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GST/HST on Investment Limited Partnerships in Canada – Bloomberg BNA International Tax Monitor

Posted By: Marina Skachkova on September 20, 2017 at 12:05:12 in All , Articles , News

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Bobby Solhi discusses the proposed legislative and regulatory changes to impose GST/HST on Investment Limited Partnerships in Canada that were announced by the federal government with Bloomberg BNA International Tax MonitorExcerpt below:

Canadian Tax Lawyers Pan Investment Fund Tax Proposals

  •  Legislative proposals would expose investment limited partnerships to VAT
  •  Changes would apply complex financial institution rules to partnerships

By Peter Menyasz 

Investment limited partnerships would face increased exposure to Canada’s value-added taxes under proposed legislative and regulatory changes announced by the federal government.

Partnerships commonly used by businesses as investment vehicles, and often involving foreign investors, would be exposed to the complicated value-added tax rules that apply to financial institutions, tax lawyers say.

The draft legislation and regulatory amendments follow a July 2016 discussion paper which proposed extending to investment limited partnerships the special rules in the Excise Tax Act that determine how value-added tax is allocated among the provinces where the partnerships operate, the federal Finance Department said Sept. 8.

The proposals also include relief from paying the federal goods and services tax and the harmonized sales tax, which applies in provinces that combine their provincial sales tax with the GST, for partnerships with non-resident investors if certain conditions are met, the department said in a statement.

The draft legislative and regulatory proposals—in separate documents for GST/HST changes and income tax changes—are open for comment until Oct. 10.

The draft changes extend to the partnerships the “onerous” selected listed financial institutions (SLFI) rules in the Excise Tax Act, which currently apply a complex formula called the special attribution method (SAM) to allocate GST/HST among a financial institution’s operations in various provinces, Toronto tax lawyer Bobby Solhi said Sept. 11.

Many industries and businesses use limited partnerships as investment vehicles, whether through private mortgage pools, real estate development, or technology ventures to hold shares or intellectual property, so the proposed changes could have “very broad” application, Solhi, a partner with TaxChambers LLP, told Bloomberg BNA.

“If this has not been done already, it would be prudent for organizations structured as limited partnerships to review their arrangement to determine whether they may now be subject to SLFI rules,” he said.

Permanent Establishment

Another proposal would deem an investment limited partnership to have a permanent establishment in any province where a unit-holder lives or where the partnership can sell or distribute units, Solhi said. That means non-resident unit-holders would be deemed residents of a non-harmonized sales tax province in applying the SAM formula, he said.

However, a partnership could elect to be excluded from the provisions so only Canadian residents would be affected, he said. And the Department of Finance has proposed a new HST rebate for investment plans with non-resident investors, he said.

If 95 percent or more of the unit-holders of an investment plan, including an investment limited partnership, are non-resident unit-holders, the plan is deemed to be a non-resident for GST/HST purposes in that year, which makes it eligible for zero rating, he said.

“There will be a clear advantage in some cases to creating a separate series of limited partnership units for Canadian residents and one services for non-residents. Many funds already have separate series for investors in HST and non-HST provinces,” he said.

…..

Other GST/HST-related changes in the draft legislation include changes to rules for pension plans and amendments to modernize the drop shipment rules.

The federal goods and services tax, implemented through the Excise Tax Act and its regulations, applies to most purchases of goods and services. Businesses that collect the tax are then able to recover a portion of it based on the GST they pay on goods and services they purchase.

Financial institutions are specifically exempt from the GST, so they aren’t required to collect the tax on the services they provide to businesses or individuals. But that also means they aren’t entitled to recover the GST they pay on goods and services purchased in providing financial services.

Proposals Include Income Tax Changes

The draft legislation also includes income tax changes first announced in the government’s budget for fiscal year 2017-18, including:

  •  changes to the tax treatment of clean energy generation equipment and exploration expenses for oil and gas discovery wells;
  •  reclassification of expenses related to flow-through shares;
  •  extension of base erosion rules to foreign branches of life insurers;
  •  anti-avoidance rules for registered plans;
  •  tax treatment of investment fund mergers;
  •  timing of recognition of gains and losses on derivatives; and
  •  phasing in of the proposal to allow billed-based accounting.

“GST/HST on Investment Limited Partnerships in Canada”.

 

*Bobby B. Solhi is a GST/HST tax lawyer and partner at TaxChambers LLP

 

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