On September 8, the federal Department of Finance released for public consultation draft legislative and regulatory proposals (Proposals) relating to the Goods and Services Tax/Harmonized Sales Tax (GST/HST). The Proposals include an amendment that will subject certain partnership distributions paid to a general partner of an "investment limited partnership" (as defined in the Proposals) to GST/HST.
Under the Proposals, an investment limited partnership is defined as a limited partnership where the primary purpose is to invest funds in property consisting primarily of financial instruments, if either:
- the limited partnership is, or forms part of an arrangement or structure that is, represented or promoted as a hedge fund, investment limited partnership, mutual fund, private equity fund, venture capital fund or a similar collective investment vehicle; or
- 50% or more of the total value of all interests in the limited partnership is held by listed financial institutions.
For these purposes, financial instruments include, among other things, debt securities, equity securities, interests in a partnership or trust (or rights in respect of such interests) and options for the future supply of money or financial instruments. A listed financial institution includes, among other things, a bank, a trust company, an insurer, a principal business trader or dealer in financial instruments, a principal business money lender, an investment plan, and a corporation that is a party to an election under section 150 of the GST/HST legislation. An investment plan includes, among other things, a trust governed by a registered pension plan, certain other tax-deferred plans such as an RRSP, a mutual fund trust or a unit trust, a mutual fund corporation, and a corporation exempt from income tax by reason of paragraph 149(1)(o.1) or (o.2) of the Income Tax Act (Canada). The Proposals would also amend the definition of "investment plan" to include an investment limited partnership. Neither the Proposals nor the explanatory notes that accompany them provide further guidance on the application of the primary purpose test or the meaning of "represented or promoted" for these purposes.
Where a general partner provides management or administrative services to an investment limited partnership, the Proposals would generally result in the investment limited partnership being considered to pay consideration to the general partner for such services (notwithstanding that the general partner may be providing such services in fulfilment of its general partner duties). As a result, the investment limited partnership may be liable to pay GST/HST in respect of such services which may not be recoverable by way of input tax credits. This amendment is generally effective for consideration paid on or after September 8, 2017.
Private equity funds and other similar collective investment vehicles structured as limited partnerships should carefully review the application of the Proposals to their structures.
The Proposals also include amendments that will extend the "selected listed financial institution" regime (the SLFI Rules) to investment limited partnerships and provide GST/HST relief to investment limited partnerships with non-resident investors where certain conditions are met. Further, the Proposals include certain previously proposed amendments, which have been modified to take into account consultations and deliberations since their release, including revisions to the GST/HST rules applicable to pension plans and revisions to the drop-shipment rules. However, the Proposals do not include amendments to extend the "imported supply" rules to certain non-resident limited partnerships proposed in the Department of Finance's July 22, 2016 consultation paper.
The Department of Finance has invited public comments on the Proposals by October 10, 2017. Comments can be sent to firstname.lastname@example.org.
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