0101-18 Investment Limited Partnerships - MNP LLP Library/mnp/images/pdf/0101-18 Investment... ·...
Transcript of 0101-18 Investment Limited Partnerships - MNP LLP Library/mnp/images/pdf/0101-18 Investment... ·...
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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.
Tax Alert
TAX ALERT - CANADA
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.
TAX ALERT - CANADA
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.
TAX ALERT - CANADA
For more information on how to determine the impact on your organization,
please contact:
B.C.
Heather Weber - 250.979.2575 or [email protected]
Angela Chang - 778.374.2121 or [email protected]
Alberta
Danny Crawford - 780.969.1426 or [email protected]
Manitoba / Saskatchewan
Jeff Harrison – 306.751.7998 or [email protected]
Ontario
Kal Ruprai – 416.515.3811 or [email protected]
Québec
Moise Pariente – 514.315.3678 or [email protected]
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