Tax Insights: Investment limited partnerships ─ GST/HST & QST filing obligations

Issue 2020-27

In brief

Most Canadian resident investment limited partnerships (ILPs) will be considered to be a Selected Listed Financial Institution (SLFI), starting January 1, 2019 (i.e. the 2019 fiscal year). This will require the ILP to adjust its GST/HST and QST liabilities for the 2019 fiscal year by filing a SLFI return by June 30, 2020.

To comply with the SLFI rules, ILPs should have obtained certain information from their unitholders, including, for certain investors, their respective “investor percentages” as of September 30, 2018 or, if an election is made, September 30, 2019. The ILP is also required to calculate the federal and provincial component of GST/HST and QST that were paid or payable throughout the year, and determine whether it can claim input tax credits, which may require the ILP to file an election pursuant to section 225.4 of the Excise Tax Act (ETA).

In detail

What is an ILP

An ILP is 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

To determine a person’s “primary purpose,” the partnership’s intentions and its principal activity should be considered. A person’s intentions are generally determined based on the taxpayer’s whole course of conduct, based on an objective review of their conduct and the steps they took to carry out their intentions. A person’s “principal activity,” as discussed by the Tax Court of Canada in College of Applied Arts and Technology Pension Plan (2003 TCC 618), depends on how important a particular activity assists the person in achieving its overall business objectives and goals when compared to its other business activities. To determine a person’s principal activity, the Canada Revenue Agency (CRA) generally considers:

• the relative profits realized by each segment of a person's business
• the total number of supplies made and the total value of the revenue received from supplies made in each business activity
• the relative value of the assets employed in each business activity
• the commercial practices of the person, including the time, attention, and efforts expended by the employees, managers, or corporate officers in each business activity, and
• the terms of any partnership agreement if the person is a partnership, or corporate objects in the case of a corporation

In situations when a limited partnership directly owns real estate, it may not be considered to be an ILP because its primary purpose is to own the real estate; however, in situations when a limited partnership is a holding partnership (with underlying partnerships, corporations or trusts that own the underlying real estate), the partnership’s primary purpose may be to invest funds in financial instruments and therefore cause the limited partnership to be an ILP. In GST/HST Notice No. 308 (released July 2018), the CRA confirmed 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.

SLFI rules

A SLFI is a “listed financial institution” that has a permanent establishment in:

• a participating province (i.e. a province that imposes HST – Ontario, Nova Scotia, New Brunswick, Newfoundland and Labrador, Prince Edward Island), or Quebec, and
• any other province

The definition of a “listed financial institution” includes mutual fund trusts, mutual fund corporations, unit trusts, investment corporations, corporations that are exempt from income tax and, as a result of recent amendments, ILPs.

An ILP will have a “permanent establishment” in a particular province if:

• it is qualified to sell or distribute units in a particular province, or
• its partners are resident in a particular province

An ILP that is a SLFI will be required to adjust its net tax in accordance with the special attribution method (SAM) formula, which generally results in the SLFI paying a “blended rate” of GST/HST and QST based on the percentage of its unitholders that reside in the HST provinces and Quebec.

Filing the annual GST/HST and QST final return for SLFIs

ILPs will be required to file the annual GST/HST and QST Final Return for Selected Listed Financial Institutions (the SLFI Return) by June 30, 2020. In filing its SLFI Return, the ILP should consider:

• the GST/HST and QST registration requirements and the available elections that may be made
• the requirement to track the federal and provincial components of GST/HST and QST paid on expenses
• the requirement to obtain certain information from its investors (i.e. their place of residency or their “investor percentages”), which is needed to calculate its provincial attribution percentages

Registration and available elections

We recommend that ILPs that qualify as SLFIs register for GST/HST and QST purposes with an annual filing frequency, because this will eliminate the requirement to perform the SAM calculation on a monthly basis. ILPs can register for GST/HST and QST purposes by filing Form RC7301, Request for a business number and certain program accounts for certain selected listed financial institutions.

There are also certain elections that ILPs can make, such as the “reporting entity election,” the “consolidated filing election” and the “tax adjustment transfer election;” however, we generally do not recommend that the ILP make these elections.

Provincial attribution percentage (PAP)

An ILP must determine its PAP based on:

• certain investor information (e.g. the investor’s place of residence or its “investor percentage”), and
• the value of their respective holdings at a particular point in time – namely, the “attribution point”

This generally requires the ILP to request information from its investors in writing. The required information depends on the particular investor and whether they are an individual, specified investor, selected investor, qualifying investor, or an investor of another class that is not separately referenced in the information sharing rules provided in the Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations. The ILP must obtain this information by December 31. Failure to do so may result in the unitholders being deemed to be resident in the province with the highest HST rate (e.g. Nova Scotia).

The default attribution point for an ILP, when filing the 2019 SLFI Return, is September 30, 2018; however, to the extent the ILP did not obtain this information before December 31, 2018, it can make an election that allows it to use September 30, 2019 as its attribution point.

Input tax credits (ITCs)

Although most ILPs do not make taxable supplies on which they collect and remit GST/HST, an ILP may undertake certain activities which allow it to claim ITCs, including making zero-rated supplies of financial services to non‑residents or, pursuant to proposed amendments to section 186 of the ETA, holding shares or debt in related corporations whose property (all or substantially all) was last acquired for use exclusively in a commercial activity. As deeming rules may preclude an ILP from claiming ITCs on expenses that are not being incurred exclusively in a commercial activity, an ILP should also consider filing certain elections under section 225.4 of the ETA.

Residency status and relief if 95% of unitholders are non-residents

ILPs that are a resident of Canada should closely monitor whether they are deemed to be a non-resident on the basis that the total value of all interests in the partnership held by non-resident members of the partnership (other than prescribed members) is 95% or more of the total value of all interests in the partnership. The primary benefit of being a non-resident is that most services purchased by an ILP should be zero-rated, provided the ILP does not have a permanent establishment in Canada.

The takeaway

Limited partnerships whose property is comprised primarily of financial instruments should consider whether they are an ILP. If they are, they should then consider the resulting GST/HST implications, including whether the ILP is:

• a SLFI (and therefore must comply with the SLFI rules and filing obligations)
• a non-resident, based on the residency of its unitholders, and
• entitled to claim ITCs, because it provides zero-rated financial services, and if any elections should be made to protect and maximize the ITC claims