Let’s recap from my previous blog post. Most First Nations are public bodies performing a function of government in Canada and, like municipal governments, are exempt from income tax under section 149(1)(c) of the Income Tax Act. This means that off-reserve business income earned by a First Nation will not be taxed as long as the First Nation does not run its business through a limited liability company.
This poses a problem since most businesses are incorporated to protect the owners from liability for the debts and other legal obligations of the business.
Luckily a First Nation can shield itself from business losses and still avoid income taxes by structuring its business through a lesser known alternative to incorporation.
Partnerships are formed when two or more people agree to enter into a business venture for profit. Normally each partner is liable for all the debts of the partnership business. However under the Limited Partnership Act of each province, “limited partners” enjoy the same protection from business liabilities as shareholders in a limited liability company. By operating its off-reserve business as a “limited partnership” a First Nation can protect itself from business debts and liabilities without incorporating its business. Even better news for First Nations, unlike a company, the limited partnership itself does not pay taxes on the income earned by the partnership. Instead each partner must report its share of the partnership income. Because a First Nation is exempt from paying taxes under s. 149(1)(c) of the Income Tax Act, it pays no tax on income reported from a business operated by a limited partnership.
A limited partnership involves at least two partners: (a) a general partner which operates the business and is fully responsible for business debts and losses, and (b) a limited partner which invests funds in the partnership business but takes no role in controlling or managing the business.
Great care must be taken when drafting a limited partnership agreement and in operating the business of a limited partnership. It is essential that the limited partner not control or manage the business. Running the business and making business decisions must be left to the general partner to protect the limited partner from liability for the business debts.
Structured and operated properly the limited partnership is the perfect business structure for First Nations and is used in many successful businesses across Canada to protect First Nations from business losses while shielding business income from taxation. The limited partnership is an important tool for generating much-needed revenues for First Nations.
The need for new sources of revenue is urgent. In a recent decision, First Nations and Family Caring Society et al. v. Canada, 2016 CHRT 2, the CAnadian Human Rights Teibunal found that the Federal government has been chronically underfunding First Nation child welfare services by 38% compared to other Canadians. This is likely the case for many other programs administered by First Nations. But that’s a matter for another post.