Nick Wright, BA JD MBA LLM (Tax)

Wright Business Law

Limited partnerships (LPs) remain the preferred structure for Canadian real estate development projects, offering tax efficiency, capital-raising flexibility, liability protection, and governance clarity. Developers and sponsors increasingly use LP structures to raise private capital under prospectus exemptions, often combining a corporate general partner (GP), a project-specific LP, and a corporate manager to separate operational risk. While conceptually straightforward, the details matter. Poor structuring can trigger unregistered dealer issues, NI 45-106 compliance failures, unanticipated tax exposure, investor disputes, and refinancing challenges.

This article provides a comprehensive overview of how to structure a real estate LP for development projects in Canada, with a focus on Ontario. It addresses the legal framework, tax considerations, securities law requirements, governance mechanics, market norms, and the risks that regulators and investors scrutinise most closely. For emerging and mid-market sponsors, this structure forms the foundation of scalable development activity.

Regulatory Framework & Sources of Law

Real estate LP structures sit at the intersection of several regulatory regimes. The foundational legal framework is the Limited Partnerships Act (Ontario), which governs liability, formation, registration, partnership powers, and dissolution. The partnership agreement is a private contract, but securities laws regulate how interests in the LP may be offered and sold.

Most capital raising relies on NI 45-106 prospectus exemptions, particularly the Accredited Investor exemption (s. 2.3) or the Offering Memorandum (OM) exemption (s. 2.9). These exemptions shape disclosure, subscription processes, investor eligibility, and ongoing reporting. The OM exemption triggers NI 45-106’s financial reporting obligations, including audited annual financial statements, which can impact project economics.

Securities law also regulates dealer activity under NI 31-103. If the sponsor or its affiliates solicit investors or distribute LP units, they must assess whether they are “in the business” of trading under NI 31-103 and whether dealer, usually exempt market dealer (EMD), registration is required. Regulators scrutinise real estate issuers in this context due to high volumes of retail and quasi-retail distribution.

Tax considerations derive from the Income Tax Act (Canada), which treats LPs as flow-through entities for most purposes. This allows project-level deductions such as interest, development costs, and capital cost allowance (CCA) to flow to LPs. GST/HST rules apply to construction and supply, while land transfer tax laws, including the Land Transfer Tax Act (Ontario) and municipal equivalents, affect acquisitions, partnerships, and reorganisations.

Definitions & Thresholds

Structuring decisions depend on several key definitions. A limited partnership consists of at least one general partner (GP) with unlimited liability and one or more limited partners with liability capped at their contributed capital, provided they do not participate in management.

The GP is the operating mind of the LP. Typically, a special-purpose corporation is used as GP to isolate liability. A management company, often affiliated with the GP, provides development, construction, or asset-management services, receiving fees for these functions. The LP usually holds title to the development property or investments through either the corporate GP or a nominee corporation for land transfer tax planning.

Securities law defines the LP units as “securities” under Securities Act (Ontario), s. 1(1), meaning any prospectus exempt distribution of units must comply with NI 45-106. The Accredited Investor thresholds are central: individuals must satisfy the income or asset tests, while entities must meet net asset thresholds. Under the OM exemption, investors must meet the eligible investor threshold unless they are an Accredited Investor or fall under the Family, Friends and Business Associates exemption (NI 45-106, s. 2.9(2.3).

Tax characterization informs fund structuring. The at-risk amount rules under the Income Tax Act (Canada) govern the deductibility of losses allocated to limited partners. Allocation mechanics and withdrawal provisions must be drafted carefully, as they can affect a partner’s at risk amount, the timing of loss utilization, and the investor’s overall tax position.

Application in Practice

Structuring a real estate LP begins with a clear division of roles. The GP entity is incorporated and capitalised, usually minimally, and is appointed to manage the LP. The partnership agreement grants the GP broad authority to acquire land, enter construction contracts, obtain financing, manage capital calls, resolve disputes, and oversee project execution. Limited partners provide capital but do not participate in day-to-day management. If a third party-manager is used, the GP may then delegate operational tasks granted under the limited partnership agreement to the manager under a management agreement. 

Capital is raised through a private placement of LP units. The sponsor selects the appropriate NI 45-106 exemption, crafts an offering package (normally including a term sheet, investor presentation, and offering documents), and prepares subscription agreements and investor questionnaires and risk acknowledgments. Investor onboarding via a registered dealer requires KYC/AML checks and verification of accredited investor or eligible investor status. If the OM exemption is used, NI 45-106-mandated disclosure and audited financials must be delivered.

The property is acquired either by the GP in trust for the LP or through a special-purpose bare trustee. Development budgets, pro formas, and cashflows are prepared, with capital contributions staged across milestones (land acquisition, permits, servicing, vertical construction). Debt financing, including acquisition loans, construction facilities, mezzanine financing, or preferred equity, is layered into the structure.

Distribution waterfalls follow a typical pattern: return of capital, preferred return, GP catch-up, and carried interest. These provisions must align with tax allocations and must be drafted with precision to avoid unintended re-characterisation or investor disputes. The GP or management company earns development fees, construction management fees, or promote distributions for achieving project milestones.

Books and records must be maintained in accordance with applicable securities and corporate law requirements. Where the sponsor, GP, or manager is registered or required to be registered under NI 31-103, the recordkeeping standards in that instrument will apply. Regulators may request documentation supporting exempt distributions, LP unit pricing, marketing claims, and investor disclosures.

Grey Areas & Regulator Focus

Real estate LPs are a focal point for securities regulators because they frequently involve retail-adjacent investors, high leverage, and complex fee structures. One grey area involves determining when the sponsor must register as a dealer, most commonly an exempt market dealer (EMD). Some sponsors assume raising capital for one’s own LP does not require registration. Regulators, particularly in Ontario, have rejected this position. Soliciting investors, holding meetings, circulating pitch decks, and negotiating terms are frequently considered dealer activity unless a valid exemption applies.

Another grey area concerns disclosure. LP offering documents often include forward-looking financial projections, but regulators may scrutinise unsupported assumptions, omissions regarding risks, and inconsistent statements across materials.

Leverage and development risk create heightened disclosure sensitivity. Where a development LP relies on presales, cost escalation assumptions, or refinancing, an Offering Memorandum, if used, must clearly disclose those factors and associated risks. Related party arrangements, including development fees payable to affiliates, must be fully disclosed and, where the sponsor or manager is registered, addressed in accordance with NI 31-103 conflict of interest requirements.

A further grey area involves investor liquidity. Real estate development LPs are typically illiquid, but some sponsors imply exit timelines or return expectations that investors may misinterpret as guaranteed. Regulators may treat such statements as potential misrepresentations under Securities Act (Ontario), s. 126.2.

Interactions with Adjacent Regimes

Real estate LPs intersect with numerous legal regimes beyond securities law. Tax planning is central: LPs must ensure profit allocations reflect economic intent and comply with the Income Tax Act (Canada), particularly around capital cost allowance, developer fees, and cost-sharing arrangements across project entities. GST/HST must be considered for construction activities, self-supply rules, and commercial vs. residential classifications.

Financing law intersects with partnership structuring. Lenders may require specific governance provisions, reporting covenants, GP guarantees, or restrictions on withdrawals and distributions. These lender-driven constraints must align with the partnership agreement and offering materials.

Land transfer tax (LTT) rules apply on acquisition and in certain circumstances where a transfer of LP interests results in a change in beneficial ownership of Ontario land. The Land Transfer Tax Act (Ontario) includes anti-avoidance provisions that can be triggered unintentionally through reorganisations, LP interest transfers, or nominee structures. Municipal land transfer tax applies to properties in Toronto.

Corporate law governs GP entities, nominee corporations, and management entities. Privacy law applies when collecting investor information. Construction law governs contracts, liens, and project execution risk.

These adjacent regimes reinforce the need for an integrated approach to LP structuring, ensuring alignment between tax, financing, securities, and operational considerations.

Illustrative Scenarios

A mid-market developer forms an LP and raises capital exclusively through Accredited Investors. The sponsor relies on self-certified forms without verification. During an Ontario Securities Commission (OSC) review, regulators discover that several investors likely did not meet the Accredited Investor criteria. Because fundraising occurred repeatedly and the sponsor held numerous investor meetings, regulators assert both invalid exempt distributions and unregistered dealing. The LP faces enforcement action, and the sponsor must overhaul onboarding procedures.

In another scenario, a development LP uses aggressive financial projections in its marketing materials to support a 22% IRR target. Cost escalation and entitlement delays are understated, and sensitivity analyses are not provided. Investors later allege liability for misrepresentation under Securities Act (Ontario), s. 130.1. Regulators scrutinise the sponsor’s marketing practices, ultimately requiring corrected disclosure and enhanced governance.

A third scenario involves a construction project structured through an LP that holds the land and a GP-owned management company that earns development fees. Regulators review the LP after investor complaints and focus on insufficient disclosure of related-party fees and conflicts of interest. The sponsor must, in addition to addressing investor and regulator claims and actions, update its partnership agreement, revise offering materials, and document how conflicts are identified and addressed.

Compliance Checklist

• Form and organize the limited partnership, the corporate general partner, the corporate management entity, and, when used, the corporate land holding entity.
• Adopt a clear governance framework in the limited partnership agreement, allocating authority to the GP and defining investor rights, reporting obligations, valuation policies, and capital call mechanics.
• Enter into a written management agreement with the manager that clearly sets out services, authority, compensation, indemnities, and conflict disclosure.
• Prepare an offering package ensuring compliance with NI 45-106 and the Securities Act (Ontario).
• Where a third party exempt market dealer (EMD) is engaged, clearly delineate responsibilities for suitability, KYC, client documentation, and trade reporting.
• Document investor closings and file Form 45-106F1 on SEDAR+ within 10 days of each distribution.

What’s Changing

Regulators continue to monitor the real estate exempt market closely. The OSC has signalled ongoing concerns regarding unregistered dealing, aggressive marketing practices, and weaknesses in investor verification. Potential reforms to NI 45-106 may introduce more prescriptive verification requirements or expanded reporting obligations. CSA initiatives to modernise NI 31-103 could lead to more explicit rules around conflicts of interest, marketing oversight, and books and records. At the tax level, potential adjustments to GST/HST rules for purpose-built rental developments and changes to residential property tax incentives may affect project economics. As SEDAR+ matures, regulators will be better equipped to track exempt market activity across provinces, increasing scrutiny on high-volume real estate issuers.

Conclusion & Next Steps

A real estate LP is a powerful and flexible structure for development projects, but success depends on disciplined planning, clear governance, robust disclosure, and rigorous compliance. Sponsors must understand how securities law, tax considerations, financing requirements, and development risk intersect. A well-structured LP supports investor confidence, facilitates capital raising, and positions the sponsor to scale additional projects. By adopting a comprehensive compliance framework, managing conflicts of interest, and documenting decisions thoroughly, developers can mitigate regulatory risk and position their projects for stable execution.

Book a Consultation

If you are forming, restructuring, or operating a real estate limited partnership investment fund, contact us to schedule an initial consultation with Nick Wright.