GST/HST and Investment Limited Partnerships

On September 8, 2017 the Minister of Finance introduced draft GST/HST legislation including the definition of Investment Limited Partnership (“ILP”).

An ILP is defined as a limited partnership that meets the following criteria:

1. Its primary purpose is to invest funds in properties consisting primarily of financial instruments such as marketable securities, trust units, partnership units or loans; and,

2. One of the following is applicable:

1. The limited partnership is promoted as a hedge fund, an ILP, a mutual fund, a private equity fund or a similar arrangement; or

2. 50% or more of the interests in the limited partnership are held by listed financial institutions;

The broad definition of an ILP may affect limited partnerships not typically considered as investment plans. When the conditions are met, the proposed changes to the GST/HST legislation will have the following consequences:

Effective on September 8, 2017

Services of management or administration rendered by the general partner (GP) to the ILP will be deemed to constitute a taxable supply of service for the benefit of the ILP. As a consequence, any amount payable by the ILP to the GP may be determined to be consideration for a taxable supply, subject to GST/HST. Even if no consideration is paid, services of management or administration will be deemed to have been made for a consideration equal to fair market value. The GP will be required to register for the purpose of the application of the GST/HST if its total annual taxable sales (including distributions from the ILP) exceed $30,000. The ILP will generally not be entitled to claim an input tax credit to offset the GST/HST payable to the GP.

This proposed changes apply in respect of management or administration services all or part of the consideration for which is paid or becomes due by the ILP on or after September 8, 2017. As a consequence, this change is likely to have a penalizing retroactive effect for services rendered prior but paid after September 8.

The draft legislation also introduces a special residency rule for ILPs. Where 95% or more of the interests in the limited partnership are held by non-resident members, the ILP will be deemed to be a non-resident of Canada. The management or administration service rendered by the general partner of a non-resident ILP will be zero-rated (taxable at a rate of 0%).

Effective for tax years beginning after 2018

The draft legislation also addresses the unequal GST/HST treatment of ILPs relative to other investment plans (held in corporations and trusts).The Minister intends to make ILPs subject to GST/HST compliance requirements that are currently imposed on Selected Listed Financial Institutions (“SLFI”). As such, for tax years beginning after 2018 an ILP will be required to adjust its final GST/HST liability based on the provincial residence of its investors.

The department of Finance is currently reviewing the submissions received from industry representative and evaluating whether amendments should be made to the September 8 proposals. We will keep you informed of modifications, if any.

The new requirements, if implemented as currently proposed, will add significant compliance obligations for ILPs. A member of the Crowe BGK Indirect tax team may be contacted to assist you in the application of the above-mentioned proposed changes.

Indirect Tax Team Members:

Jean-François Senécal, LL.B., D. Tax | Senior Tax Manager | 514 908-1012 |
[email protected]

Marie-Gabrielle Bronsard, M.Tax | Indirect Tax Manager | 514 908-3606 |
[email protected]

Éric Svoboda, B.C.L., LL.B, Attorney | Indirect Tax Specialist | 514 908-3600 |
[email protected]