The new investment limited partnership definition in the draft GST/HST draft legislation is potentially intractable
The investment limited partnership (“ILP”) definition contained in the September 8, 2017 draft legislation is one of the building blocks for the proposed ETA s. 272.1(8) rule, which would render many previously-exempt general partner distributions taxable.
It also is the key definition for extending, effective January 1, 2019, the special attribution method (SAM) rules, which currently are applicable to most selected listed financial institutions (SLFIs), to ILPs. These rules, for example, require a distributed investment plan, such as a mutual fund trust with unitholders across Canada, to follow detailed rules for determining the place of residence (under some somewhat artificial definitions of that concept) for the purpose of computing (to speak quite simplistically) a blended rate of HST that reflects that geographic distribution of its unitholders so that if its unitholders were mostly in the west, its blended rate would be close to 5%, whereas if they were mostly in the Maritimes, that blended rate would be close to 15%. This normative blended rate is then compared to the actual rate of HST charged to the MFT on its purchases to determine whether it owes top-up tax or is entitled to an HST refund. (See the Example in our Commentary on s. 32(1) of the SLFI Regs.) If the MFT does not follow safe-harbour procedures for determining the imputed residence of its unitholders on a timely basis, those unitholders may be deemed to be resident in high-rate (15%) provinces for SAM computation purposes.
These SAM rules are being extended to ILPs simply by defining a distributed investment plan to include an ILP.
The ILP definition references a limited partnership (LP), the primary purpose of which is to invest funds in property consisting primarily of financial instruments, provided that either or both of the tests in paragraphs (a) or (b) of the definition is satisfied.
Paragraph (a) references the situation where the LP 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.
Paragraph (b) references the situation where the total value of interests in the LP held by listed financial institutions (defined in s. 149(1)) is 50% or more of the total value of all interest in the LP.
A number of observations on this definition:
- It is quite unclear how to apply the primary purpose test. For example, if the investors in an LP think of it as a commercial real estate vehicle, but its modus operandi is to invest in projects through separate subsidiary LPs or other subs, is this test satisfied? (See Example 1 of our Commentary.)
- It is quite unclear what is meant by the reference in paragraph (a) to an LP that forms part of an “arrangement or structure.” What if it is 40% owned by an entity (such as a s. 149(1)(o.2) corporation) that would clearly taint it if it held a 100% interest? (See Example 2.)
- Respecting the paragraph (b) test, in some situations, an LP and its general partner may have difficulties ascertaining what is the tax status of a partner, for example, whether it is a listed financial institution by virtue of being “a person whose principal business is the lending of money or the purchasing of debt securities” (s. 149(1)(a)(viii). Furthermore, an investor could become a listed financial institution if it amalgamated with one (see s. 149(2).) (See Example 3.)
Neal Armstrong. Commentary on the investment limited partnership definition under ETA s. 123(1) - investment limited partnership.