What Constitutes a Legal Partnership in Ontario?
In Ontario, a legal partnership exists when there are “persons carrying on a business in common, with a view to profit”.
Let’s break this down into its main elements.
“Carrying on a business”
A “business” means every trade, occupation and profession”. And, includes any ongoing activity and even a single transaction. These words are non-exhaustive and intentionally broad; the law will evaluate the entirety of the circumstances to determine whether or not a partnership exists at law.
For example, these are all acts which have been found to constitute “carrying on a business” in a legal partnership:
- acquiring real property;
- buying and taking delivery of furniture;
- entering into a credit arrangement;
- advertising the business
It is crucial to note that Ontario courts have found that a partnership may arise even in relation to a single, time-limited activity.
That said, a business is less likely to be deemed a partnership where the people involved are merely passive investors; for example, if several people jointly owned an apartment building and collected rent (including sharing the profits of this venture).
“View to Profit”
These words simply mean that the undertaking is not for the purpose of carrying out a charitable, social or cultural purpose. There is no need to actually make profits. The business just needs to have the intention to profit.
“In Common”
This means that there is some type of agreement between the partners to work together. The agreement may be oral, written or implied by action.
What is important here is that this is an objective standard. The question is simply this: does some sort of agreement exist? If yes, then a partnership exists. Period. This will be true even if a partner did not think it did, and even if they expressly did not want an agreement to exist. Meaning, if a partner participate in a relationship that is found to be a partnership, then that partner’s intention or knowledge of the existence of a partnership does not matter.
Practically, this means that:
- a partner can be found to be a partner even if they don’t think they are, in fact, a partner;
- even if there is a written agreement denying that a partner intended to be a partner, a partnership will still be found to exist.
Interestingly, in the Ontario Partnerships Act, the co-ownership of property, on its own, does not make the co-owners partners (I will breakdown the implication of co-ownership of property in relation to partnership in a future blog post). Similarly, the sharing of gross returns (i.e. business revenues without deducted of related expenses) does not, on its own, create a legal partnership. However, receipt of profits of a partnership, absent any contrary evidence, does indicate the person is a partner.
It is difficult to define precisely the circumstances in which a partnership may be found to exist; the context of each situation is what matters. When we evaluate these elements together, we notice a particular risk emerging: you may be found to be operating a partnership when you never intended to.
Practically, this means that you should consult with your business lawyer on how to structure the business relationship in order to mitigate the risk of being found to be a partner. Such steps might include holding the partnership interest in a corporation; being compensated for any risk of being found to be a partner that cannot be addressed through contractual means; and including indemnities in any agreement establishing the relationship.
