On July 22, the Canadian federal Department of Finance (Finance) released a Consultation Paper on proposed changes to the GST/HST rules which, if enacted, would apply to certain limited partnerships and investment plans. Finance has invited comment on the proposals in the Consultation Paper, to be submitted from interested parties by November 30, 2016.
What You Need To Know
- Investment plans (e.g., mutual funds, pension plans, etc.) with permanent establishments in two or more provinces, including at least one HST province, are subject to the SLFI Rules under the Excise Tax Act (ETA). However, the current rules do not apply to investment entities structured as limited partnerships. The Consultation Paper proposes to expand the application of the SLFI Rules to limited partnerships whose principal activity is the investing of funds on behalf of investors though the acquisition and disposition of financial instruments.
- The imported supply rules under the ETA require certain financial institutions to self-assess GST/HST on certain cross-border transactions. The Consultation Paper proposes to amend these rules to ensure that non-resident limited partnerships whose Canadian investors exceed a certain ownership threshold are required to self-assess GST/HST on goods and services that relate to their Canadian activities (if any).
- The Consultation Paper also proposes to introduce a new GST/HST rebate that would be available to investment plans (including certain limited partnerships) that have non-resident investors.
The Consultation Paper proposes three key changes to the GST/HST rules: 1) expansion of the so-called SLFI Rules to include investment limited partnerships, 2) extension of the imported supply rules to certain non-resident limited partnerships, and 3) a new GST/HST Rebate for investment plans having non-resident investors.
1. Expansion of the SLFI Rules
Special rules, referred to as the SLFI Rules, apply to certain entities that are defined as "investment plans" under the Excise Tax Act (the ETA) where the investment plan has a permanent establishment in at least two provinces, including at least one HST province. Very generally, the SLFI Rules require such investment plans to self-assess the provincial component of the HST based on the province of residence of their investors. Under the current rules, investment plans include unit trusts, mutual fund trusts and corporations, and registered pension plan trusts and corporations but do not include investment entities structured as limited partnerships.
Finance is proposing to expand the definition of "investment plan" to include an "investment limited partnership" and to adapt the SLFI rules applicable to entities defined as "distributed investment plans" in the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations to apply to investment limited partnerships. For these purposes, it is proposed that an "investment limited partnership" would be defined to include a limited partnership whose principal activity is the investing of funds on behalf of a group of investors through the acquisition and disposition of financial instruments. As a result of this proposal, investment limited partnerships would become subject to the SLFI Rules.
2. Extension of the Imported Supply Rules
Certain financial institutions (referred to as qualifying taxpayers in the ETA) are required to self-assess GST/HST on certain cross-border transactions. Finance is proposing to expand the concept of a "qualifying taxpayer" to include non-resident limited partnerships having Canadian investors that meet a specified ownership threshold (the Canadian Investor Threshold). The Canadian Investor Threshold will be met where Canadian investors in the partnership have an aggregate interest in the underlying assets of the partnership of at least $10 million and that represents at least 10% of the total assets of the partnership. Where the Canadian Investor Threshold is met, the non-resident limited partnership will be required to self-assess GST/HST on goods or services that relate to its Canadian activities (if any). This proposal will impact offshore investment funds that are structured as limited partnerships where the Canadian Investor Threshold is met and the fund has Canadian activities. It is noteworthy that the self-assessment requirement is limited to the non-resident limited partnership’s Canadian activities. As a result, non-resident limited partnerships that have no Canadian activities should not be impacted by this proposal even if the Canadian Investor Threshold is met. Non-resident limited partnerships that are subject to this proposal should qualify for the new GST/HST rebate described in the next point, 3. New GST/HST Rebate, below, if they qualify as an investment plan.
3. New GST/HST Rebate
Finance is proposing a new GST/HST rebate that would be available to investment plans (including investment limited partnerships that would become investment plans under the proposals in SLFI expansion rules noted above) that have non-resident investors. In general, the rebate would be equal to the "non-resident investor percentage" of the otherwise unrecoverable GST/HST paid by the investment plan in each reporting period. The non-resident investor percentage for a fiscal year would be based on the value of the units of the investment plan held by non-resident investors at a particular point in time. The rebate is subject to a number of other parameters and conditions set out in the Consultation Paper. An additional aspect of this proposal is that if the non-resident investor percentage is 95% or more for a fiscal year, the investment plan would be deemed to be a non-resident of Canada and therefore may benefit from the zero-rated export rules in Part V of Schedule VI of the ETA. This proposal should be a welcome change for investment plans having non-resident investors.
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