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Investment Limited Partnerships – NEW GST / HST Changes Released

The federal Department of Finance released draft legislation on September 8,

2017 proposing new rules for the GST / HST treatment of “investment limited

partnerships” (ILPs). The changes include imposing GST / HST on most services

performed by the general partners of ILPs and subjecting the ILPs to new

reporting requirements.

Who is Affected

Not every limited partnership is affected. The changes will apply to ILPs, which

are defined as a limited partnership whose primary purpose is investing funds

primarily in financial instruments (such as shares of corporations, partnership and

trust units, and debt instruments) and which meet either of the following criteria:

• the partnership is represented or promoted as a hedge fund, investment

limited partnership, mutual fund, private equity fund, venture capital

fund or other similar collective investment vehicle; or

• listed financial institutions hold at least 50 percent of the value of all

interests in the limited partnership.

While this is a broad definition, it is likely to raise several interpretive issues, such

as when is a limited partnership represented or promoted as a collective

investment vehicle. However, the rules generally will not impact limited

partnerships that primarily engage in commercial activities, such as buying and

selling goods and real property and providing non-financial services. The main

target of the proposed changes appears to be limited partnerships used as

investment vehicles.

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For example, if a limited partnership (the “Construction LP”) is engaged in

constructing and selling new residential housing, the Construction LP’s primary

purpose is not investing in financial instruments and it would not be an ILP as

defined in the draft legislation. However, if another limited partnership (the

“Investment LP”) acquires limited partnership units of the Construction LP, the

Investment LP could be caught by the ILP rules if it markets its own units to the

general public and the Investment LP’s only activity is holding the partnership

units of the Construction LP.

GST / HST on Payments to General Partner

Generally, GST / HST is not payable on distributions of capital and profits to a

partner of a partnership because the partner’s interest in the partnership is

regarded as a financial instrument for GST / HST purposes and a distribution to

the partner is treated as a financial service. Usually, the partner is regarded as

performing its work in the course of the partnership’s business and, thus, the

partner is not making a supply to the partnership.

However, the GST / HST legislation deems most payments from investment

vehicles to the vehicle’s manager to be taxable payments. The same treatment

has now been extended to payments to the general partner of an ILP.

Under the proposed amendments, the general partner of an ILP will be deemed

to make a taxable supply to the ILP of all management, administrative and asset

management services that it performs for the partnership. This wording is likely

broad enough to cover most functions undertaken by a general partnership for a

limited partnership. The general partners will be required to charge and collect

GST / HST on the fair market value of the services performed for the ILP.

Determining the fair market of the services could raise myriad valuation issues.

Nevertheless, the Canada Revenue Agency (CRA) is likely to require the payment

of tax on all amounts actually payable to the general partner.

While the general partner will now be making taxable supplies and may be able to

claim input tax credits, it will also have to register for GST / HST purposes and

collect tax from the ILP.

For its part, the ILP will now carry an additional GST / HST burden, unless it

engages in making taxable supplies and can claim input tax credits. However, if

the ILP simply invests in other corporations, limited partnerships or other such

vehicles, its ability to claim input tax credits will be severely restricted. This

additional tax cost would generally be borne by the limited partners.

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It is worth noting that, as a financial institution, the ILP will be subject to the input

tax credit rules for financial institutions, which vary significantly from the general

rules in several respects.

New Reporting Requirements

ILPs will be added to the definitions of “listed financial institution” and

“distributed investment plan”, which will bring them squarely within the financial

institution reporting rules. Most are likely to fall within the definition of “selected

listed financial institution” (SLFI) as well. The result is that most ILPs will be

required to file the special returns for financial institutions, such as the SLFI

return. The annual information return might be a possibility for the ILPs that are

registered but not a SLFI. These are complex returns which will require the ILP to

track additional information which it would not ordinarily keep. Thus, ILPs can

expect their compliance costs to increase.

ILPs will also be required to report on a calendar year basis, effective in 2019,

regardless of their fiscal year for income tax and financial accounting purposes.

Effective Date of New Rules

The new rules for ILPs have an effective date of September 8, 2017.

However, tax on payments to the general partner will apply to all amounts that

became payable for the deemed service if any amounts become payable for the

service after September 8, 2017. This could impose tax on amounts that were

paid or became payable prior to the announcement date, if the pre- and post-

announcement payments are regarded as payment for the same supply.

The new rules are complex to navigate and understand. While the legislation is

still at a draft stage, the CRA is likely to administer it as if it had already been

enacted as law.

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For more information on how to determine the impact on your organization,

please contact:

B.C.

Heather Weber - 250.979.2575 or heather.weber@mnp.ca

Angela Chang - 778.374.2121 or angela.chang@mnp.ca

Alberta

Danny Crawford - 780.969.1426 or danny.crawford@mnp.ca

Manitoba / Saskatchewan

Jeff Harrison – 306.751.7998 or jeff.harrison@mnp.ca

Ontario

Kal Ruprai – 416.515.3811 or kal.ruprai@mnp.ca

Québec

Moise Pariente – 514.315.3678 or moise.pariente@mnp.ca

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