written on behalf of Feigenbaum Law
Earlier this month, Canada’s Department of Finance released draft legislation intended to amend the Excise Tax Act (ETA) and address newly defined “Investment Limited Partnerships”.
These proposed amendments will impact mutual funds or investment plans that use limited partnerships in their structure (including private equity, venture capital, and hedge funds), and has the potential to significantly increase the amount of GST/HST paid by limited partnerships.
The Draft Legislation
The draft legislation essentially deems the general partners of these newly defined Investment Limited Partnerships, which provide “management or administrative services” to the partnership be making a taxable supply to the partnership.
The legislation also extends the application of the GST/HST rules currently applicable to selected listed financial institutions (SLFI) to the Investment Limited Partnerships.
What are Investment Limited Partnerships?
An Investment Limited Partnership is broadly defined within the draft legislation. It includes certain limited partnerships whose primary purpose is to invest funds in financial instruments, including hedge funds, private equity funds, venture capital funds, mutual funds, and other collective investment vehicles.
The definition also includes certain limited partnerships that act as investment vehicles for investing on behalf of listed financial institutions.
The draft legislation contains a stipulation stating that an Investment Limited Partnership is not considered resident in Canada where at least 95% of all interests in it are held by members who are non-residents of Canada.
Services of a General Partner Subject to HST/GST
Under current rules, distributions made to a general partner in a limited partnership are not subject to GST or HST if that general partner’s activities are done “in the course of” their partnership activities.
Under the draft legislation, management or administrative services provided by the general partner are deemed not to be made “in the course of” their partnership activities. As such, any payments to the general partner for such services (i.e. anything that covers most activities performed by a general partner) will be subject to GST/HST, where the partnership is an investment limited partnership.
The draft provisions essentially treat the provision of management or administrative services by a general partner as a separate taxable supply by that partner to the partnership.
If the draft legislation is passed, any distributions to a general partner after September 8, 2017 will be subject to GST/HST (including distributions that have been accrued but not paid out).
Extension of SLFI Rules
In general, financial service providers are not able to register for GST/HST purposes, nor are they able to claim input tax credits (ITCs) to offset any GST/HST paid.
If the SLFI rules did not exist, financial services providers would be inclined to relocate to jurisdictions with no HST in order to minimize taxes on things such as management fees. The SLFI rules remove this incentive. They require “investment plans” (specifically defined in the ETA) and certain other specific financial institutions to calculate their GST/HST based on the residence of investors.
Currently, “investment plan” as defined under the ETA includes mutual fund trusts and corporations, registered pension plan trusts, and similar entities, but does not include partnerships. Under the draft legislation, the SLFI rules would be extended to Investment Limited Partnerships, which would be treated similarly to entities currently defined as investment plans.
The Department of Finance is accepting comments on the draft legislation until October 10, 2017. We will continue to follow developments in this regard, and will provide updates as they become available.
In the meantime, if you have questions about personal or corporate tax planning, contact the team at Feigenbaum Law. We have unparalleled knowledge of both U.S. and Canadian tax, and are leaders in our field. We offer services to clients in the US, Canada and around the world. Contact us to learn more about how we can help or call us at (905) 695-1269 or toll free at (877) 275-4792.