Many partnerships in Ontario run on nothing but a handshake. The arrangement holds until it fails, and at that point the Partnerships Act supplies every term the partners never negotiated. Those defaults rarely match what either side assumed. This guide explains what governs partnership disputes in Ontario, how a partnership ends, and what an exiting partner can actually claim.
You May Be in a Partnership Without Knowing It
The Partnerships Act, R.S.O. 1990, c. P.5, does not require a written agreement, or any document at all. Section 2 defines the relationship:
Partnership is the relation that subsists between persons carrying on a business in common with a view to profit.
Section 3 then tells a court how to decide whether one exists, and rule 3 is the one that catches people. Receiving a share of the profits is proof, absent evidence to the contrary, that the recipient is a partner.
Read the rest of rule 3 before you panic. It expressly carves out an employee paid by a share of profits, a lender under a written profit-linked contract, a debt repaid in instalments out of profits, and a vendor of goodwill paid the same way.
Conduct decides it, not paperwork. Many a partnership dispute in Ontario begins with one side arguing there was never a partnership at all. The essential ingredients were set out by Bastarache J. in Continental Bank Leasing Corp. v. Canada, [1998] 2 S.C.R. 298, and adopted by a unanimous Court in Backman v. Canada, 2001 SCC 10: a business, carried on in common, with a view to profit.
Co-ownership is not partnership
The argument runs the other way as well, and it decides many a partnership dispute in Ontario at the threshold. In A.E. LePage Ltd. v. Kamex Developments Ltd. (1977), 16 O.R. (2d) 193, one co-owner of an investment property signed an exclusive listing agreement without the authority of the others, and the broker sued them all on the footing that they were partners. The Court of Appeal held that owning property in common and taking profits from it does not by itself make the owners partners. Instead, the question is whether they intended to carry on a business together, or only to regulate their rights as co-owners.
The Default Rules Are Not What You Expect
Where there is no agreement, section 24 supplies the terms, and they surprise almost everyone. These defaults sit at the centre of many a partnership dispute in Ontario.
Partners share capital and profits equally and contribute equally to losses, regardless of who put in more money or did more work. Every partner may take part in management, and every partner may inspect and copy the books. Nobody draws pay either, because rule 6 says flatly that “[n]o partner is entitled to remuneration for acting in the partnership business.”
Rule 8 then splits decision-making in two:
Any difference arising as to ordinary matters connected with the partnership business may be decided by a majority of the partners, but no change may be made in the nature of the partnership business without the consent of all existing partners.
Admitting a new partner likewise takes everyone’s agreement.
Then there is section 25, which decides more partnership disputes in Ontario than any other provision:
No majority of the partners can expel any partner unless a power to do so has been conferred by express agreement between the partners.
Without an agreement, therefore, you cannot fire your partner. If you are thinking of starting a business partnership, it makes sense to have a written agreement so that you are not governed by the rather harsh default rules.
Fiduciary Duties Run Both Ways
Partners owe each other more than commercial good faith.
Section 28 requires partners to render true accounts and full information on everything affecting the partnership. Section 29(1) then reaches side benefits:
Every partner must account to the firm for any benefit derived by the partner without the consent of the other partners from any transaction concerning the partnership or from any use by the partner of the partnership property, name or business connection.
Section 30 goes further. A partner who carries on a competing business of the same nature without consent must account for and pay over the profits.
Ontario courts apply these sections strictly, and dishonesty is not a precondition. A judge can order a partner who honestly believed an opportunity was personal to hand over every dollar of it, which is why side ventures drive so many partnership disputes in Ontario.
How a Partnership Ends
Four routes exist, and choosing the wrong one gets expensive. Each ends the firm rather than removing one partner, which is the distinction that catches people in a partnership dispute in Ontario.
Dissolution by notice
Section 32 dissolves a partnership entered into for an undefined time when any partner gives notice of an intention to dissolve. That describes almost every handshake arrangement, which the Act calls a partnership at will.
The power is immediate, it cuts both ways, and it is the most misused tool in any partnership dispute in Ontario.
Notice generally cannot be withdrawn once given, so it makes a poor bargaining tactic. It also dissolves the firm rather than removing your partner, so the business, its contracts and its goodwill go into wind-up rather than into your hands. And where an agreement fixes a term or sets out an exit mechanism, this route may not be open at all.
Dissolution by events
Subject to any agreement, section 33 provides that the death or insolvency of a partner dissolves the whole partnership. Where a creditor charges a partner’s share for that partner’s separate debt, the others may dissolve at their option.
Dissolution by illegality
Section 34 dissolves a partnership in every case on any event that makes it unlawful to carry on the firm’s business, or for the members to carry it on in partnership. Sections 32 and 33 both open with the words “Subject to any agreement between the partners.” Section 34 does not, so the partners cannot draft around it. A lost licence or professional registration is the common trigger.
Dissolution by the court
Section 35 lets a partner apply to dissolve the firm. Most of the grounds target the conduct of a partner other than the applicant: permanent incapacity, conduct calculated to prejudicially affect the business, wilful or persistent breach of the agreement, and conduct making it not reasonably practicable to carry on business with that partner.
Two further grounds stand on their own. Either the business can only be carried on at a loss, or the court considers dissolution just and equitable in the circumstances.
This route runs slower and costs more than notice. However, a judge supervises it, and the last two grounds are broad enough to cover most genuine falling-outs.
Buyouts and Damages in a Partnership Dispute in Ontario
Here is the point that reframes most partnership disputes in Ontario. The Act contains no buyout formula and no equivalent of the shareholder oppression remedy.
The statutory outcome is an accounting and a winding up, not a court-ordered purchase at a valuer’s number. A negotiated buyout really settles that entitlement, which is why parties fight over valuation rather than calculate it.
On a final settlement, assets go first to outside creditors, then to repay partners’ advances, then to repay capital, with anything left divided in the profit-sharing proportions. Document whether your money went in as a loan or as capital, because loans rank ahead.
An exiting partner also holds a valuable right where the others carry on using partnership assets before settling the accounts. That partner may elect between a share of the profits attributable to the use of their share of the assets, or interest at five per cent a year instead. The election usually waits until an accounting shows which is worth more.
Note the difference between the two remedies. An accounting is gain-based and strips a partner of what they made, without you proving your own loss, whereas damages require you to quantify what you lost. The accounting is often the stronger claim in a partnership dispute in Ontario, because a partner’s gain is easier to prove than the firm’s counterfactual profits.
What to Do Next: When to Call a Lawyer
Do not send a dissolution notice to make a point. Take advice on whether you are actually in a partnership at will before anything goes out. A notice dissolves the firm on the date it names, or on the date it reaches the other partners if it names none, and you generally cannot recall it.
Secure the records now. Your statutory right to inspect and copy the books is far cheaper to exercise than to enforce, so take bank statements, ledgers, client and supplier lists, tax filings and correspondence.
Be careful about trading after dissolution. Your authority narrows to winding up and completing existing transactions, and any profit the firm’s assets generate remains exposed to the exiting partner’s election.
Do not start a competing business while you are still a partner, and do not accept a final payout before you have seen an accounting. Both mistakes recur in partnership disputes across Ontario.
The first email usually makes a partnership dispute in Ontario worse. If your partnership is breaking down, contact Cowan before you send it.
