On September 8, 2017, the Department of Finance Canada released proposed amendments to the Excise Tax Act (“ETA”) that could deem certain payments from “investments limited partnerships” to its general partner (“GP”), which were historically exempt from this taxation, to be subject to GST/HST. The Department of Finance Canada is accepting comments in respect of the proposed legislative amendments until October 10, 2017.
According to the current rules, where a GP renders services to the limited partnership (“LP”) in the course of the LP’s activities, the ETA deems that the GP is not making a supply to the LP. Consequently, GST/HST would not apply to distributions made by the LP to the GP in relation to such services.
Proposed legislative amendments
When a GP renders management or administrative services to an “investment limited partnership”, whether in the course of the LP’s activities or not, the ETA would deem the services to be taxable supplies, and any distributions or other payments made by the investment LP to the GP would be subject to GST/HST.
What is the impact?
Where a partnership (such as an investment fund) used to be able to make distributions to GPs and avoid having to pay an additional amount for GST/HST on that distribution, pursuant to the proposed legislative amendments, GST/HST will now apply on this amount. For partnerships engaged entirely in financial services, this GST/HST may not be recoverable in the form of input tax credits, and the tax will be a cost to the partnership.
GP entities that were not previously registered for GST/HST will need to register if the aggregate value of all taxable supplies (including payments made to the GP from the LP) is in excess of $30,000. Failure to do so would generally result in an assessment by the Canada Revenue Agency.
Who is affected?
A new definition of “investment limited partnership” will be included in the ETA, which has a vast meaning and will likely trigger LPs that are not typically seen as “investment” partnerships to fit within the meaning of “investment limited partnership”. Hence, not only would typical investment LPs, such as private equity or portfolio investment LPs, be included, but it could also include LPs engaged in a real estate or operating business.
When will the new rules apply?
The measures will apply in respect of the supply of a management or administrative service of a GP to an investment LP, where the consideration by the LP becomes due to the GP on or after September 8, 2017. Therefore, these amendments will apply to amounts paid by the investment LP that have accrued for the past year(s), but only became due on or after September 8, 2017.
What about QST in Québec?
While it is highly likely that the Québec legislation will harmonize with these proposed amendments for QST purposes, there has been no confirmation released in this respect.
What should you do?
If you operate as or are invested in a limited partnership, you should review your arrangements to determine how these proposed amendments can affect your business. These proposed amendments may add a tax cost to existing arrangements and Dentons’ tax team can assist you in making these determinations, as well as propose tax efficient alternatives.