Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 167342
Dear [Client]:
Subject: GST/HST INTERPRETATION
Partnership Distributions
Thank you for your letter concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to distributions made to partners.
The HST applies in the participating provinces at the following rates: 13% in Ontario; and 15% in New Brunswick, Newfoundland and Labrador, Nova Scotia and Prince Edward Island. The GST applies in the rest of Canada at the rate of 5%.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
In addition to your incoming letter, you also provided two redacted agreements to illustrate your scenario – an amended and restated Limited Partnership Agreement (the Partnership Agreement) and a Management Agreement (the Management Agreement).
Based on your letter and these documents, our understanding is as follows:
1) A number of persons are limited partners of a limited partnership (the Partnership) including a limited partner that is a corporation and the sole holder of Class B Units of the Partnership (the Class B Limited Partner).
2) In accordance with the Management Agreement, the general partner appoints a manager (the Manager) to provide management, administration and certain other services to the Partnership. Certain individuals who are shareholders or employees of the Manager are also shareholders of the Class B Limited Partner.
3) The Class B Limited Partner has no employees and, consistent with section […] of the Partnership Agreement, does not perform any services or take any part in the management or control of the business or affairs of the Partnership in its role as the Class B Limited Partner. The Class B Limited Partner’s only activity is its investment in the Partnership; it is not a member of the Partnership Advisory Committee.
4) Pursuant to section […] of the Partnership Agreement, in addition to the distributions to be made pursuant to sections […], […] and […] of the Partnership Agreement when a general partner resigns or is removed, or the Partnership is sold or dissolved, the Partnership will, subject to section […], make a distribution to the holders of Class B Units and Class C Units (the “Priority Distribution”) in proportion to their ownership of Class B Units and Class C Units equal to an undisclosed specified percentage per annum of an undisclosed factor.
5) Pursuant to section […] of the Partnership Agreement, the general partner is required to make distributions to the partners from time to time - that is, essentially all sums received from eligible investments, net of: the payment or reimbursement of the partnership expenses, which includes the payment of management fees, […] and other types of fees pursuant to section […], and the payment of the Priority Distribution.
6) Section […] of the Partnership Agreement provides that amounts distributed shall be distributed to the partners as follows:
* first, to the holders of Class B Units and Class C Units in proportion to their ownership of Class B Units and Class C Units, until such time as the holders of Class B Units and Class C Units have received all due and unpaid Priority Distributions;
* as to the balance: […]% to the general partner and […]% to the limited partners in proportion to their ownership of Class A Units.
INTERPRETATION REQUESTED
You requested a GST/HST interpretation as to whether GST/HST is exigible in respect of distributions to the partners of the Partnership.
You state that the management fee payable to the Manager under the Management Agreement and referenced in section […] of the Partnership Agreement is subject to the GST/HST. Accordingly, we are not commenting on the GST/HST treatment of the management fee in this interpretation.
INTERPRETATION GIVEN
When a partner acquires partnership units, the partner has acquired certain rights which include a right to receive distributions.
Subsection 123(1) defines “supply” to mean, subject to sections 133 and 134, the provision of property or a service in any manner, including sale, transfer, barter, exchange, licence, rental lease, gift, or disposition. The definitions of both “service” and “property” exclude money. However, paragraph (f) of the definition of “financial service” in subsection 123(1) specifically includes the payment and receipt of money in respect of a “financial instrument” and paragraph (d) of the definition of “financial instrument” in this subsection includes an interest in a partnership. A supply of a financial service is generally exempt under section 1 of Part VII of Schedule V to the ETA.
Generally, when a partnership pays an amount of money to a member of a partnership with respect to the member’s interest in the partnership, such as a distribution, the partnership is paying money in respect of a financial instrument, which is a financial service under paragraph (f) of the definition of “financial service” in subsection 123(1). Payments made by a partnership to a partner in respect of an interest in the partnership are generally consideration for an exempt supply of a financial service under section 1 of Part VII of Schedule V and no GST/HST would be payable in respect of such payments.
The foregoing comments represent our general views with respect to the subject matter of your request. These comments are not rulings and, in accordance with the guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, do not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or our interpretative policy could affect this interpretation.
If you require clarification with respect to any of the issues discussed in this letter, please call me at 613-952-9206. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Luba Baran
Manager, Financial Institutions Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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