In the 2018 federal budget, the Department of Finance confirmed its intention to proceed with legislative proposals that impact investment limited partnerships (ILPs). These proposals have the effect of deeming management or administrative services provided by the general partner (GP) of an ILP to be taxable services, such that the GP is required to collect GST/HST on the fair market value of the services.
This Tax Insights discusses when a limited partnership is considered to be an ILP, with a focus on limited partnerships that invest in real estate.
For a limited partnership to be considered an ILP, the following conditions must be met:
– 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 other similar collective investment vehicle, or
– the total value of all interests in the limited partnership held by listed financial institutions is 50% or more of the total value of all interests in the limited partnership
While a limited partnership that directly owns real estate may not be considered an ILP because its primary purpose is to own real estate, a limited partnership that is a holding partnership with underlying partnerships, corporations or trusts that own underlying real estate may be an ILP if its primary purpose is to invest funds.
Canada Revenue Agency (CRA) GST/HST Notice No. 308 (July 2018) confirms that a limited partnership that acts as a collective investment vehicle to indirectly own real estate by acquiring interests in other partnerships may be an ILP. Specifically, the CRA provides the following examples of a limited partnership that would be considered an ILP:
For GST/HST purposes, a financial instrument includes, among others, a partnership interest, debt securities, equity securities and interests in a trust. While “investing funds in property” is not defined, it has generally been interpreted to include transactions such as the purchase of property for the income that it can generate or for potential profit on resale.
To determine a partnership’s “primary purpose,” consideration is given to the partnership’s intentions, its principal business and its principal activity, which, as discussed by the Tax Court of Canada in The College of Applied Arts and Technology Pension Plan (2003 TCC 618), depend on the importance of the activity to the achievement of the organization's goals or purposes.
A person’s (or partnership’s) intentions are generally determined based on their whole course of conduct based on an objective review of the conduct and the steps taken to carry out the intentions. In determining a partnership’s principal business, the CRA references the following factors in GST/HST Memorandum 17.6 (July 2014):
These factors should also be relevant in assessing a partnership’s primary purpose, such that a limited partnership that directly owns real estate should not have a primary purpose of investing in financial instruments (e.g. other partnerships) when:
As noted, an ILP must also be represented or promoted as a type of collective investment vehicle or be held 50% by listed financial institutions.
There is some uncertainty as to when a limited partnership is considered to be represented or promoted as a particular class of collective investment vehicle. However, given that a separate rule captures partnerships with listed financial institutions as investors, merely having multiple limited partners does not, in and of itself, make a limited partnership an ILP. Rather, some form of offering memorandum or prospectus is generally needed to be issued to potential investors, which is consistent with the examples set out in CRA GST/HST Notice No. 308.
A “listed financial institution” is defined to include banks, securities dealers, insurers and investment plans. An “investment plan” includes investment corporations, mutual fund corporations and certain types of trusts, including those governed by a registered pension plan, an employee profit sharing plan, an employee benefit plan, a mutual fund trust or a unit trust and, effective January 1, 2019, an ILP.
As such, a limited partnership whose investors are primarily pension plans or other investment plans will generally be an ILP if its primary purpose is to invest in funds consisting mainly of financial instruments.
For GST/HST purposes, a “management or administrative service” is defined to expressly include an “asset management service.” An “asset management service” is defined to include functions such as managing the assets or liabilities of a person, providing research, analysis and advice in respect of assets, determining which assets to acquire or dispose of and acting to realize performance targets or other objectives in respect of the assets.
Based on a GP’s powers to manage the affairs of a limited partnership, the services that it provides will be considered to include management or administrative services and thus the GP of an ILP will be required to collect GST/HST on the fair market value of these services.
Canadian courts have generally interpreted “fair market value” to mean the highest price an item might reasonably be expected to bring if sold in:
The above interpretation is supported by CRA GST/HST Notice No. 308.
When an ILP is merely a passive investor in another limited partnership (i.e. the ILP is a limited partner), the services that the GP actually provides to the ILP should be fairly limited as the ILP’s activities are generally limited to dealing with its investors and receiving distributions from the underlying limited partnership. Therefore, the value of the GP’s services to the ILP should be minimal and the fact that the GP may receive an allocation of profit should not affect the value of the service it provides to the ILP.
In other words, it is the underlying limited partnership that owns the property that requires the vast majority of management and administrative services, and the GP of the ILP is not providing these services to the ILP.
PwC can help to assess if a limited partnership is an ILP and if it is: