The Q3 2025 PE Briefing

Ontario: An Attractive Choice for Non-US Flow-Through Vehicles

Ontario is a popular jurisdiction for foreign sponsors to establish limited partnership (LP) special purpose investment vehicles. The province offers tax and reputational advantages that make it attractive when compared to other jurisdictions with onerous anti-money-laundering and know-your-client requirements.

There are benefits for sponsors who choose Ontario when seeking a jurisdiction with no US nexus. Sponsors consider tax efficiencies and protection of limited liability of its limited partners the most important criteria when forming LPs—and Ontario offers both. With respect to reporting, Ontario LPs that do not carry on business in Canada and do not have a Canadian-resident general partner (and are otherwise managed and controlled outside of Canada) will not generally be subject to Canadian income tax reporting (assuming that the LP has at least one partner who is a non-resident of Canada) or Canadian income tax. The income of the LP is allocated to its partners and taxed under the laws where such partner is resident.

Ontario LPs can be formed by filing a declaration under the Limited Partnerships Act (Ontario). Formation requires only one general partner and one limited partner. The simplicity of the rules allow an LP in Ontario to be formed quickly and with little involvement from the regulators. Ontario LPs are not subject to any periodic filing requirements except for the requirement to submit a declaration of change if there is a change in any of the information in the declaration, such as the LP name or address of a general partner. There is also no legal requirement for a general partner or limited partner of an Ontario limited partnership to be resident in Canada.

Ontario LPs can be formed with administrative ease and are conveniently maintained with simple periodic filings and only nominal initial and ongoing fees. These qualities together with the tax benefits offered as a non-US flow-through vehicle, make Ontario a natural choice for foreign sponsors.

Earnout Drafting Tips

Earnouts in mergers and acquisitions can involve significant amounts of potential additional sale proceeds. Often, earnouts are the last major issue to be negotiated and the parties rush to settle their terms.

The following general drafting tips should be considered in the drafting of the earnout:

1. The purchase agreement terms can greatly impact the outcome in the event of a breach. Courts use the agreement as the starting point – and apply regular dictionary meanings. Courts also apply certain legal principles and precedents. Ensure that competent legal counsel is engaged.
2. For the seller, attempt to include detail regarding how the target business will be operated/funded post-closing so that there is maximum opportunity to achieve the milestones.
3. For the buyer, consider whether implementation is feasible given the constraints imposed by the earnout terms and consult with applicable buyer management to ensure management support.
4. For the buyer, be careful of the oral and written representations made to the target/seller about post-closing operations. If promises are made that are not honoured post-closing, the seller may have claims for misrepresentation or fraud.
5. Consider liquidated damages (a pre-estimate of the damages in certain circumstances) to simplify the calculation of (or limit) damages if breach by the buyer.
6. For the seller, consider acceleration of earnout payments if certain changes in the buyer's business (such as an IPO, change of control or termination of key personnel).
7. Consider the pros and cons of private arbitration (rather than public courts) for disputes.

Different considerations may apply in these situations depending on the circumstances. Legal advice should be sought out in any particular scenario.

SRS Acquiom's 2025 Deal Terms Study found that earnouts were used in 22 percent of non-life sciences private-target M&A transactions in 2024, up from 15 percent in 2019. The ABA's 2025 Canadian Deal Points Study found that earnouts hit a new high of 31 percent in transactions that involved private targets being acquired or sold by public companies.

Q3 2025 Canadian PE Activity

The number of private equity deals was up and announced aggregate value was down in Canada in Q3, according to Preqin. Globally, deal count declined but total deal value is up.

Software is leading the way by industry in Canada in 2025 with 35 transactions since the start of the year. Business support services is next with 25 deals, followed by insurance with 23. Financial services accounted for 15 transactions—and automobiles, other vehicles and parts and industrial machinery both had 11.

Looking Ahead

2025 has still not been the kind of year the private equity industry was hoping for—and the slowdown in exits and pressure on fundraising continue to cloud the outlook. But many in PE are adjusting to the uncertainty and keep tapping a deep well of creativity in dealmaking. And while the recent rate cuts by both the Bank of Canada and US Federal Reserve may not have an immediate impact, there is some optimism that further easing could propel more deal activity. We will be following these and other key developments in PE closely in the fourth and final quarter of 2025.