Limited Liability Partnership in Canada
Nova Scotia 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 Nova Scotia, a Limited Liability Partnership (LLP) is treated similarly across provinces for tax purposes. LLPs, like other types of partnerships, are flow-through entities, meaning the partnership itself is not subject to corporate tax. Instead, the individual partners are responsible for paying taxes on their share of the LLP’s income.

Let’s break down the corporate taxation for a Nova Scotia LLP and the respective tax exemptions.

LLP as a Flow-Through Entity

No direct corporate tax: A Nova Scotia LLP is not taxed as a separate legal entity. The LLP’s profits (or losses) are “passed through” to the individual partners, who are responsible for paying tax on their respective share of the income.
Partner-level taxation: Each partner is taxed based on their residency and the source of income from the LLP. Partners can be individuals, corporations, or other entities, and their tax obligations depend on their status.

Taxation of Partners in an LLP

The tax obligations for LLP partners depend primarily on whether they are residents of Canada or non-residents, and on the source of the income.

Canadian-resident partners: If any of the partners are Canadian residents (either individuals or corporations), they are taxed on their worldwide income, including any income from the LLP, regardless of where that income was earned.
Non-resident partners: Non-resident partners are generally only taxed in Canada on Canadian-source income or if they are deemed to have a permanent establishment in Canada. If the LLP generates income from foreign sources only, non-resident partners would typically not be taxed in Canada on that income.

Corporate Taxation of LLP Income

Canadian-source income: If the LLP generates income from business operations or investments within Canada, this income would be considered Canadian-source income, and the partners (whether resident or non-resident) would be liable to pay taxes on their share of that income.
Foreign-source income: If the LLP’s income is earned entirely from sources outside of Canada, non-resident partners would generally not be subject to Canadian taxation. Canadian-resident partners, however, would be taxed on their share of the LLP’s global income, though they may be eligible for foreign tax credits to offset taxes paid in other countries.

Permanent Establishment and Taxation

Permanent Establishment (PE): Canadian tax law taxes businesses (including LLPs) that have a permanent establishment in Canada. A permanent establishment typically refers to a fixed place of business, such as an office, factory, or warehouse in Canada. Even if the LLP is registered in Nova Scotia, if it conducts no business operations within Canada and has no fixed place of business there, it may not be considered to have a permanent establishment.
If the LLP has no permanent establishment in Canada and its income is entirely foreign-sourced, non-resident partners would typically not be subject to Canadian tax.

Tax Exemptions and Benefits for LLPs

While LLPs are not taxed directly, individual partners can benefit from certain exemptions or tax credits based on their residency status and the source of their income:
Non-residents with foreign-source income: If non-resident partners earn income exclusively from sources outside of Canada through the LLP, and the LLP has no business operations or permanent establishment in Canada, their share of the LLP’s income is generally exempt from Canadian taxation.
Foreign tax credits: Canadian-resident partners who earn income through the LLP from foreign sources may be able to claim foreign tax credits for taxes paid to foreign jurisdictions. This helps avoid double taxation, as they can offset their Canadian tax liability with the taxes they have already paid abroad.
Nova Scotia tax incentives: Although LLPs are not directly taxed, Canadian-resident partners can benefit from provincial tax incentives or credits available in Nova Scotia, such as research and development (R&D) credits, if the LLP or its partners engage in qualifying activities.

Withholding Taxes for Non-Resident Partners

Withholding taxes: If the LLP pays Canadian-source income to non-resident partners (such as rental income, dividends, or royalties from Canadian activities), the LLP may be required to withhold Canadian tax. The general withholding tax rate is 25%, although this may be reduced if a tax treaty exists between Canada and the partner’s country of residence.

Tax Treaties and Exemptions

Canada has tax treaties with many countries, which aim to avoid double taxation and allocate taxing rights between jurisdictions. Some key benefits of tax treaties include:

Reduction of withholding tax: Tax treaties can lower the withholding tax rate on certain types of income paid to non-resident partners.
Exemptions for non-residents without a permanent establishment: Under many tax treaties, if a non-resident partner has no permanent establishment in Canada and earns income from foreign sources, they may be exempt from Canadian taxation on those earnings.

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 Nova Scotia are flow-through entities, meaning that the partnership itself is not subject to corporate tax. Instead, the partners are taxed on their share of the LLP’s income.

Non-resident partners: If non-resident partners earn foreign-source income and the LLP has no permanent establishment in Canada, they are generally exempt from Canadian taxation.

Foreign tax credits: Canadian-resident partners may be eligible for foreign tax credits to reduce their Canadian tax liability on foreign-source income.

Withholding tax: If the LLP distributes Canadian-source income to non-resident partners, it may be subject to withholding taxes, although tax treaties may reduce this rate.

Conclusion

A Nova Scotia LLP is not subject to corporate taxation in Canada, but its partners are taxed based on their share of the LLP’s income. Non-resident partners are typically exempt from Canadian tax if their income is generated outside Canada and the LLP has no permanent establishment in the country. For Canadian-resident partners, they are taxed on their worldwide income, though they may claim foreign tax credits for taxes paid abroad. Reporting obligations still apply, even if the LLP is not directly taxed.