The new rule subjecting GP draws from investment limited partnerships to GST/HST could extend beyond private equity and portfolio investment LPs
Draft ETA s. 272.1(8)(b), which was included in Friday’s release of draft legislation, would effectively provide that if the general partner (GP) of an investment limited partnership provides a management or administrative service to the partnership, the supply of such service is deemed to be a taxable supply that is subject to GST/HST on its fair market value. The draft definition of “investment limited partnership” is quite broad, and could include LPs that would be viewed commercially as being engaged in a real estate or operating business, rather than being in the targeted category of private equity or portfolio investment LPs. For example, if a majority of the interests in a real estate LP, which carried on its business through subsidiary LPs, was held by “listed financial institutions” such as pension plans or REITs, the carry of the general partner would be subject to GST/HST. See Example 1 in our Commentary.
The effective-date rule is quite draconian, and appears to have the effect of retroactively making draws paid to the GP of a calendar-year investment limited partnership from January 2017 onwards subject to GST/HST assuming that the GP compensation for the year will not be finally determined until the accounts for the year are finalized in 2018. See Example 2.