GST/HST Notice 308 GST/HST and Investment Limited Partnerships July 2018

Overview of formula (pp. 3-4)

Under the SLFI rules, an SLFI determines its liability in respect of the provincial part of the HST for net tax calculation purposes for a reporting period based on where it provides financial services using a formula called the special attribution method (the SAM formula). The calculation using the SAM formula involves allocating the amount of an SLFI’s unrecoverable GST and the federal part of the HST to each participating province according to its provincial attribution percentage for the province. The provincial attribution percentage is a proxy of the extent to which the SLFI provides financial services in a particular participating province. Under the SLFI rules, an investment plan’s provincial attribution percentage for a participating province is generally based on the extent to which its units are held by persons residing in the province. The unrecoverable amount of GST and federal part of the HST allocated to the province is then grossed up by a factor to reflect the rate of the provincial part of the HST for the province. Other adjustments may also apply.

If the amount determined as the liability in respect of the provincial part of the HST for a reporting period of an SLFI under the SAM formula is less than the provincial part of the HST that is paid or payable by the SLFI in the reporting period, the SLFI would be entitled to deduct the amount in determining its net tax for the reporting period. Conversely, if the amount determined as the liability in respect of the provincial part of the HST for a reporting period of an SLFI under the SAM formula is more than the provincial part of the HST that is paid or payable by the SLFI in the reporting period, the SLFI would be required to add the amount in determining its net tax for the reporting period.

Example 1 of limited partnership that uses the subscription proceeds raised under a prospectus to invest in other LPs investing in commercial real estate (p. 5)

The interests that LP holds in the other limited partnerships are financial instruments for GST/HST purposes. As the capital that was contributed by the investors was used to acquire interests in other limited partnerships, the funds raised by LP are invested in property consisting primarily of financial instruments. In this tiered partnership structure, LP would be an ILP under paragraph (a) of the definition of investment limited partnership since LP is represented or promoted as a collective investment vehicle, whose primary purpose is to invest funds in property consisting primarily of financial instruments (that is, interests in the other limited partnerships).

Example 7 (respecting "LP Fund [which] is promoted to investors as an investment limited partnership for investing in residential and commercial real estate projects" is similar.

Implications of ILP being an investment plan (p. 6)

It is proposed that new paragraph 149(5)(f.1) would add an ILP to the definition of investment plan in subsection 149(5). As an investment plan under proposed paragraph 149(5)(f.1), an ILP would be a listed financial institution under subparagraph 149(1)(a)(ix) and subject to the rules for financial institutions and listed financial institutions. For example, an ILP that is not an SLFI could be a reporting institution and required to file an annual information return for financial institutions, such as, Form GST111, Financial Institution GST/HST Annual Information Return.

Timing of becoming an investment plan (p. 6)

This proposed amendment would apply to any taxation year of an ILP that begins after 2018. The coming into force provision for proposed paragraph 149(5)(f.1) also provides that an ILP could elect to have proposed paragraph 149(5)(f.1) apply to its taxation year(s) that begins in 2018 (ILP election) and takes into account the possibility that an ILP may have more than one taxation year that begins in 2018. ...

Election to become an ILP (pp. 6-70

Where an ILP makes an ILP election, proposed paragraph 149(5)(f.1) would apply to any taxation year of the ILP that begins in 2018. This election would be made in prescribed form, containing prescribed information and be filed with the Minister of National Revenue in prescribed manner on or before the day that is 60 days after the day the legislation enacting this provision receives royal assent or any later day the Minister may allow. ... [disclosure of address]

The letter must indicate in the subject line “Investment limited partnership election” and include the following information:

• the name and contact information (telephone number and mailing address) of the ILP;
• the business number and the GST/HST program account of the ILP, if applicable;
• the taxation year(s) of the ILP that begins in 2018;
• a statement that the ILP elects to have proposed paragraph 149(5)(f.1) apply to its taxation year(s) that begins in 2018;
• the first day of the taxation year with respect to which the election is being made;
• an indication of whether the ILP making the election would be an SLFI for GST/HST or QST purposes or both as a result of making the ILP election; and
• the signature of an authorized person of the ILP.

Ability of SLFI to backdate registration by more than 30 days to beginning of reporting period (p. 12)

An ILP may be able to voluntarily register for GST/HST purposes under subsection 240(3). For example, as a listed financial institution under the proposed amendments, an ILP could voluntarily register if it is resident in Canada even if it is not engaged in a commercial activity in Canada. For voluntary registration, the effective date of registration is usually the date the person's application is considered to be received by the CRA (for example, when an application is mailed, the post-marked date). However, the CRA will accept an earlier effective date, provided that the date is within 30 days of the date when the registration application was received, regardless of the method of registration (online, telephone, or paper).

In recognition of the reduced administrative requirements for a registrant SLFI compared to a non-registrant SLFI, in certain circumstances, the CRA will register an SLFI that is registering voluntarily effective the first day of the reporting period in which the registration application is received, if that effective date is requested by the SLFI on its registration application. The registration application must be made using Form RC1, Request for a business number and certain program accounts or Form RC7301, Request for a business number and certain program accounts for certain selected listed financial institutions, as applicable. In addition, a letter from the SLFI should be attached to the registration application including confirmation in writing that in the particular reporting period: (i) it is an SLFI; (ii) it did not make any taxable supplies; and (iii) it did not file any rebate applications. These documents should be sent to the CRA’s Prince Edward Island Tax Centre.

Filing requirement for a SLFI registrant with election for monthly or quarterly reporting period (p. 13)

If an ILP that is a registrant and an SLFI under the proposed amendments makes an election to have monthly or quarterly reporting periods, it would be required to file an interim GST/HST return (Form GST34 or Form RC7200) for each reporting period, and make an interim net tax payment or claim an interim net tax refund for each period. Under paragraph 238(2.1)(a), the interim GST/HST return would need to be filed within one month after the end of the reporting period along with an interim net tax payment, where required. To reconcile the interim net tax with the actual net tax, the SLFI ILP would also be required to complete and file a final return for each reporting period using Form GST494 or Form RC7294, and either remit any additional amount owing or claim a refund of any excess amount previously remitted. Under paragraph 238(2.1)(b), a final return would need to be filed within six months after the end of the ILP’s fiscal year.

Filing requirement for an ILP that is not a SLFI and not a registrant (p. 13)

If an ILP is a non-registrant and is not an SLFI, pursuant to subsection 238(2) it is only required to file a GST/HST return (Form GST62, Goods and Services Tax/Harmonized Sales Tax (GST/HST) Return (Non-personalized) or Form RC7262, Goods and Services Tax/Harmonized Sales Tax (GST/HST) and Quebec Sales Tax (QST) Return (non-personalized)) for each calendar month for which it has net tax remittable. This return must be filed within one month of the end of the particular calendar month. If an ILP is a non-registrant and an SLFI under the proposed amendments, it would be required to file an interim GST/HST return (Form GST62 or Form RC7262) for each calendar month, and make an interim net tax payment or claim an interim net tax refund for each period. The interim GST/HST return would need to be filed within one month after the end of the month along with an interim net tax payment, where required. To reconcile the interim net tax with the actual net tax, the ILP would complete and file a final return for each reporting period using Form GST494 or Form RC7294, and either remit any additional amount owing or claim a refund of any excess amount previously paid. A final return would need to be filed within six months after the end of the ILP’s fiscal year.

Does not permit consolidated rebate claims (p. 14)

Pursuant to subsection 54(2) of the SLFI Regulations, a manager that currently has a consolidated filing election in effect with two or more investment plans can jointly elect with another investment plan that is an SLFI to include the other investment plan in the same consolidated filing election using Form RC4604-1, Election for a Selected Listed Financial Institution to Join a GST/HST Consolidated Filing Election. In order to make this election, the other investment plan and its manager must have a reporting entity election in effect.

It is important to note that the consolidated filing election only allows for filing GST/HST returns such as Form GST34 and GST494 on a consolidated basis. For example, GST/HST rebates cannot be filed on a consolidated basis.

Requirements for late-filed consolidation (or reporting entity) election (pp. 5-16)

An ILP that makes the ILP election could request that the CRA accept a reporting entity election or a consolidated filing election effective on a date before the particular election is filed (often referred to as a late-filed election). As the Minister has the authority to accept these elections late, each request will be considered on a case-by-case basis. This type of request must be made in writing and sent to the CRA’s Prince Edward Island Tax Centre. A request will generally be accepted by the CRA where the following conditions are met:

• the request includes a written explanation as to why the election(s) was filed after the requested effective date of the election and is signed by an authorized person of one of the parties to the election(s);
• the request includes the completed election form(s) unless the form(s) was previously received by the CRA;
• all of the conditions to make the election(s) must be met on the requested effective date of the election (for example, for a consolidated filing election, the end of the reporting periods of all the investment plans making the election must be the same; this would also be the case where an election to join a consolidated filing election is made);
• for a consolidated filing election, if the investment plan does not have a reporting entity election already in effect, it must also include that election form with the same effective date as the consolidated filing election (this includes an election to join a consolidated filing election);
• if the investment plan is registered for GST/HST purposes as of the first day of a reporting period, the request to file the election(s) late should be received on or before the due date of the return(s) under Division V of Part IX for the reporting period of the investment plan that includes the effective date of the election(s) provided that the return has not been filed before that date (evidence of the registration number must be provided);
• if the investment plan is not registered for GST/HST purposes, the request to file the election(s) late must be received on or before the end of the reporting period in which the investment plan becomes a registrant and the election(s) takes effect, an application for registration is made with the request, and the effective date of the registration is the same as the effective date of the election (unless the investment plan is required to be registered prior to the effective date of the election under another provision of the Act, such as if it made taxable supplies and was not a small supplier);
• as of the effective date of the election(s), (including the election to join a consolidated filing election) there are no outstanding GST/HST returns for the investment plan for which there would be amounts owing that must be remitted;
• the investment plan did not file any GST/HST rebates for the particular reporting period that includes the effective date of the election(s); and
• the parties to the election(s) must not have been negligent or careless in complying with the legislation related to the particular election(s).

Effect of tax adjustment transfer election (p. 15)

The effects of the tax adjustment transfer election between an investment plan and its manager depend on whether or not the investment plan and its manager also have a reporting entity election in effect at the same time. If both a tax adjustment transfer election and a reporting entity election are in effect between an investment plan and its manager and if there is a positive net tax adjustment (for example, an amount owed by the plan) calculated using the SAM formula, the manager is required to remit the amount equal to the liability of the investment plan in respect of the provincial part of the HST upon filing its GST/HST return. The investment plan then has no liability to remit this amount to the CRA. If there is a negative net tax adjustment (for example, the investment plan would be eligible for a refund or credit) calculated using the SAM formula, the manager may deduct the amount of the negative net tax adjustment in calculating its own net tax provided the manager has paid or credited this amount to the investment plan. The investment plan is not entitled to deduct this amount from its net tax.

If a tax adjustment transfer election, but not a reporting entity election, is in effect between an investment plan and its manager, the amount of the provincial part of the HST that can be credited/refunded or assumed as liability would be limited to amounts related to supplies made by the manager.

Late election generally not available (p. 16)

A tax adjustment transfer election should be filed before the first day on which the election is to be in effect. As the Minister has the authority to accept a late-filed election, each request will be considered on a case-by-case basis. Generally, the CRA would not accept a late-filed tax adjustment transfer election as the election affects the net tax calculation of both the investment plan and its manager.

1(1)(c) and (d) of PE definition inapplicable to investment plan (p. 17)

The term permanent establishment is defined in subsection 1(1) of the SLFI Regulations for purposes of these regulations. Currently paragraphs (c) and (d) of that definition relate to partnerships. The effect of the proposed amendment to this definition would ensure that this definition would only apply to a partnership if it is not an investment plan such as an ILP. As previously discussed in the section “Determination of SLFI status” in this notice, an ILP will use the deeming rules in paragraph 3(e) of the SLFI Regulations to determine whether it has a permanent establishment in a particular province.

Deemed non-resident ILP under s. 132(6) may be deemed resident under s. 132(2) (p. 18)

[A]n ILP that would be deemed to not be resident in Canada under proposed subsection 132(6) may, nevertheless, be deemed to be resident in Canada under subsection 132(2) in respect of, but only in respect of, its activities carried on through a permanent establishment it has in Canada. For example, if an ILP that would be deemed under proposed subsection 132(6) to not be resident in Canada has a permanent establishment in Canada through which it makes supplies (for example, renting office space in real property situated in Canada), the ILP would be deemed to be resident in Canada in respect of such supplies under subsection 132(2).

General partner may be providing its management services to LP in its separate capacity (p. 19)

[W]here a general partner of a limited partnership provides a management or administrative service to the limited partnership, the general partner may be providing this service to the limited partnership otherwise than in the course of the limited partnership’s activities. As such, existing subsection 272.1(3) may have application. In such cases where existing paragraph 272.1(3)(b) applies, the general partner is required to account for GST/HST calculated on the FMV of the management or administrative service provided to the limited partnership at the time the supply is made (that is, when the agreement to provide the service was entered into, unless subsection 136.1(2) applies). The proposed amendments clarify this position with respect to ILPs.

Example 7, Scenario 2 respecting admin and management services provided to ILP ("LP Fund") by its GP ("Aco") (which is entitled, at the beginning of each month, to a monthly percentage of NAV, and also to an annual carry), were taxable even before s. 272.1(8) (p. 26)

As Aco did not charge, collect or remit any tax in respect of any of the prior services, proposed subsection 272.1(8) would not apply to the prior services. Nevertheless, in accordance with existing paragraph 272.1(3)(b) and subsection 136.1(2), Aco was required to make a determination, on the first day of each billing period, of the FMV of the management and administrative services rendered to LP Fund during each billing period determined as if Aco were not a member of LP Fund and were dealing at arm’s length with LP Fund. Aco is required to amend its returns for those periods to account for this tax that was collectible by Aco.

The September 1 to 7, 2017 period would be a billing period for purposes of subsection 136.1(2) and based on the application of existing paragraph 272.1(3)(b), Aco would be required to make a determination, on the first day of that billing period, of the FMV of the management and administrative services rendered to LP Fund during that billing period.

Example 7, Scenario 1 respecting admin and management services provided to ILP ("LP Fund") by its GP ("Aco") for a monthly fee (taxable) and with annual performance fee (not directly taxable) (pp. 22-24)

Where Aco accounted for the GST/HST charged on the monthly payments with respect to the subsequent services in determining its net tax, Aco may be required to make an adjustment to its net tax [Footnote 5: Given the annual payment that Aco may be entitled to receive from LP Fund, the monthly payment may not be reflective of the FMV of the management and administrative services rendered in a particular month.] Where Aco did not calculate the GST/HST on the FMV of the services rendered during a billing period, Aco would need to make a determination, on the last day of each billing period, of the FMV of the management and administrative services rendered to LP Fund during each billing period determined as if Aco were not a member of LP Fund and were dealing at arm’s length with LP Fund.

To the extent that the total GST/HST on the FMV of the supplies made on or after September 8, 2017 and before February 27, 2018, exceeds the total GST/HST deemed collected on those supplies before that day, Aco would add the excess amount in determining its net tax for its reporting period that includes February 27, 2018.