P3 projects raise a range of income tax and GST/HST issues

Observations on P3 projects (e.g., for the construction and operation of hospitals or infrastructure projects) include:

• Interim payments received (before the operational phase commences) from the public sector proponent are typically treated as reducing construction costs under s. 13(7.1) rather than as income receipts.
• However, if the progress payments are treated as capital cost deductions, the potential Reg. 3100(1)(b) benefit can cause Projectco partners to be deemed to be limited partners under s. 96(2.4)(b).
• CRA appears to be willing to apply the two-year rolling-start rule in s. 13(27)(b) on an as-expended basis so that, for example, expenses incurred in Year 1 would satisfy the available-for-use test in Year 3, even if the entire contract is not complete in Year 3; however, the more conservative approach may be to treat the assety as not being available for use until the construction phase is complete - which could give a more favourable result under the tax-shelter analysis.
• A P3 project likely will flunk the mathematical test in the s. 237.1 “tax shelter" definition at financial close given that costs not yet incurred (albeit committed to be incurred) are not taken into account.
• GlaxoSmithKline emphasized the difference between the reasonableness standard in s. 20(l)(c) and the arm’s-length standard in the predecessor of s. 247(2). “These two standards are different, which means that potentially different allowable interest expenses might be permitted as deductions under paragraph 20(1 )(c) or section 67, as compared with transfer pricing.”

Neal Armstrong. Summaries of John Tobin, “Infrastructure and P3 Projects,” 2017 Conference Report (Canadian Tax Foundation), 10:1-31 under ETA, s. 168(3)(c), ITA s. 9 – nature of income, s. 13(27)(b), Reg. 3100(1)(b), s. 96(2.2)(d), s. 237.1(1) – tax shelter – para. (b), s. 248(1) – taxable Canadian property - para. (d). s. 18(7) and s. 20(1)(c).