As Canadian investors continue to look south for diversification and income, U.S. publicly traded partnerships (PTPs) often come up as potential opportunities. While these investments can be attractive, they carry U.S. tax implications that are very different from owning U.S. stocks and are often overlooked.
Unlike investing in shares of a U.S. corporation, investing in PTP units can quietly pull non‑U.S. investors into the U.S. tax system; often in ways that are unexpected, complex, and poorly understood. The result? Surprise tax filings, confusing withholding, and a significant compliance burden that many investors only discover after the fact.
Let’s discuss why this happens and what non‑U.S. investors should know before investing.
What Makes Publicly Traded Partnerships Different?
At first glance, PTPs look like stocks. You can buy and sell them on major exchanges like the NYSE or NASDAQ, just like shares of a corporation. From a U.S. tax perspective, however, they are very different.
PTPs are generally treated as flow‑through entities, not corporations. That means the partnership itself doesn’t usually pay U.S. income tax. Instead, its income, deductions, and credits “flow through” to the investors, called partners, who are taxed as if they earned that income directly.
Why PTP Income Becomes Effectively Connected Income (ECI)
Many PTPs are actively operating businesses in the United States. For example, pipelines, energy storage, shipping, or real estate operations. When a partnership is engaged in a U.S. trade or business, the tax rules treat all partners as being engaged in that business as well. That includes non‑U.S. investors.
As a result, a non‑U.S. investor’s share of partnership income is classified as effectively connected income (ECI). This is a critical distinction because ECI is taxed very differently from passive income like dividends or interest.
Instead of a simple flat withholding tax, ECI is subject to graduated U.S. income tax rates, up to 37% for individuals and 21% for corporations. In other words, non‑U.S. investors are treated much more like U.S. taxpayers than they might expect.
Withholding and Filing Obligations: Where It Gets Complicated
Once ECI enters the picture, the compliance obligations quickly multiply.
1. Annual Withholding on PTP Income
PTPs are required to withhold U.S. tax on a non‑U.S. partner’s share of effectively connected taxable income. The withholding is done at the highest applicable U.S. tax rate, regardless of the investor’s actual tax position.
This often results in over‑withholding. Recovering that excess requires filing a U.S. federal income tax return.
2. Selling PTP Units: The 10% Withholding Trap
Many investors are especially surprised when they sell their PTP units.
Under U.S. tax law, when a non‑U.S. person sells an interest in a PTP, the gain is generally treated as ECI. To enforce this, the rules require the buyer (or broker) to withhold 10% of the gross amount realized, not just the gain on the sale.
Even if the investor sells at a loss, the withholding can still apply. Once again, the only way to recover excess tax is by filing a U.S. tax return.
3. U.S. Tax Returns Are Not Optional
Non‑U.S. investors in PTPs are generally required to file a U.S. federal income tax return:
- Form 1040‑NR for individuals
- Form 1120‑F for corporations
This filing requirement exists even if the investor’s only U.S. connection is the PTP investment and even if all tax has already been withheld at source.
4. State Tax Filings May Also Apply
Because many PTPs operate across multiple states, non‑U.S. investors may also face state income tax filing obligations. These rules vary by state and are often overlooked until notices start arriving.
Estate Tax Exposure
Another often‑missed issue: PTP units are U.S. situs property for U.S. estate tax purposes. Non‑U.S. individuals holding PTP units at death may face U.S. estate tax of up to 40% on their value, an exposure that does not apply in the same way to shares of U.S. corporations.
U.S. Individual Taxpayer Identification Number (ITIN).
Canadian investors are required to obtain U.S. ITINs to file a U.S. federal tax return. PTPs generally require Canadian investors to provide their U.S. ITINs to track U.S. federal tax withholding and properly report annual tax information.
Recently, the Internal Revenue Service issued a directive making it much harder for Canadian investors to obtain a U.S. ITIN. Before the change, a Canadian investor could file IRS Form W-7 to obtain their ITIN by simply providing the name and Employer Identification Number of the PTP. Starting in June 2026, Canadian investors will need to provide further details in their ITIN application which include a copy of the PTP agreement showing them as a partner. Such a document is near impossible to obtain for PTPs, forcing Canadian investors to wait until the year following their initial investment to apply for their ITIN with their U.S. federal tax return.
Hopefully, the IRS will listen to commentary from tax professionals and relax these requirements for PTP owners applying for ITINs.
Practical Takeaways for Non‑U.S. Investors
If you’re considering investing in U.S. PTPs, a little planning can go a long way:
- Get U.S. tax advice before investing. PTPs are not “set‑and‑forget” investments for non‑U.S. persons.
- Expect to file U.S. tax returns annually. This is part of the cost of ownership.
- Plan ahead for sales. The 10% withholding on gross proceeds can create cash‑flow issues.
- Don’t ignore estate tax exposure. This risk should be considered as part of broader cross‑border estate planning.
Understanding the tax and compliance obligations before investing can help avoid surprises and ensure the investment aligns with your overall financial and estate planning goals.
If you have questions about current or prospective U.S. investments, we can help. Please contact Paula Owen, Partner to learn more.
