A new measure in the federal budget will facilitate the use of limited partnerships by tax-exempt and foreign investors for their venture capital investments.

The first measure deals with “qualified limited partnerships”. At present, limited partnership structures can be unattractive to pension funds because interests in limited partnerships are generally treated as foreign property and pension funds are therefore prohibited from investing in them by the foreign content rule.

Several exceptions from characterization of limited partnership investments as foreign property are presently included in income tax regulations, including an exception for qualified limited partnerships (QLPs).

One of the conditions for QLP eligibility is that none of the limited partners may hold more than a 30% interest in the partnership. This ownership limitation has been identified by the venture capital industry as a potential impediment to venture capital investment in Canada.

The federal government has proposed to remove this potential impediment in the budget, by legislating elimination of the 30% foreign ownership limitation for QLPs.

Accordingly, a limited partnership may be a QLP even though a limited partner, either alone or as part of a non-arm’s-length group, has more than a 30% ownership interest in the partnership. This measure will apply after 2001.