Tax Insights: 2018 Federal budget – GST/HST implications for investment limited partnerships

March 02, 2018

Issue 2018-12

In brief

The February 27, 2018 federal budget proposes to expand the application of the Selected Listed Financial Institution (SLFI) rules to investment limited partnerships effective January 1, 2019. If an election is made, the rules can apply as of January 1, 2018. As this election can be beneficial to investment limited partnerships that reside in HST provinces, all investment limited partnerships should consider the implications of the SLFI rules, and if system changes are required to comply with the rules. 

The budget also contains the September 8, 2017 GST/HST draft legislative and regulatory proposals that:

  • require general partners to collect GST/HST on the fair market value of management and administrative services provided to an investment limited partnership 
  • provide a relieving rule that can deem an investment limited partnership to be a non-resident of Canada when non-resident members hold 95% or more of the value of all interests in the partnership

In detail

SLFI rules

The budget expands the definition of a “listed financial institution” to include an investment limited partnership. As such, an investment limited partnership will be considered to be a SLFI if it has a permanent establishment in a participating province and any other province. 

An investment limited partnership will have a “permanent establishment” in a particular province if any of its partners are resident in a particular province.

As a SLFI, an investment limited partnership will be required to adjust its net tax in accordance with the “special attribution method” formula, which generally results in the SLFI paying a “blended rate” of GST/HST based on the percentage of partnership interests that are held by residents in the HST provinces. 

An investment limited partnership that is a SLFI must file the GST/HST and QST Final Return for Selected Listed Financial Institutions (SLFI Return) for taxation years commencing after December 31, 2018. However, an investment limited partnership can elect to be treated as a SLFI for the 2018 taxation year. 

The potential costs and benefits of making this election should be considered. 

Should an election be made?

All investment limited partnerships should consider the implications of making the election, including:

  • the cost/benefit of being a SLFI
  • the requirement to track the federal component and provincial component of GST/HST and QST paid on expenses
  • the ability to simplify compliance by voluntarily registering the investment limited partnerships for GST/HST and QST purposes and filing any applicable elections 
  • the information sharing requirements

Investment limited partnership

In general, the budget defines an “investment limited partnership” as a limited partnership: 

  • whose primary purpose is to invest funds in property consisting primarily of financial instruments (e.g. shares, debt, partnership interests, etc.), and 
  • that meets one of the following conditions:
    • it 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
      • other similar collective  investment vehicle, or
    • 50% or more of the total value of all interests in the limited partnership are held by listed financial institutions

Provincial attribution percentage

An investment limited partnership that is a SLFI must determine its provincial attribution percentage based on the residency of its investors and the value of the holdings at a particular point in time (the “attribution point”). The default attribution point for the 2019 year is September 30, 2018, and if an election to be treated as a SLFI for the 2018 year is made, the default attribution point is September 30, 2017. 

An investment limited partnership that makes the election to be treated as a SLFI for the 2018 year should ensure that the residency data for 90% or more of its investors is available. If this is not the case, certain investors may be treated as being resident in the “highest rate province” (e.g. Nova Scotia, which imposes HST at the rate of 15%). 

Look-through requirements

An investment limited partnership that is a SLFI must make written requests to its investors to obtain information, in order to determine its provincial attribution percentage so that the GST/HST and QST liabilities can be calculated. The required information from the investor will depend on the particular type or class of investor.  

The information must be provided to the investment limited partnership on or before the later of:

  • November 15 of that calendar year, and
  • 45 days after the day on which the unit holder received the request

Accordingly, it is important that investment limited partnerships issue the information requests by September 30, 2018, to ensure they receive all of the required information by November 15, 2018. If the information request is not sent in a timely manner, certain investors may be deemed to be resident in “the highest rate province” (e.g. Nova Scotia).

Registration and available elections 

An investment limited partnership that is a SLFI in the 2018 and/or 2019 year(s) should register for GST/HST and QST purposes to avoid filing SLFI Returns on a monthly basis. Investment limited partnerships should also consider filing the following elections that are currently available to investment plans:

  • Reporting entity election – allows the investment limited partnership and the “manager” to jointly elect to have the manager file the returns of the investment limited partnership
  • Consolidated filing election – allows two or more investment limited partnerships to file the SLFI Returns on a consolidated basis under one GST/HST registration number
  • Tax adjustment transfer election – allows the investment limited partnership and the “manager” to elect to transfer the investment limited partnership’s net tax adjustment under subsection 225.2(2) of the Excise Tax Act to the “manager” 

Services provided by general partners to investment limited partnerships

General partners that provide management and administrative services to an investment limited partnership after September 7, 2017, will be required to collect GST/HST on those services. As a result, all general partners of an investment limited partnership should:

  • register for GST/HST purposes
  • calculate the fair market value of the management and administrative services that they may be providing to an investment limited partnership

Generally, the general partner is deemed to have received consideration for the provision of any management or administrative services during the reporting period in which the services were rendered, and there is a general four-year assessment limitation period for the Canada Revenue Agency to assess a registrant that has filed a GST/HST return for non-collection of tax.

Residency of investment limited partnership

A relieving measure provides that, subject to the regulations, if 95% of the total value of all interests in an investment limited partnership are held by non-resident members of the partnership, the investment limited partnership is deemed to not be resident in Canada. Consequently, the partnership should not have to pay GST/HST on management and administrative services, because most services provided to a non-resident are zero-rated.

The takeaway

Application of the proposed rules can be uncertain.

PwC can help:

  • determine if a limited partnership falls within the definition of an “investment limited partnership”
  • determine the general partner’s obligation to collect GST/HST on services provided to an investment limited partnership
  • prepare and file an investment limited partnership’s SLFI Return and determine if it is beneficial to elect to become a SLFI effective January 1, 2018
  • register an investment limited partnership for GST/HST and QST purposes and implement system changes to comply with the SLFI rules 

 

Contact us

Brent Murray

Partner, PwC Law LLP

Tel: +1 416 947 8960

Tariq Nasir

Senior Manager, PwC Canada

Tel: +1 416 815 5320

Mario Seyer

Partner, PwC Canada

Tel: +1 514 205 5285

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