Tax Alert - Proposed GST/HST Changes for Investment Limited Partnerships from Federal Budget 2018

March 09, 2018

As part of the 2018 Federal Budget, the government announced their intention to move forward with proposed changes to the application of GST/HST to certain types of partnerships that were originally proposed on September 8, 2017 (the fall proposals). Take note that while the changes proposed on February 27, 2018 largely mirror the fall proposals, the government has made some modifications to the amendments that are worth noting.

Background

As a bit of a background, the fall proposals included the following amendments to the Excise Tax Act:

  • A newly defined “investment limited partnership” (ILP) for GST/HST purposes;
  • A requirement for GST/HST to be collected and remitted on supplies of management and administrative services provided by a general partner (GP) to an ILP;
  • The designation of certain ILPs as Selected Listed Financial Institutions (SLFI), requiring these ILPs to file complex GST/HST returns that were not previously required.

Please note that these items are discussed in detail in our Tax Alert, “Proposed GST/HST Changes and Their Impact on Investment Limited Partnerships”.

What is an ILP?

Prior to the introduction of the fall proposals, distributions from a limited partnership (LP) to a GP were generally viewed as exempt supplies of financial services for GST/HST purposes. The fall proposals redefined certain LPs as ILPs, treating payments made by those ILPs related to management and administrative services as taxable for GST/HST purposes. As a result of these proposals, it becomes important for a LP to determine if it is an ILP. Where a LP is not an ILP, it should not be captured by the new rules.

The fall proposals provided that a LP will be viewed as an ILP where the LPs “primary purpose” is to invest funds in property consisting primarily of financial instruments (such as equity securities, debt securities, units of a partnership or trust, and insurance policies) and does the following:

  • the LP is represented or promoted as a hedge fund, ILP, mutual fund, private equity fund, venture capital fund or other similar collective investment vehicle; or
  • the unitholders in the LP are listed financial institutions and hold 50% or more of the total value of all the interests in the LP.

Initially, there were concerns and questions on the part of taxpayers as to the timing of when GST/HST would need to be collected on the supplies as well as how to determine the fair market value of the management and administrative services supplied by GPs to ILPs. Although some clarity was provided in the modifications introduced as part of the 2018 Federal Budget, taxpayers are left with unanswered questions related to valuing supplies between non-arm's length parties.

2018 Federal Budget – Revised Legislation

In accordance with the fall proposals, GST/HST was payable on the fair market value of management and administrative services provided to an ILP by the GP where consideration became due or was paid on or after September 8, 2017. In contrast, as part of the federal budget, the government proposed modified provisions which require that GST/HST will apply to the supply of management and administrative services that are rendered by a GP to an ILP on or after Sept 8, 2017 unless the GP collected GST/HST in respect of such services before that date. The Federal Budget also proposes that GST/HST will generally be payable on the fair market value of management and administrative services in the period in which the services are rendered.

Where an ILP meets the definition of a SLFI, it will be subject to the complex reporting requirements that are to be effective January 1, 2019. However, the Federal Budget provides that SLFI's will be eligible to elect to file these returns one year earlier (i.e. January 1, 2018) providing certain SLFIs that have incurred HST on the majority of expenses with the opportunity to potentially reduce their HST liability.

It is worth reiterating that the government did not specifically address the valuation concerns associated with supplies of management and administrative services supplied by GPs and ILPs that are not dealing at arm's length in the budget.

What are the Implications of the Proposed Changes?

Given the proposed changes, it is a good idea for LPs to confirm whether they meet the definition of ILP. In cases where they do, GPs of ILPs will need to register for and collect GST/HST on supplies of management and administrative services rendered on or after September 8, 2017. Take note that this will result in additional reporting requirements for GPs and an additional cost to ILPs as this GST/HST will likely not be recoverable.

As well, GPs may consider the need to undertake a valuation study to determine what constitutes the fair market value of the management and administrative services that are provided to ILPs. Keep in mind that his will further increase costs to GPs and ILPs. Do not forget that ILPs that are SLFIs for GST/HST purposes will need to comply with additional reporting requirements effective January 1, 2019 (or earlier if an election is made).

Lastly, it would appear that the new ILP rules are not intended to apply to LPs that own or invest directly in residential or commercial real estate. Unfortunately, LPs that exist to hold units in other LPs that are engaged in these activities may be viewed as ILPs. Structuring of such real estate investments should be reviewed in the context of the fall proposals.

Summary

We are committed to keeping you updated on current tax changes. Should you have any questions on the proposed changes and how they may impact your ILP, please contact Shelley Smith, Indirect Tax Practice Leader, or a trusted BDO advisor.

Learn more about our Indirect Tax team.


The information in this publication is current as of March 7, 2018.

This publication has been carefully prepared, but it has been written in general terms and should be seen as broad guidance only. The publication cannot be relied upon to cover specific situations and you should not act, or refrain from acting, upon the information contained therein without obtaining specific professional advice. Please contact BDO Canada LLP to discuss these matters in the context of your particular circumstances. BDO Canada LLP, its partners, employees and agents do not accept or assume any liability or duty of care for any loss arising from any action taken or not taken by anyone in reliance on the information in this publication or for any decision based on it.

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