Ontario Partnership Law

Ontario's Partnerships Act

Partnership law in Ontario is governed primarily by the Partnerships Act, R.S.O. 1990, c. P.5. The Act codifies and supplements common law partnership principles derived from the English Partnership Act 1890. The statute provides default rules that apply in the absence of a partnership agreement — but the partners can contract out of most default provisions (other than obligations owed to third parties) through a written partnership agreement.

Section 2 of the Act defines partnership as "the relation that subsists between persons carrying on a business in common with a view of profit." This is an automatic, relationship-based definition — a partnership can exist without registration, without a written agreement, and without any conscious intention to form a partnership.

The Limited Partnerships Act, R.S.O. 1990, c. L.16 governs limited partnerships. The Partnerships Act's provisions on limited liability partnerships (LLPs) for professionals were added by amendment and are now in ss. 44.1–44.4.

Formation of a General Partnership

A general partnership is formed when two or more persons carry on business in common with a view to profit — no formalities, registration, or written agreement required. Courts look at the substance of the relationship rather than labels.

The Indicia of Partnership

Section 3 of the Partnerships Act provides rules for determining whether a partnership exists. Key indicators include:

• Sharing of profits is strong evidence of partnership, but sharing of gross returns is not conclusive
• Sharing of losses is strong evidence
• Joint ownership of property does not by itself create a partnership
• Receiving a share of profits as payment for a debt, wages, or annuity does not automatically make a creditor, employee, or annuitant a partner

The leading Ontario case on inadvertent partnership is Backman v Canada [2001] 1 SCR 367 (SCC), which confirmed that even commercially motivated arrangements intended as something other than a partnership can be caught by the partnership definition if the three elements — carrying on business, in common, with a view to profit — are present.

Partnership by Estoppel

Under s. 15 of the Partnerships Act, a person who holds themselves out as a partner — or who knowingly allows themselves to be represented as a partner — is liable to third parties who rely on that representation to their detriment. Partnership by estoppel does not create an actual partnership between the parties, but it creates liability to third parties as if a partnership existed.

Partner Authority to Bind the Firm

Section 8 of the Partnerships Act provides that every partner is an agent of the firm and of co-partners for the purpose of the firm's business. An act of a partner carried out in the usual course of the firm's business binds the firm, unless the partner had no authority to act in the particular matter and the third party knew of the limitation or did not know or believe the person to be a partner.

The authority analysis is similar to agency law: actual authority (express or implied by the partnership agreement), and apparent authority (what third parties reasonably believe a partner has authority to do given the usual scope of the firm's activities). Restrictions on a partner's authority in the partnership agreement are effective only against third parties who have actual notice of them.

Section 11 extends liability to wrongful acts — the firm is liable for loss or injury caused to a third party by a partner acting in the ordinary course of the firm's business, or with the authority of co-partners. This covers torts committed by a partner in the course of firm business.

Partner Liability: Joint and Several

The hallmark of general partnership — and its primary disadvantage — is the unlimited joint and several liability of partners. Under s. 10, all partners are jointly liable for debts and obligations of the firm. Section 11 imposes joint and several liability for wrongful acts and misapplication of money or property received by a partner.

Joint and several liability means:

• A creditor can sue any individual partner for the full amount of a partnership debt
• A judgment obtained against the firm can be enforced against the personal assets of any partner
• A partner who pays more than their proportionate share can seek contribution from co-partners
• A new partner joining the firm is not personally liable for debts incurred before they joined (s. 18(1)), but a retiring partner remains liable for debts incurred before retirement unless the creditor agrees to release them

This unlimited liability exposure is the primary reason professionals choose limited liability partnerships (LLPs) or professional corporations over general partnerships for their practice structure.

Fiduciary Duties of Partners

Partners owe each other fiduciary duties arising from both the Partnerships Act and the common law. These include:

Duty to Account

Section 28 requires every partner to render true accounts and full information to co-partners or their legal representatives. Section 29 requires a partner to account for and pay over to the firm any benefit derived — without the consent of co-partners — from any transaction concerning the partnership or any use by the partner of partnership property, name, or business connection.

Duty Not to Compete

Section 30 requires a partner who carries on a competing business without the consent of co-partners to account to the firm for all profits from that competing business. The duty subsists throughout the partnership and is not limited to competing activities that directly appropriate firm clients or business.

Good Faith and Utmost Fairness

Partners owe each other duties of good faith and utmost fairness — a higher standard than the ordinary commercial dealing standard of good faith. In Rochwerg v Truster(2002) 212 DLR (4th) 498 (ONCA), the court confirmed that partners must act with the highest standard of integrity toward co-partners in all dealings touching the partnership. This includes disclosing material information and not exploiting the partnership relationship for private benefit.

The Partnership Agreement

The Partnerships Act's default rules can be displaced by a partnership agreement. Key matters typically addressed in a partnership agreement include:

• Capital contributions and profit sharing — overriding the default equal sharing rule (s. 24(1))
• Decision-making authority — majority vote for ordinary matters, unanimity for changes to the business nature (s. 24(8))
• Admission of new partners — override the default unanimity requirement (s. 24(7))
• Restrictive covenants — non-competition and non-solicitation post-departure
• Expulsion and withdrawal — procedures and compensation terms
• Valuation of a departing partner's interest
• Dispute resolution — arbitration clauses
• Dissolution procedures

In the absence of a partnership agreement (or where the agreement is silent), the Partnerships Act applies. Default rules include equal sharing of profits and losses (s. 24(1)), no payment of interest on capital (s. 24(4)), and each partner having an equal right to participate in management (s. 24(5)).

Limited Partnerships

A limited partnership is governed by the Limited Partnerships Act, R.S.O. 1990, c. L.16. It consists of at least one general partner with unlimited liability and one or more limited partners whose liability is limited to their capital contribution — provided they do not take part in the management and control of the business.

Formation requires filing a declaration with the Ministry of Government and Consumer Services under s. 3 of the LPA. Key features:

• General partner liability — general partners have the same unlimited joint and several liability as in a general partnership
• Limited partner liability cap — limited to capital contributed; a limited partner who takes part in management and control becomes liable as a general partner (s. 13)
• Return of capital — a limited partner may not receive back their contribution if doing so would leave the firm unable to pay its debts (s. 15)
• No management rights by default — limited partners may not participate in management; permitted activities are narrowly defined (s. 12)

Limited partnerships are widely used as investment vehicles for real estate, private equity, and resource projects because they allow passive investors to benefit from the flow-through tax treatment of partnership income while capping liability to their invested capital.

Limited Liability Partnerships for Professionals

Sections 44.1–44.4 of the Partnerships Act (added in 1998) permit designated Ontario professionals to carry on practice as a limited liability partnership (LLP). The LLP shield protects partners from personal liability for the negligence of other partners and employees not under their direct supervision.

The LLP protection is limited: a partner remains personally liable for:

• Their own negligent acts and omissions
• Negligence by employees or agents under their direct supervision
• All debts, obligations, and liabilities of the LLP arising from ordinary commercial transactions (e.g., leases, loans)

For Ontario law firms, LLP status is governed by Law Society Rule 2.1 — every Ontario law firm practising as an LLP must have the "LLP" or "Société à responsabilité limitée" designation in its name and meet the LSO's insurance and maintenance requirements. The LLP must maintain at least the minimum insurance required by the LSO.

LLPs replaced general partnerships as the standard structure for Ontario law firms. The LLP shield means that a partner in a Toronto law firm is not personally liable for a file mishandled by a partner in the Ottawa office — unless the Toronto partner had supervisory responsibility for that file.

Dissolution of Partnership

Under the Partnerships Act, a partnership may be dissolved by:

• Fixed term expiry or completion of undertaking (s. 32)
• Notice — by any partner in a partnership at will (s. 32(1)(c))
• Death or insolvency — subject to contrary agreement (s. 33)
• Charging order — a partner's share being charged may entitle co-partners to dissolve (s. 33(2))
• Court order — under s. 35, on grounds including partner incapacity, prejudicial conduct, persistent breach of agreement, or where it is just and equitable

The "just and equitable" ground for dissolution (s. 35(f)) is broadly applied. Courts have ordered dissolution where a deadlock renders the partnership unworkable, where there has been a breakdown in trust between partners, or where the substratum of the partnership has disappeared. The oppression remedy under the Business Corporations Act is not available for partnerships — s. 35(f) dissolution is the primary equitable remedy.

On dissolution, the firm's assets are applied first to firm debts, then to return capital contributions, and finally to distribute any surplus equally among partners (absent contrary agreement). A dissolution notice does not retroactively affect completed transactions — authority to bind the firm continues for the purpose of winding up existing business.

Frequently Asked Questions