An operating agreement in Canada governs the internal affairs of partnerships and limited liability entities, as Canada does not have a federal LLC statute equivalent to the US model. The primary vehicles are general partnerships (governed by provincial Partnership Acts such as Ontario's Partnerships Act, R.S.O. 1990, c. P.5), limited partnerships (Ontario Limited Partnerships Act, R.S.O. 1990, c. L.16), limited liability partnerships (LLPs available to certain professions), and the Alberta Unlimited Liability Corporation (AULC) which approximates some LLC features under the Alberta Business Corporations Act, R.S.A. 2000, c. B-9.
For general partnerships, the applicable provincial Partnership Act provides default rules in the absence of a partnership agreement. Under Ontario's Partnerships Act, s.24, partners share equally in profits and losses, have equal management rights, and must unanimously consent to admit new partners. A comprehensive operating agreement displaces these defaults by specifying capital contributions, profit-sharing ratios, management authority, decision-making thresholds, and withdrawal/expulsion procedures. For limited partnerships, the agreement must carefully delineate the roles of general and limited partners to preserve limited liability protection.
Tax considerations are central to Canadian partnership agreements. Under the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), partnerships are flow-through entities: income is allocated to partners under s.96 and taxed at the individual or corporate level. The agreement must coordinate profit allocations with the "reasonable in the circumstances" test that the CRA applies to income splitting among partners. Special allocations must withstand scrutiny under the general anti-avoidance rule (GAAR, s.245 ITA). GST/HST obligations should also be addressed.
Exit and dissolution provisions should specify buyout triggers (death, disability, retirement, voluntary withdrawal, breach), valuation methodology (independent appraisal, formula-based, or negotiated), payment terms (lump sum, installments, funded by insurance), and post-exit restrictive covenants. Dispute resolution clauses typically provide for mediation followed by arbitration under the applicable provincial Arbitration Act (e.g., Ontario Arbitration Act, 1991, S.O. 1991, c. 17). The agreement should also address governing law, entire agreement clauses, and the procedure for amendment.