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: 178323
Business Number: […]
Dear [Client]
Subject: GST/HST INTERPRETATION
[…] [Registration of a] Limited Partnership
Your letter of March 17, 2016, addressed to the Taxpayer Services Regional Correspondence Center of the […] Tax Services Office regarding the backdating of the registration of your client, […] ([…][LP1])), for purposes of the goods and services tax (GST)/harmonized sales tax (HST), was forwarded to us to address the interpretative issues that you raised in your letter.
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.
INTERPRETATION REQUESTED
[LP1] is registered for purposes of the GST/HST effective [mm/dd], 2016. You have raised a number of interpretative issues to support your position that the effective date of [LP1]’s registration be backdated to [mm/dd], 2013.
Background
Based on the information provided, our understanding is as follows:
1. [LP1] is a limited partnership formed under and governed by the laws of […][Province 1]. It was established pursuant to the [LP1] Agreement made as of […], 2013, between [LP1] as the general partner and [X] as the limited partner. According to the [LP1] Agreement, the business of [LP1] is real property development including all necessary or incidental activities.
2. [LP1]’s activities generally include:
* raising capital by issuing limited partnership units in [LP1], which give rise to a claim, title or legal share of an investment in the Partnership for which they receive contributions of funds from limited partners;
* distributing proportionally income, gains or other profits to the partners in respect of the partners’ interest in [LP1]; and
* acquiring interest in, contributing proportional capital to, getting proportional allocation and distribution of cash from, and getting a proportional share of the net income and loss from […][LP2].
3. Activities undertaken by [LP1] include entering into the [LP2] Agreement made as of [mm/dd], 2013, with […][LPX] [a Limited Partnership] and [GPX] to form [LP2] pursuant to which [LP1] agreed to make a capital contribution of $[…] in exchange for [#] limited partnership units of [LP2]. According to the [LP2] Agreement, the purpose of [LP2] is to acquire, own, develop, construct, market and sell real property.
4. Section […] of the [LP2] Agreement more specifically explains that [LP1] will make its capital contribution to [LP2] by contributing $[…] cash firstly and fund the remaining balance of its capital contribution of $[…] by way of a set-off of the amount that will be payable on the second closing date by [LP2] to [LP1] pursuant to the […].
5. According to the […], [LP1] agrees to pay for and on behalf of [LP2], costs and expenses related to the offering of [#] units of limited partnership interest in [LP1]. The […] reiterates the conditions that [LP2] will pay [LP1] the expense reimbursement incurred in the course of issuing limited partnership units by way of set-off against [LP1]’s capital contribution at second closing provided [LP1] funds its capital contribution in full. This condition is for the sole benefit of [LP2].
6. Subsection […] of the [LP2] Agreement, under the heading […], includes distributions payable by [LP2] to [LP1] of $[…], representing a return of [LP1]’s Capital Contribution in the amount of the cash reimbursement which [LP2] is required to make pursuant to the […] for certain expenses incurred in the course of issuing Partnership interests (such amount hereinafter referred to as the […]). “Partnership” is defined as [LP2].
7. Subparagraph […] of the [LP2] Agreement provides that upon the occurrence of an event giving rise to a dissolution, the amount of $[…] shall be distributed to [LP1] subsequent to the payment of certain costs, expenses and liabilities.
INTERPRETATION GIVEN
A person’s effective date of registration is the day the person first makes a taxable supply in Canada otherwise than as a small supplier. Since [LP1] undertakes activities as a member of [LP2] and makes only exempt supplies of financial services, it has not made a taxable supply.
The definition of a “person” under subsection 123(1) includes a partnership. Therefore, a partnership is considered to be a separate person from its partners. The determination of whether a partner does something as a member of a partnership such that subsection 272.1(1) applies depends on the applicable provincial partnership law and the facts of the particular situation. Please refer to GST/HST Policy Statement P-244, Partnerships – Application of subsection 272.1(1) of the Excise Tax Act, for more information on the factors that must be considered. Factors to consider include, but are not limited to, the following:
* the terms of the partnership agreement;
* the nature of the action taken by the partner; and
* the partner's ordinary course of conduct.
Subsection 272.1(1) provides that, for GST/HST purposes, anything done by a person as a member of a partnership is deemed to have been done by the partnership in the course of the partnership’s activities and not to have been done by the person. Further, under section 126, a member of a partnership is deemed to be related to the partnership and thus they are deemed not to deal with each other at arm’s length.
Supplies of financial services are generally exempt under section 1 of Part VII of Schedule V. Paragraph (f) of the definition of “financial service” specifically includes the payment and receipt of money as dividends, interest, principal, benefits or any similar payment or receipt of money in respect of a financial instrument. Paragraph (d) of the definition of “financial instrument” in subsection 123(1) includes an interest in a partnership or any right in respect of such an interest. The definition of financial service speaks of receipt as well as payment to, and so both transactions are considered exempt supplies.
“Inducement payment” as described in paragraph 43 of GST/HST Memorandum 19.4.1, Commercial Real Property – Sales and Rentals is referenced in your submission in relation to the transaction in question. Paragraph 43 states:
43. If the landlord makes a cash payment to the lessee as an inducement to enter into the lease, the lessee is considered to have made a taxable supply to the landlord. The taxable supply is the service of entering into the lease. The lessee, if a GST/HST registrant, must collect and account for the GST/HST on this supply. The landlord, if a GST/HST registrant, may claim an ITC with respect to the GST/HST paid or payable to the lessee.
GST/HST Memorandum 19.4.1 illustrates how the GST/HST may apply to lease inducements relating to a taxable supply of commercial real property made by a landlord to a lessee in the course of a commercial activity of the landlord where the parties are dealing with each other at arm’s length. Paragraph 36 of that Memorandum provides that the GST/HST consequences vary according to the circumstances and the examples that follow assume an arm’s length relationship between the landlord and lessee. The transactions described in GST/HST Memorandum 19.4.1 can be distinguished from the transaction in question.
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, the interpretation given in this letter, including any additional information, is not a ruling and does not bind the Canada Revenue Agency (CRA) with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation or the additional information provided herein.
If you require clarification with respect to any of the interpretative issues discussed in this letter, please call me directly at 613-670-1341.
Yours truly,
Susan Eastman
Special Provisions – FI Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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