On Sept. 8, 2017, Canada’s Department of Finance released draft legislation to amend the Excise Tax Act (Canada) with regards to investment limited partnerships, and was accepting comments until Oct. 10, 2017.
If implemented, the suggested changes will result in certain limited partnerships being required to pay Goods and Services Tax/Harmonized Sales Tax on management and administrative services provided by their general partners, even if the general partner is providing such services under obligations as a member of the partnership.
Implications
Under the existing regime, a general partner conducting activities in its capacity was generally not considered to be making a supply to the partnership, provided such activities were not “otherwise than in the course of the partnership’s activities,” and no GST/HST applied to distributions compensating the general partner for such activities. However, it was not always clear whether a partner was performing services in the course of the partnership’s activities (and therefore no GST/HST applied, as many practitioners believed was a reasonable position), or as taxable services that were supplied to the partnership (which is an existing audit risk). The proposed amendments resolve this issue for certain limited partnerships by deeming any management or administrative services provided by a general partner to an investment limited partnership to not be done by the general partner as a member of the partnership and to have been done otherwise than in the course of the partnership’s activities.
The proposed amendments link to the existing rules for supplies by partners to a partnership otherwise than in the course of the partnership’s activities. These existing rules deem that the general partner made the supply of services for consideration that becomes due at the time the supply is made, equal to the fair market value at that time, determined as if the person were not a member of the partnership and were dealing at arm’s-length with the partnership.
In practice, this will mean that the general partners who provide such management and administrative services to investment limited partnerships must register for GST/HST and invoice and remit GST/HST on a regular basis (assuming their services are supplied regularly) on amounts that meet the arm’s-length test. The deeming rules do not explicitly require a general partner to charge GST/HST on its carried interests or other partnership distributions. The rules simply deem a certain amount of consideration, based on an arm’s-length, fair market value test, to have been paid to the general partner and the partner is required to remit GST/HST on that amount, without regard to the partnership distributions that are paid. That said, the new amendments, in conjunction with the existing rules, will likely lead to increased scrutiny of the activities of investment limited partnerships and may provide additional scope for the Canada Revenue Agency to assert on audit that partnership distributions (or portions thereof) should be characterized as taxable fees for services, as well as for disputes regarding the fair market value for such services.
The proposed rules also include a broad definition of “investment limited partnership,” which appears intended to capture limited partnerships whose primary purpose is to invest funds in financial instruments. The new rules should not apply to operating limited partnerships whose primary purpose is to directly purchase or manage real estate or infrastructure assets. However, they may apply to some partnerships in the ownership structure that do not directly hold the real estate assets.
Once the new rule becomes law, consideration for management and administrative services performed by a general partner that becomes due on or after Sept. 8, 2017 is subject to GST/HST (assuming the general partner has not been charging tax on its services prior to that time). If the general partner has been charging GST/HST on a management/administrative service fee prior to Sept. 8, 2017, the new rules allow the CRA to audit prior periods (e.g., determine if such fees were at proper fair market value).
Changes to SLFI rules
The proposals also expand the selected listed financial institution rules to investment limited partnerships that qualify as SLFIs. The SLFI rules will apply to fiscal years of investment limited partnerships that begin after 2018.
The amendments propose treating qualifying investment limited partnerships as listed financial institutions, which may cause them to qualify as SLFIs. Such a partnership would generally be considered a SLFI if it has a permanent establishment in an HST province and a permanent establishment in any other province. Investment limited partnerships would be considered to have a permanent establishment in a province if a partner holding one or more units (e.g., an interest in the partnership) is resident in the province or if the investment limited partnership is able to sell or distribute its units in the province. The proposals also expand the definition of “distributed investment plan” to include investment limited partnerships. As a result, the current SLFI rules that apply to distributed investment plans will also generally apply to investment limited partnerships.
Allan Gelkopf and Robert Kreklewich are partners and Zvi Halpern is an associate with Blake, Cassels & Greydon LLP