What are the GP/LP tax benefits and advantages for Canadian real estate investors and founders? Let’s delve into the tax attributes of limited partnerships and how they can benefit both investors and founders in terms of tax planning and optimization.
Video Transcript: GP/LP tax benefits
From the perspective of the investor or the founder’s component of the investment, let’s think about a couple of the tax attributes of the limited partnership itself.
I’m George Dube, saving the world from tax, one bow tie at a time.
So one, I’ve touched on the idea that the limited partnership is going to flow through its profits, its activities. The limited partnership does not in itself pay taxes. The limited partnership instead it calculates how much rental revenue did I receive or sales revenue or operating income, rental expenses, these expenses, those expenses, what’s my net numbers? What numbers are available for depreciation purposes?
That information is typically proportionate based on how much the investors have invested. In other words, if that investor has put in $100,000 to a million dollar project, they’re going to receive 10% of the profits in various expenses. And by saying it’s a million dollar project in my example, I mean of the funds invested.
So now, if those investors are receiving their income with that flow through ability, so there’s no corporate tax, for example, if there was a corporation used instead of a limited partnership, the limited partners are able to dictate how they’re taxed.
In other words, if they own it through a corporation they’re going to be taxed as if they had that proportionate income earned in their corporation. Or if they own it personally or through a registered investment or through a family trust or a partnership or this, that, or the other thing, they can create for themselves what makes sense in their case from a tax perspective.
Another benefit to be considered from the founder’s perspective in terms of how they phrase things for the investors or the founder’s own money, is that the limited partnership, because it is not taxed, has the ability to prevent double taxation.
In particular for long term real estate investors, if they have a structure where they’ve got a holding company, which in turn owns the real estate holding company, if a project is refinanced it’s quite possible there’s a double tax where funds are paid through a dividend from the subsidiary company to the parent company. In a limited partnership example, that does not exist, or rather the limited partners are able to circumvent those rules, if you will, ensuring they do not get ensnared.
So they can set up for themselves a situation that is advantageous for them without hurting anybody else. As well, and and maybe it’s kind of expected or inferred, but with this flow through ability, the nature of the income is maintained.
In other words, if it was rental income that the limited partnership made, it’s rental income that the owners or the limited partners receive. If it was operating income, if it was income from operating a hula hoop factory, whatever it happens to be that that limited partnership is doing, it has flowed through to the investors according to their proportionate interest in most cases.
For the founders or the investors that are looking for more details on how, whether it’s the rental income, the sales of real estate, the hula hoop factory activities, how they’re taxed at a corporate level, keeping in mind that a good number of the investors and probably the founders are going to hold their limited partnership units through a corporation. Please refer to some recordings that we’ve done describing the active income, the passive income, how these are taxed at a corporate level.
No question, this series of recordings on the GP/LP structuring, very high level, not a lot of detail, Please feel free to reach out, set up a time to talk further and we can get into the nuts and bolts for what’s right in your specific situation. Have more questions?
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Resources
For additional resources related to the gp/lp tax benefits, and other benefits:
- What is a GP/LP structure?
- GP/LP structure growth: Simple to complex
- How to set up a GP/LP structure
- Who should set up a GP/LP structure?
Back to: GP/LP structure: Ultimate guide for Canadian real estate investors
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Remember – circumstances are unique! This information is summary in nature. Seek out advice from your tax advisor about your specific situation.
