintenance as you don’t need to do any yearly filings.