Tax Insights: Structuring a partnership: CRA attacks GST/HST-exempt treatment of partnership distributions

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Issue 2014-29

Incorrectly structuring the activities of a partnership can cause GST/HST deeming rules to apply; resulting in a GST/HST liability for person’s involved in the partnership’s business.

In particular, a recent Canada Revenue Agency (CRA) ruling letter indicates that the CRA may not agree with the exempt status of partnership distributions, which may trigger the deeming rules.

All partnerships, but particularly those engaged in exempt activities, should consider this issue carefully.

For GST/HST purposes, a partnership is considered a separate person and not merely a relationship that exists between the partners.

As a result, special GST/HST deeming rules in section 272.1 of the Excise Tax Act (ETA) apply with respect to activities that a partner undertakes relating to a partnership’s business activities.

Subsection 272.1(1) deems anything done by a person as a member of a partnership to have been done by the partnership ‘in the course of the partnership’s activities’ and not by the partner.

The practical effect is that the partner is not considered to have made a supply to the partnership when it performs duties ‘as a member of a partnership.’ Therefore, the partner is not required to account for GST/HST in relation to activities performed as a member of the partnership.

In contrast, subsection 272.1(3) applies when a person supplies property or services to a partnership ‘otherwise than in the course of the partnership’s activities.’

The partner is deemed to have supplied property or a service to the partnership for consideration that equals the fair market value of the supply when the partnership is not acquiring the supply for use exclusively in commercial activities.

For partnerships that are not engaged exclusively in commercial activities (e.g. partnerships whose principal activity is investing funds and partnerships that own residential real estate), whether subsection 272.1(1) applies can be important because unrecoverable GST/HST may be payable on the fair market value of the partner’s contributions to the partnership.