2025-10-01
Many Canadians look south of the border for income investments, often drawn by the high payouts from U.S. limited partnerships (LPs) and master limited partnerships (MLPs). Companies like Energy Transfer (ET) regularly offer distributions that look far more generous than traditional corporate dividends.
At first glance, the numbers are appealing. For example, ET currently pays about $1.32 USD per unit annually, or $0.33 per quarter. An investor holding 1,000 units might expect $1,320 USD in yearly cash flow. But the reality is very different for Canadians who hold LPs or MLPs in tax-advantaged accounts like RRSPs or LIRAs.
Video: https://youtu.be/Vhib3lxFcLo
1. Dividends vs. Distributions
It’s important to recognize that MLPs and LPs do not pay dividends in the way that U.S. corporations like Microsoft or Coca-Cola do. Instead, they pay partnership distributions.
- Corporations: Profits are taxed at the corporate level, then distributed to shareholders as dividends. Under the Canada–U.S. tax treaty, U.S. dividends held in RRSPs or LIRAs are exempt from the usual 15% withholding tax.
- MLPs/LPs: These are pass-through entities. The business does not pay corporate tax; instead, income (or losses) “flows through” to the partners. To the IRS, Canadian unitholders are treated as foreign partners — and that’s where the tax bite begins.
2. The 37% Withholding Tax Problem
Unlike U.S. corporate dividends, MLP and LP distributions are not covered by the Canada–U.S. tax treaty.
- The U.S. automatically withholds 37% tax on distributions paid to foreign (non-U.S.) investors.
- This withholding applies even inside registered accounts such as RRSPs or LIRAs.
- Worse still, because the tax was already withheld before reaching your Canadian brokerage account, you cannot recover it through the foreign tax credit.
Let’s return to our Energy Transfer example:
- Annual distribution: $1.32 per unit
- Withholding tax: 37%
- Net to Canadian RRSP investor: $0.83 per unit annually
So, if you hold 1,000 units in an RRSP or LIRA, instead of $1,320, you’d only receive $830 per year.
3. Registered vs. Taxable Accounts
- RRSP / LIRA / RRIF: You lose 37% of every distribution to U.S. withholding. No credit or refund is available.
- TFSA: Same as above — 37% withholding tax applies, unrecoverable.
- Taxable Account: Distributions are still hit with the 37% U.S. withholding tax, but you may be able to claim a foreign tax credit on your Canadian return. Even so, the reporting is complex, since MLPs issue K-1 partnership forms that don’t align neatly with Canadian tax slips.
4. The UBTI Risk
Beyond withholding taxes, MLPs can also generate Unrelated Business Taxable Income (UBTI). If UBTI in your registered account exceeds $1,000 USD in a year, your RRSP or LIRA may actually owe U.S. tax, which the Canadian trustee has to file and pay. While this is uncommon for small investors, it’s another reason why brokerages and advisors often discourage Canadians from putting U.S. MLPs in registered plans.
5. Better Ways to Access MLP Income
Canadian investors still interested in the high yields of the MLP sector have alternatives:
- MLP ETFs or ETNs: Some funds, like AMLP in the U.S. or Canadian-listed ETFs such as ENGY, package MLP exposure into a corporation or trust structure. This changes the tax treatment and often avoids the 37% withholding issue.
- Canadian Pipeline Stocks: Companies like Enbridge (ENB), TC Energy (TRP), or Pembina (PPL) offer strong dividends and pipeline exposure, but without the complex tax consequences.
- Stick to Corporations: In general, U.S. corporations (like utilities, REITs, or dividend aristocrats) are far more RRSP-friendly.
6. Key Takeaways
- LP and MLP payouts look attractive but come with serious tax leakage for Canadian investors.
- In RRSPs, LIRAs, TFSAs, and RRIFs, 37% withholding tax applies and cannot be recovered.
- Taxable accounts allow for some recovery via foreign tax credits, but reporting is messy.
- UBTI exposure creates additional risk in registered accounts.
- For most Canadians, holding MLPs directly is not worth the hassle. Exposure through ETFs or sticking to Canadian pipeline corporations is usually a more tax-efficient way to invest.
Bottom Line: When investing in an LP or MLP, there is a steep haircut. Best to avoid such businesses as there are much better investments to be owned.
Disclaimer: This analysis is for informational purposes only and does not constitute investment advice. Always perform your own due diligence or consult with a financial advisor before making investment decisions.
