Canadian Taxation Framework

Forms of Entity

Treatment of Expenditures in Canada

Flow-Through Shares

Investment Outside of Canada

Mergers & Acquisitions

Provincial Mining Taxes

Other Topics


Forms of Entity

Executive Summary

  • Corporations are separate legal entities that are often used because they limit the liability of investors from the operations of the corporation. The corporation pays tax on its income, and then investors in the corporation pay tax on distributions of profit (dividends) made by the corporation.
  • Partnerships are separate legal entities for some purposes only, and may offer limited liability to investors (partners) in some circumstances. For Canadian income tax purposes, a partnership computes its income as if it were a separate taxpayer, but the partnership does not pay tax. Instead, the partnership’s income is allocated out to the partners automatically, and the partners pay tax on the partnership’s income.
  • Joint ventures are not separate legal entities (either legally or for tax purposes), but rather contractual arrangements made between the joint venturers, each of whom includes their share of joint venture revenues and expenses in their taxable income.

The manner in which income from mining in Canada is taxed depends in part on the entity that is undertaking the mining activities:  different entities are taxed differently.  The choice of entity also has very important business and legal implications.


Corporations are the most common form of business organization in Canada.  They have separate legal (and perpetual) existence as persons, and have the capacity to own property, incur liabilities and carry on business generally.  Investors in corporations created under Canadian federal or provincial law (“shareholders”) own “shares” of the corporation evidencing their ownership interest in the corporation, and do not have an ownership interest in the property of the corporation.  From time to time the shareholders of the corporation vote to elect a “board of directors”, which meets to determine the general strategy of the corporation’s activities and supervise the persons of the corporation administering its day-to-day affairs (the “officers”).

A corporation can have different types or “classes” of shares with different rights (subject to any limitations existing in the relevant statute governing the corporation), and the rights of each class of a corporation’s shares are described in a constating document referred to as the “articles” of the corporation.  The principal attributes of shares of a corporation are its voting rights (if any) at meetings of the corporation’s shareholders, its dividend rights to share in distributions of profits, and its liquidation rights to the property of the corporation on the termination of the corporation’s existence.  Investors subscribe for new shares by delivering money or property to the corporation in exchange for the issuance of shares to them (or may instead purchase existing shares from another shareholder).  When a corporation issues a new share of any particular class of the corporation’s shares, the relevant corporate law typically requires that the corporation add the amount it received as consideration for issuing the share to the “stated capital” of that class of the corporation’s shares (i.e., each class of shares has its own stated capital amount).

The liability of shareholders in most corporations is limited, such that shareholders are not exposed to legal liability for the activities of the corporation and risk only the value of their shares in the corporation.  This “limited liability” is particularly important for activities such as mining where the operations present significant potential legal liabilities (e.g., environmental, worker safety, etc.).  Some Canadian provinces also permit the creation of unlimited liability companies (“ULCs”) where shareholders are exposed to some degree to liabilities of the corporation.  ULCs are often used where they potentially result in favourable tax treatment for non-Canadian shareholders under tax laws of another country (such as the United States).

Corporations are treated as taxpayers for Canadian income tax purposes:  the corporation that is carrying on mining activity in Canada is itself subject to and liable for tax on income generated by that activity.  As noted, corporations are subject to rates of tax that are different than the rates of tax applicable to natural persons.  A corporation may be created under the laws of Canada or a province of Canada, or may be created under the laws of another country.

Corporations pay tax on the income they earn, while shareholders pay tax on distributions of profits (dividends) paid to them by the corporation and on any gains realized when they dispose of their shares.  As such, there are two distinct levels of tax and two separate taxpayers:  the corporation and the shareholder.


Partnerships are a different form of entity.  Under Canadian law, a partnership requires that two or more persons (the partners) carry on business in common with a view to a profit.  Canadian law provides for both general partnerships (where all partners have full liability for the activities of the partnership) and limited partnerships.  In a limited partnership, the general partner actively manages the business and has full liability for the activities of the partnership, while the limited partners are not actively involved in the business of the partnership and are not liable for the partnership’s activities beyond their investment in the partnership.  The rights and obligations of the partners are governed largely by contractual agreement amongst them, which is usually set out in a partnership agreement governing matters such as the sharing of profits and liabilities, the management of the partnership and the rights of the parties on the dissolution of the partnership.  The partnership law (i.e., statutes and common law) of the jurisdiction in which the partnership exists also governs the rights and obligations of the partners.

In very general terms, for Canadian tax purposes the partnership is treated as owning the property used in and earning the income generated by the mining operation (i.e., the partnership is treated as a taxpayer for purposes of computing income), but the partnership itself does not pay tax.  Instead, the partnership’s income (net of deductions such as CCA, discussed here is then attributed to the partners whether or not the partnership actually distributes any property to the partners.  The partners themselves are then able to claim a number of important deductions in computing their respective taxable incomes (such as CEE and CDE, discussed here, and are liable to pay income tax on any remaining taxable income.

Partners are not considered to own the partnership’s property for tax purposes; instead they are considered to own a separate property that is their respective interest in the partnership, and they may realize a gain or loss from that partnership interest.  As such, partnerships are often attractive from a tax perspective, because for Canadian tax purposes they are treated as transparent or “flow-through” entities:  instead of the partnership being taxed, the income earned by the partnership is treated as having been earned by the partners themselves, and taxed in their hands.  Unlike corporations, partnerships involve one layer of tax (at the partner level), not two.

Partnerships are useful tax vehicles because they are very flexible, being largely governed by whatever contractual agreements the partners choose to put in their partnership agreement.  A partnership composed exclusively of Canadian partners is entitled to avail itself of certain “rollover” provisions in the ITA allowing it acquire property in exchange for an interest in the partnership or be wound up on a tax-deferred basis.

The CRA’s views on partnerships are set out in Interpretation Bulletin IT-90, “What is a Partnership?” available here.

Joint Ventures

Joint ventures are not themselves legal entities.  They really represent a contractual arrangement between two or more persons, usually for a specific project, whereby the parties each agree to contribute money, property or services and to share the resulting output and liabilities in an agreed-upon way.  A joint venture is not considered to be a separate entity either for legal or tax purposes.  Instead, the joint venturers each pay tax on their respective shares of revenues and expenses generated by the joint venture’s operations.  In mining joint ventures, the joint venturers typically appoint one party (usually the party with the greatest financial interest) to act as their agent in managing and operating the project on behalf of all of them.  Where this occurs, each joint venturer still reports his own share of the revenues and expenses of the joint venture for tax purposes.