Picture a hypothetical Brampton landowner with a vacant industrial lot and a builder with the crews and financing relationships to put a warehouse on it. Neither wants to sell out to the other, and neither wants a permanent business relationship. They want to do this one project, share the outcome, and go their separate ways. Someone says, “Let’s do a joint venture,” they shake hands, and the builder orders steel.
The phrase sounds as if it has a clear legal meaning, but Ontario has no joint venture statute and no such thing as registering “a JV.” The label describes a commercial idea. The law will look at what the parties actually did, and it may decide they formed something they never intended. So the most useful question is which legal form your shared project will take, and what you will write down before work begins.
This piece provides general information and is not legal advice on any particular project. Tax structure matters a great deal to these arrangements as well, so it should be reviewed by a tax adviser at the same time as the legal documents.
The Accidental Partnership Problem
Start with the risk that drives most structuring decisions. Under Ontario’s Partnerships Act, a partnership is the relationship between persons carrying on a business in common with a view to profit. No registration, agreement, or even intention to be partners is needed. Calling your arrangement a joint venture and adding “this is not a partnership” to the contract will help, but will not decide the matter, as a court looks to the substance.
The Act offers some guidance. Co-owning property does not by itself create a partnership, and neither does sharing gross returns. Receiving a share of the profits, however, is evidence that you are a partner, unless the evidence shows otherwise. Other signs include joint control of the business, shared bank accounts, a common trade name, and holding out to others as partners.
Why does this matter so much? Because a partner is an agent of the firm and of the other partners for the partnership’s business. One partner acting in the usual way can bind the others. Every partner is also liable jointly with the others for the firm’s debts and obligations. A subcontractor left unpaid by your co-venturer, a supplier who extended credit, or someone injured on the site may be able to come after you directly, even though your own part of the project was running flawlessly.
Partners can also owe one another fiduciary duties, requiring loyalty and full disclosure. That may conflict with your plan to keep pursuing similar work elsewhere.
Three Common Structures
Most shared projects in Ontario use one of three forms, sometimes with variations.
A contractual joint venture
The parties remain separate and sign an agreement dividing up the work and the results. Each owns its own assets, employs its own people, and sells its own output or shares in specified revenues. No new entity is created.
This is well suited to bid teams, marketing alliances, and projects where each party has a defined task. Hypothetically, a Brampton logistics firm and a cold-storage operator might jointly bid on a food distribution contract, with each performing and invoicing for its own segment.
It is relatively inexpensive and flexible, and easy to dismantle. The drawback is the partnership risk discussed above, which grows when the parties start sharing profits and decision-making rather than just cooperating. It also gives you nothing to hold jointly owned assets or to borrow against.
A jointly owned corporation
The parties incorporate a new company, usually under the Ontario Business Corporations Act (OBCA) or its federal counterpart, and each takes shares. The company signs the contracts, holds the property, hires staff, and borrows money.
The main attraction is limited liability. Generally speaking, the company’s creditors look to the company, and the owners’ other businesses are insulated, apart from any guarantee they sign. A corporation also provides a clear governance framework and a straightforward way to bring in or buy out participants.
The trade-offs are cost and tax. Losses generally stay inside the corporation and do not flow through to its owners, and getting money out as dividends may be less efficient. Directors take on statutory liabilities, including for unpaid wages and some tax remittances. And lenders will probably require personal or parent guarantees from a young company with no track record, which can take back much of the protection you were seeking.
A limited partnership
A limited partnership has at least one general partner, often a new corporation created for the purpose, and one or more limited partners who contribute capital. Income and losses can flow through to the partners for tax purposes. A limited partner’s liability is generally capped at what it has contributed, provided that partner does not take part in controlling the business. That last condition can be uncomfortable in a joint venture, where each participant usually wants a say, so the agreement has to be drafted with this point in mind.
Real estate projects frequently use this form or a co-ownership arrangement, where the parties hold title together through a nominee and share expenses and revenues directly. Co-ownership agreements carry their own partnership and tax questions. They are worth discussing with a lawyer and an accountant before the land changes hands.
What the Agreement Should Settle
Whatever form you choose, the document between the parties does the real work. If you want your deal to survive the first disagreement, these questions need answers.
Scope. Exactly what is this venture? A defined project, a territory, a product line? Vague scopes lead to arguments over whether a later opportunity belongs to the venture or to one party. Say whether the parties remain free to compete outside the scope.
Contributions. Who brings what, and at what agreed value? Cash is easy. Land, equipment, know-how, a customer relationship, and unpaid management time are not. Agree on values in writing up front.
Further funding. What happens when the project needs more money than planned? Common answers include mandatory calls, optional calls with dilution for the party who does not fund, and shareholder loans at a set rate. Without a clear answer, a cost overrun in month eight turns into a crisis.
Control. List the decisions that require unanimous agreement, such as budgets, borrowing above a limit, related-party contracts, and bringing in another participant, and then leave the rest to a management committee or a designated project manager. Too many unanimity items can bring day-to-day work to a stop. Too few can leave a party feeling blindsided.
Money out. Set out when distributions are made, in what order, and who gets paid first for management fees or cost recovery. Include a waterfall worked out with sample numbers if the formula is not simple.
Reporting. Each party should get regular financial statements, access to the books, and audit rights. If one party handles the accounting, the other’s right to inspect should be spelled out.
Liability between the parties. Each party should indemnify the other for losses caused by its own breach or negligence, and the insurance program should name the right parties. An indemnity is only as good as the party giving it, so consider this when your partner is a thinly capitalized company.
Intellectual Property and Confidential Information
Projects tend to generate things of value that nobody planned for: software, processes, customer lists, designs, a brand. An agreement should distinguish between what each party brought in and keeps, and what the venture creates. Licence terms should cover the venture’s right to use each party’s background material and what happens to that right when the venture ends.
Ownership also depends on who created the work. In the absence of a written assignment, the rules about authors and employers under the Copyright Act can produce surprising results, especially where a contractor wrote the code. If a shared brand is created, decide who owns it, and consider whether a trademark or other intellectual property filing is needed. A confidentiality clause should survive the end of the venture.
Competitors Working Together
If your co-venturer is also your competitor, take particular care. Section 45 of the Competition Act makes it a serious criminal offence for competitors to agree to fix prices, allocate customers or markets, or restrict supply, with penalties that include substantial fines and imprisonment. The ancillary restraints defence can protect limits that are directly related to, and reasonably necessary for, a legitimate broader agreement, and the broader agreement itself must not offend the section.
In plain terms, a real project with a legitimate purpose can include limits that are genuinely needed to make it work. A “joint venture” that is really just two local competitors agreeing not to bid against each other cannot. Keep your exchange of pricing and customer information to what the project truly requires, and if the joint activity is significant in a market, have it reviewed. Larger transactions may also raise merger review questions under the same statute.
Tax Is a Structuring Question, Not an Afterthought
Income tax treatment differs sharply among corporations, partnerships, and co-ownership, which is usually why the form gets chosen in the first place. HST can also be complicated. The Excise Tax Act provides a joint venture election in some cases, allowing one participant to account for the tax on behalf of the others, but it applies only to particular kinds of activities and conditions. Land transfer tax may also be triggered when property moves into a venture. Have these reviewed before signing and before title changes.
Deadlock and Disputes
With a 50-50 venture, disagreement can stop everything. The usual approach is a ladder:
- Escalation from project managers to senior principals within a set number of days
- Mediation, followed by arbitration or court
- An independent engineer or accountant for narrow technical or financial issues
- A buyout mechanism as a last resort, such as a shotgun clause or a put and call at a formula price
Shotgun clauses deserve careful thought, because they favour the party with ready access to cash. In a venture between a well-funded developer and a smaller local builder, the wealthier party may effectively be able to force out the other at a time of its choosing. Where this is a real concern, longer timelines or an alternative valuation process may be fairer.
Planning the Ending at the Beginning
Joint ventures are supposed to end. Build that into the document with care, since a poorly designed exit is the most common source of expensive fights. Address these questions:
- What events end the venture: project completion, a fixed date, a sale, insolvency of a party, or a material breach?
- Can one party withdraw early, and at what cost?
- Who gets each asset, including the leftover equipment, the customer data, and the phone number?
- Who honours warranties and handles latent claims after completion?
- How long must records be kept, and who keeps them?
- If you incorporated, who is responsible for the dissolution and final tax filings?
Warranty and construction liability questions in particular can outlive the project by years. A hypothetical warehouse completed in Brampton may generate a roof claim long after the parties have parted ways, so a holdback or reserve, or at least a clear allocation of responsibility, is worth considering.
Getting Started
Before you speak with a lawyer, put a two-page outline on paper: what each party is contributing, what each expects to receive, how long the project should last, and what would make you want to get out. A summary like this often exposes disagreements that would otherwise take months to surface. It also speeds up the drafting of a proper commercial agreement.
A term sheet is a good early step, but say clearly which terms are binding and which are not. If you are considering a shared project in Peel Region, Sawan Law House LLP can help you compare the structures in light of your particular risk and tax picture.