Limited Liability Partnership in Canada
New Brunswick LLP
Corporate Taxation

A Full Tax-Exempt Entity

Since:
Partners not resident in Canada
Place of Business and Management not based in Canada
Income generated Overseas

In Canada, including New Brunswick, a Limited Liability Partnership (LLP) is treated similarly to other provinces when it comes to taxation. LLPs are flow-through entities, meaning that the LLP itself is not taxed directly. Instead, the individual partners are taxed on their share of the LLP’s income. This tax treatment depends on the residency of the partners, the source of the income, and whether the LLP has business activities in Canada.

Let’s break down the corporate taxation for a New Brunswick LLP and the respective tax exemptions:

LLP as a Flow-Through Entity

No direct corporate tax: An LLP in New Brunswick, like in other provinces, is not subject to corporate tax. The LLP’s profits or losses are passed through to its partners, who are responsible for paying tax on their share of the income, based on their residency and the source of the income.
Partner-level taxation: Each partner (whether an individual, corporation, or another entity) is taxed based on their share of the LLP’s income. The taxation of the partner’s share depends on whether they are a Canadian resident or a non-resident and where the income is generated.

Taxation of Partners in a New Brunswick LLP

Canadian-resident partners: Canadian residents (either individuals or corporations) are taxed on their worldwide income, including their share of the LLP’s income, regardless of where that income was earned.
Non-resident partners: Non-resident partners are typically only taxed in Canada on Canadian-source income. If the LLP’s income is generated outside of Canada, and the non-resident partners have no permanent establishment in Canada, their share of the income would generally be exempt from Canadian taxation.

Corporate Taxation of LLP Income

Canadian-source income: If the LLP earns income from business operations, investments, or other activities in Canada, that income is considered Canadian-source income, and both resident and non-resident partners would be liable to pay tax on their share of this income.
Foreign-source income: If the LLP generates income from sources entirely outside of Canada, non-resident partners generally would not be taxed in Canada on that income. Canadian-resident partners, however, would be taxed on their share of the LLP’s foreign-source income, though they could be eligible for foreign tax credits to reduce double taxation.

Permanent Establishment (PE) and Taxation

Permanent Establishment (PE): A business, including an LLP, may be subject to tax if it has a permanent establishment in Canada. A PE refers to a fixed place of business, such as an office or warehouse, in Canada. If an LLP does not have a PE in Canada and does not conduct business activities within Canada, non-resident partners would generally not be subject to Canadian tax on income earned from non-Canadian sources.
Even if the LLP is registered in New Brunswick, if the LLP’s activities are conducted entirely outside of Canada and there is no PE, Canadian taxation may not apply to the non-resident partners.

Tax Exemptions and Benefits for LLPs

While LLPs are not taxed directly, partners may benefit from certain exemptions or credits depending on their residency and the source of their income:

Non-residents with foreign-source income: Non-resident partners are generally exempt from Canadian taxation if their share of the LLP’s income is from foreign sources and the LLP does not have a PE in Canada.
Foreign tax credits: Canadian-resident partners can claim foreign tax credits for taxes paid to foreign jurisdictions on foreign-source income, which helps reduce or eliminate double taxation.
New Brunswick provincial tax incentives: Canadian-resident partners may indirectly benefit from provincial tax credits or incentives available in New Brunswick, such as credits for research and development (R&D) or other qualifying activities, though these incentives do not directly impact non-residents.

Withholding Taxes for Non-Resident Partners

Withholding taxes: If the LLP distributes Canadian-source income (such as dividends, royalties, or interest) to non-resident partners, the LLP may be required to withhold Canadian taxes at a rate of 25%. However, Canada has tax treaties with many countries that can reduce the withholding tax rate.
Treaty benefits: Many tax treaties between Canada and other countries allow for reduced withholding tax rates and provide exemptions to prevent double taxation, particularly where there is no PE in Canada.

Tax Treaties and Exemptions

Canada has a network of tax treaties with many countries to avoid double taxation and provide clarity on taxation matters involving non-resident partners. Key features include:

Reduced withholding tax rates: Tax treaties can lower the withholding tax rates on Canadian-source income paid to non-resident partners.
Exemptions for non-residents with no permanent establishment: If a non-resident partner does not have a PE in Canada and earns only foreign-source income through the LLP, tax treaties may further confirm their exemption from Canadian taxes.

Tax Filing Obligations

Even if the Nova Scotia LLP is not subject to corporate tax, it may still have some reporting obligations:

T5013 Partnership Information Return: An LLP must file this return with the Canada Revenue Agency (CRA) to report its income, expenses, and allocation of income to the partners.
Filing for non-resident partners: Non-resident partners might be required to file a Section 216 or 217 tax return if they receive certain types of Canadian-source income (such as rental or pension income), but this typically does not apply to foreign business income.

Summary of Tax Exemptions and Key Points

No direct corporate tax: LLPs in New Brunswick are flow-through entities, so the partnership itself is not taxed. Instead, partners are taxed on their share of the LLP’s income based on their residency and the income source.

Non-resident partners: Non-resident partners are typically exempt from Canadian taxation if the LLP earns foreign-source income and has no permanent establishment in Canada.

Foreign tax credits: Canadian-resident partners can claim foreign tax credits to reduce their Canadian tax liability on foreign income, preventing double taxation.

Withholding tax: For Canadian-source income paid to non-resident partners, the LLP may need to withhold tax (generally 25%), though tax treaties may reduce this rate.

Tax treaties: Canada’s tax treaties with various countries provide exemptions and reduced withholding tax rates, especially for non-residents with no business presence in Canada.

Conclusion

A New Brunswick LLP is not subject to corporate taxation in Canada, but the individual partners are taxed on their share of the LLP’s income. Non-resident partners with no Canadian-source income or permanent establishment in Canada are generally exempt from Canadian taxes on their share of foreign-source income. Canadian-resident partners are taxed on their worldwide income, though they can claim foreign tax credits to offset taxes paid abroad.