Limited Partnerships – The Overlooked Alternative?
When choosing a legal structure, clients often migrate to familiar business vehicles such as sole proprietorships or corporations. Typically, the discussion between counsel and client focuses on limited liability, taxes as well as the upfront and ongoing costs of utilizing the proposed vehicle. While a corporation often provides the optimal structure, a limited partnership may achieve similar objectives to that of a corporation with added tax benefits.
What is a Limited Partnership?
In Alberta, limited partnerships are governed under Part 2 of the Partnership Act and, to a certain extent, by common law principles. A limited partnership is a legal relationship involving two (2) or more individuals, corporations, partnerships or trusts that carry on a business or a trade with a view to profit. A limited partnership has two types of partners, general and limited. Each type of partner acquires different rights and responsibilities which are typically documented through a written agreement and certificate. For example, a limited partner may contribute cash or other property to the partnership but not services and provided that the limited partner does not “take part in the control of the business”, the limited partner is generally not liable for the debts of the limited partnership. Alternatively, the general partner assumes responsibility for managing the business of the limited partnership and as such, attracts unlimited liability. To mitigate such liability, the general partner is ordinarily a limited liability corporation.
Why Use a Limited Partnership Instead of a Corporation?
The short answer to this question is taxes. The Income Tax Act defines a “taxpayer” to include “any person whether or not liable to pay tax.” A partnership, unlike a corporation or individual, is a relationship and not a separate legal entity or “person” under the Income Tax Act.1 As such, a partnership does not pay tax or file separate tax returns.
Having said that, subsection 96(1) of the Income Tax Act requires a partnership to compute its income as if it were a separate legal entity. The Federal Court of Appeal in Madsen v. R.2 described the process of calculating income at the partnership level as follows:
A partnership's lack of separate legal personality is what distinguishes it from an individual or corporation. The Act maintains this lack of legal personality, and does not generally treat partnerships as taxpayers. Instead, it is the individual partners who pay tax on the basis of their particular share of the income or losses of the partnership.
In other words, a partnership, while not a legal person, is treated as if it were a separate person to compute income at the partnership level. Once the profits or losses of the partnership are calculated, they are allocated to the partners and combined with the other income of the partners to determine their respective tax liability.3 This “flow-through” feature is very attractive to those business clients who wish to raise capital from investors and anticipate some losses prior to generating profits. If losses are generated using a corporate structure, such losses are, with some exceptions, generally “trapped” and the investor is unable to offset the losses against his or her other income.
In addition to potential tax advantages, managing relationships with investors is very important. While investor participation in a business venture may be useful, such participation may also be unattractive for those investors who merely wish to participate in the profits of a business while not sharing in the risks or operations of the business. Investor participation in decision-making may prove too cumbersome for those persons ultimately responsible for managing the business. If a limited partner in any way participates in the management of the limited partnership, such individual will lose their limited liability status. This potential result helps to delineate a clear distinction of roles and provides for a very effective governance structure.
Conclusion
Overall, a limited partnership is an effective alternative for raising investment capital and managing relationships with investors while providing potential tax advantages. For more information on limited partnerships and their application to business ventures, please contact the writers.
1 It should be noted that, for GST purposes, partnerships are treated as persons.
2 2001 D.T.C. 5093 (F.C.A.).
3 The rules surrounding losses in a limited partnership are complicated and beyond the scope of this article.
Ross Swanson
Testamentary Trusts: Income Splitting with the Family
Income splitting is sharing income with others so that it can be taxed in a lower tax bracket. The federal government taxes Canadians at graduated rates of tax across Canada. Each province then adds its taxes to the federal rates to arrive at the combined marginal tax rates. The first $10,320 is tax free (the "basic personal exemption"), and thereafter, income is taxed at increasingly higher rates. Alberta has the lowest rates of tax of any of the provinces. It levies a flat tax of 10% on all income above $16,775. The following are the approximate combined rates of tax for Alberta for 2009: (The rates shown are for interest and other income; capital gains and dividends are taxed at lower rates.)
• $10,320 or under - 0%
• $10,320 to $16,775 15%
• $16,775 to $40,726 25%
• $40,726 to $81,452 32%
• $81,452 to $126,264 36%
• over $126,264 39%
If a person in the highest tax bracket can allocate some of their income to another member of the family who is in a lower bracket, the family would have a lower overall tax bill and therefore have more disposable income. The Income Tax Act has a labyrinth of rules that prevent taxpayers from splitting their income with family members during their lifetime. Income moved from the highest taxpayer to a spouse or minor child is "attributed" back to the taxpayer; the spouse or child is entitled to the money but the taxpayer pays the tax. These rules do not normally apply on death.
Many people will leave their entire estate to the surviving spouse absolutely. If both spouses die, they usually divide the estate equally among the adult children, absolutely. If a child also predeceases the parents, many people will want that child's share to be divided equally amongst his or her children (the grandchildren).
A testamentary trust is a trust established in a person's will. It is common to use a testamentary trust for minor children or grandchildren whereby the funds are used for the beneficiary's needs until a more mature age such as 21 or 25, at which time the capital is paid to the beneficiary. Income retained in a testamentary trust is taxed at the graduated rates of tax, except there is no basic personal exemption. Income paid from the trust to the beneficiary is taxed in the hands of the beneficiary at his or her graduated rates of tax. The first $10,320 is tax free (the basic personal exemption.)
Spousal Trust
If the surviving spouse is already in a high tax bracket, most of an inheritance will likely be invested with the income being taxed at that spouse's high tax rate. In this circumstance, a spousal trust in the will could save substantial tax annually. This is particularly so when the surviving spouse is over 71 and receives all of the income from their Registered Retirement Income Funds.
Under the Income Tax Act, the spouse must receive all the income from a spousal trust and no one but the spouse may be entitled to any of the income or capital of the trust for the life of the spouse. Usually a power is given to the trustees to encroach on the capital for the benefit of the spouse when necessary. Under the Income Tax Act, the spouse can elect to have this income taxed in the spousal trust at the graduated rates of tax of the trust. The spouse receives the income, but it is taxed in the trust at rates lower than the spouse would pay. Depending on the type of income, the size of the estate and the applicable tax rates, the spouse can save as much as $9,600 per year in tax for the life of that spouse.
Family Trusts for Children
For children who are already in a high tax bracket, most of an inheritance will likely be invested with the income being taxed at that child's high tax rate. If the inheritance were instead held in a testamentary trust, the income could be split between the child and the trust and therefore be taxed at lower marginal tax rates.
If grandchildren are added as beneficiaries of the trust, some of the income can be paid to them or used to purchase necessaries for them. Any income paid to or for a beneficiary is taxed in the hands of that beneficiary. If minor grandchildren are included as beneficiaries, the first $10,320 of their income is not taxed. The spouse of the child could also be included as a beneficiary of the trust thereby allowing the child to split the trust income with their spouse.
General Concerns
Some clients may be reluctant to use testamentary trusts because they want the beneficiary to have control over their inheritance. This can be achieved by appointing the spouse or child as the trustee of his or her trust. The spouse or child could be given the power to pay the income or capital for any of the beneficiaries, or to leave the income in the trust to be taxed at lower rates. The trust could also be drafted to allow the trustee to collapse the trust at any time and divide the capital among the beneficiaries in the discretion of the trustees. The trust must be carefully drafted to ensure that the trustee has sufficient power to manage the trust in this manner.
Clients are sometimes concerned about the complexity of administering a testamentary trust. A tax return for the trust must be filed annually, careful records must be kept and an annual accounting to the beneficiaries is required. These types of trusts are not for everyone and the beneficiaries must be comfortable with the concept. We find that beneficiaries in high tax brackets appreciate the tax savings and are happy to live with a little added complexity. In fact, we find that the children are usually the ones asking their parents to establish such a trust in their wills.
If you are interested in discussing these estate planning possibilities, please contact us.
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Philip Renaud
Role of Trade-mark Law in Protecting your Brands
To the consuming public, much of a company’s corporate identity is linked to its brands. A brand can serve as a way for the public to identify a particular business. Branding, therefore, is the key to building and protecting a company’s corporate identity. Trade-mark law provides one method of protecting what some have called the company’s most valuable assets – its brands.
This article offers a brief overview of trade-mark law, including the basic steps and costs in registering and protecting trade-mark rights in Canada.
What is a Trade-mark?
A trade-mark is a word, symbol, logo, design (or a combination of these elements) used to distinguish the goods and services of one person or organization from those of others in the marketplace. They can include brand names, such as Coca-Cola, symbols, such as the Nike swoosh, and slogans, such as Tim Horton’s ‘Roll up the Rim to Win’. Each of these famous trade-marks enables consumers to distinguish a company’s products or services from the products or services of its competitors in the marketplace.
Trade-marks vs. Trade Names
A trade name should not be confused with a trade-mark. A trade name is the name under which a business is conducted. It identifies a business or commercial undertaking, whereas a trade-mark identifies the goods and services provided by the business and distinguishes these from those of others in the marketplace.
A trade name can also be used as a trade-mark if it is used to identify wares or services. For instance, “eBay Corporation” is a corporate/trade name identifying a business and “eBay” is also a trade-mark identifying online auction services. Where the trade name is being used is association with the goods and services being provided, it is recommended that the trade name be registered as a trade-mark, thereby reducing the risk of a dispute over who has the right to use a particular trade name. It is important to note that the registration of a trade name in accordance with provincial or federal legislation does not confer any exclusive trade-mark rights. These rights are only available by registering the trade name as a trade-mark.
Is Registration Necessary?
In Canada, trade-marks are governed by federal law through the Trade-marks Act. A registered trade-mark is one that is entered on the federal government’s Trade-marks Register. There is, however, no requirement to register a trade-mark in Canada and continued use of a mark for a length of time can establish ownership and provide protection to the owner of the mark. The primary difference between registered and unregistered trade-marks is that the rights of registered trade-mark holders are more extensive. Therefore, while there is no requirement to register a trade-mark, it is advisable to do so.
By registering a trade-mark, a company obtains the exclusive right to use the mark in respect of the goods and services associated with it, and prevent all others from doing so across Canada for a period of 15 years. The use of a trade-mark must continue during the 15 year period, or the registration is susceptible to expungement proceedings. Upon the expiration of 15 years, the trade-mark can be renewed for a further 15 year period.
A registered trade-mark is protected across Canada regardless of whether or not it is used throughout Canada. Registration of the trade-mark is direct evidence of its ownership. Therefore, a registered trade-mark is easier to protect than an unregistered mark. In a legal dispute, the registered trade-mark owner does not have to prove ownership; the onus is on the challenger to prove invalidity or that the registered owner of the mark does not have the right to use it.
Where registration confers protection across Canada, unregistered marks are protected only within the particular localities in which they are used. For example, a local restaurant may have a strong reputation in a particular city. However, without registration, the restaurant’s mark (name, slogan, logo, etc.) is only protected in the geographic area where the restaurant operates. Outside that geographic boundary, anyone can use the unregistered mark in association with their own goods and services.
The Registration Process
The Canadian Intellectual Property Office (CIPO) is responsible for the administration and registration of trade-marks. The registration process, which typically takes 12 to 24 months, begins upon the filing of an application in the proper form and submitting the appropriate fee (currently $300.00 per application) to CIPO. An application can be filed on the basis of actual use of the trade-mark or on the basis of proposed/intended use. If the application is filed on the basis of proposed or intended use, the applicant must file a Declaration of Use demonstrating that the mark has been used since the application was made, before CIPO will grant registration.
Once filed, a CIPO examiner conducts a substantive examination to determine any irregularities in the application and whether the proposed trade-mark is registrable. The Trade-marks Act defines the types of marks that are not registrable. Clearly descriptive marks and “deceptively misdescriptive” marks (for example, using the term “organic” in the trade-mark when in fact the product is not organic) are not registrable. In addition, a trade-mark that is confusingly similar to an already registered mark will not be registered by CIPO if used in association with similar wares or services.
If CIPO considers the mark to be unregistrable, the applicant can file submissions to address CIPO’s objections. In the end, CIPO may allow the trade-mark to be registered or it may maintain its opposition, thereby effectively ending the application process.
If the trade-mark is allowed, the application is then advertised to give notice to potential opponents who may wish to challenge the proposed trade-mark. The grounds of opposition usually relate to issues of confusion between the proposed trade-mark and the opponent’s trade-mark. Oppositions to a trade-mark can take many months or years to resolve and add substantially to the overall cost of registering the trade-mark. For that reason, it is highly advisable to do the necessary searches before the application is filed to ensure that the proposed trade-mark is not confusingly similar to other registered marks.
In the absence of opposition, or if these are successfully overcome, the application will proceed to registration. There is currently a filing fee of $200.00 to register the trade-mark.
Conduct a Brand Portfolio Review
Trade-mark law provides a powerful tool in protecting your company’s valuable branding efforts. Registration of the trade-mark provides a monopoly to the owner of the mark for 15 years to exclusively use the mark in Canada in respect of the goods and services associated with it. More importantly, registration prevents others from using the mark in association with their own goods and services. Although unregistered marks are protected by the common law, this protection is limited to the area in which the mark is used, whereas registered marks are protected throughout Canada.
It is highly recommended that you review your company’s brand portfolio to ensure that these vital business assets are protected. The relatively small cost associated with registering your trade-mark can offer you or your business powerful options for their enforcement and can substantially reduce the possibility of lengthy and expensive legal disputes over the use of the trade-mark. For that reason alone, an owner of a trade-mark should give careful consideration to registering it.
Malkit Atwal
New Clients - Verification of Identity
Recently, the Federation of Law Societies of Canada (“FLSC”) launched various initiatives to address concerns with respect to money laundering, terrorist financing and fraud. One of these such initiatives is the introduction of new client identification rules for lawyers and law firms. In April of 2008 the Law Society of Alberta adopted the rules created by the FLSC and in January of 2009 it will become mandatory for all lawyers to collect certain personal information with respect to individuals and business information with respect to organizations prior to opening a file. You can read more information about the Alberta Law Society’s policies with respect to the “Know Your Client” rules on their website at: www.lawsocietyalberta.com/lawyerservices/ClientIDVerification.cfm
In order to assist in a smooth transition, Duncan & Craig LLP will implement a new file opening process to ensure that we collect the appropriate information. Please note that all personal information that Duncan & Craig LLP collects will be used, disclosed, retained and secured in accordance with our Privacy Policy which is compliant with both the Personal Information Protection Act and the Personal Information Protection and Electronic Documents Act.
Specifically, when you contact us with a new matter we will ask you to provide us with or confirm the following information:
• Idividuals: full name, business address, business telephone, e-mail address, home address, home telephone, and occupation(s). Furthermore, we will need to arrange to view and photocopy a piece of photo identification.
• Organizations/Corporations: full name, business address, business telephone, incorporation or business identification number and place of issue, and a general description of the organization’s business activities. Additionally, we will confirm the name, position, and contact information for those authorized to give instructions on the matter.
• Third Parties: if you or your organization are representing any third parties interests we will also be required to collect information about those parties.
If your matter involves receiving, paying or transferring money, securities, negotiable instruments, or other financial instruments we will need to collect additional information to verify your organization’s identity. The following is a list of the additional information we will require: name and occupation of each director; name address and occupation of each shareholder that holds more than 25% of the organization’s shares; and a document verifying the organization’s existence (i.e. certificate of good standing, certificate of status, partnership agreement).
We would like to take this opportunity to say thank you in advance for allowing us to collect this information and assisting us in our commitment to following the rules and guidelines implemented by the Law Society of Alberta. If you have any questions or concerns regarding these new rules, please do not hesitate to contact your Duncan & Craig LLP lawyer.
Douglas Gahn
The articles in The Duncan & Craig LLP Perspectives are necessarily of a general nature and cannot be regarded as legal advice. The firm will be pleased to provide additional details on request and to discuss the possible effect of these matters in specific situations. Please feel free to contact the authors if you have any questions regarding the articles.
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