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, 11th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 197267a
Business Number: […]
Dear [Client]:
Subject: GST/HST INTERPRETATION
Allocation to a general partner
[…]. […][This letter concerns] the application of the goods and services tax/harmonized sales tax (GST/HST) to allocations of income, dividends and taxable capital gains made by a partnership to a general partner. The allocations […] are set out in […][the agreement]. […]
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.
RULING REQUESTED
You would like to confirm that the payment of […][the allocations] by a limited partnership to a general partner […][are not subject to the GST/HST].
INTERPRETATION GIVEN
Pursuant to GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, we are not able to provide a GST/HST ruling on the tax status of [the allocations] made by a limited partnership to a general partner because the request involves a determination of the fair market value (FMV) of the management and administrative services provided by a general partner to a limited partnership that is not engaged exclusively in commercial activities; i.e., the limited partnership is primarily engaged in investment activities. Accordingly, we are providing the following interpretation of the relevant provisions of the ETA in order to assist in the fulfillment of the obligations under the law.
Investment limited partnership
For GST/HST purposes, a limited partnership that is created primarily for investment purposes is defined in subsection 123(1) as an “investment limited partnership”. An investment limited partnership is a type of investment vehicle that exists primarily for the purpose of investing in financial instruments, such as holding securities or holding interest in other partnerships. Under paragraph (a) of the definition, the limited partnership 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. The investment fund is under the control of a general partner.
A general partner is a separate person from the partnership
Under partnership law, a partnership is not recognized as a separate legal person distinct from its members and the members of a partnership are the persons who carry on the business of the partnership. However, for GST/HST purposes “person” is defined in subsection 123(1) to mean “an individual, a partnership, a corporation, the estate of a deceased individual, a trust, or a body that is a society, union, club, association, commission or other organization of any kind”. The inclusion of a partnership in the definition of person in the ETA provides for a partnership to be treated for GST/HST purposes as if it were a legal entity. Therefore, for GST/HST purposes the members of a partnership exist as separate persons from the partnership.
A general partner’s status as a separate person from a limited partnership of which it is a member means that when the general partner renders services to the limited partnership, the rendering of these services would be regarded for GST/HST purposes as a supply made to the partnership unless the deeming rule in subsection 272.1(1) applies to those services.
Subsection 272.1(1) provides that, for purposes of the GST/HST, 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. Subsection 272.1(1) only applies to an action done by a person as a member of a partnership. An exception to the application of subsection 272.1(1) is where a general partner provides services to a limited partnership of which it is a member and receives as consideration for those services provided a distribution or allocation of income from the limited partnership that is not in proportion to the general partner’s actual percentage of equity interest in the capital of the partnership. Such distributions or allocations are indicators that the general partner’s actions involve something more than the general partner’s investment in the capital of the partnership. These distributions or allocations could be used to compensate the general partner who has provided services, such as management or administrative services to the limited partnership but it is not assigned a larger percentage of ownership interest in the limited partnership agreement. For example, a limited partnership agreement may allocate an additional amount of profits to the general partner in exchange for the provision of services.
In these circumstances, an analysis to determine the application of subsection 272.1(1) to the actions of a general partner requires identifying the amount of the partnership’s capital and the percentage of each member’s interest in the partnership (or entitlement to profits from the partnership’s business) in order to determine whether an amount paid to a general partner is in respect of either:
* the interest that the general partner holds in the partnership; or
* the provision of property or services by the general partner to the partnership.
As explained further below, a management or administrative service rendered by a general partner of an investment limited partnership to the investment limited partnership is expressly excluded from the application of subsection 272.1(1).
The application of subsection 272.1(8)
As indicated in GST/HST Notice 308, GST/HST and Investment Limited Partnerships, the ETA contains special rules for investment limited partnerships. Subsection 272.1(8), which came into force on September 8, 2017, applies in respect of the rendering of any management or administrative service to a limited partnership that is an investment limited partnership by a general partner of the investment limited partnership. Subsection 272.1(8) deems the rendering of the service not to be done by the general partner as a member of the investment limited partnership. It also deems the supply by the general partner to the investment limited partnership that includes the service to have been made otherwise than in the course of the investment limited partnership’s activities.
A “management or administrative service” is defined in subsection 123(1) to include an “asset management service”, which is also defined in subsection 123(1).
The specific deeming rules set out in subsection 272.1(8) mean that subsection 272.1(1) does not apply to a management or administrative service rendered by a general partner to an investment limited partnership of which it is a member; i.e. such services will not be deemed to have been carried out by the partnership and not by the general partner. Accordingly, a management or administrative service rendered by the general partner continues to be a supply made to the investment limited partnership even though the general partner may have rendered the service pursuant to its obligations as a member of the investment limited partnership.
Generally, partnership law and the terms of the limited partnership agreement set out the responsibilities of the general partner to carry on the business of the limited partnership, as well as the general partner’s fiduciary duty to the limited partners because of its agency role. The general partner manages, administers and controls the business of the limited partnership for and on behalf of the limited partnership. This includes the management by the general partner of the assets of the limited partnership. The general partner is expected to exercise the degree of care, diligence and skill that a reasonably prudent administrator would exercise in comparable circumstances and is entitled to retain advisors, experts or consultants to assist in the exercise of its powers and the performance of its duties.
The limited partnership agreement may provide for the general partner to engage others to assist the general partner in carrying out its duties. If the general partner appoints a third party manager to manage or administer business or assets of the limited partnership, this appointment does not negate the general partner’s responsibilities and fiduciary duties to the limited partnership as well as to the limited partners. Under the legal structure of a limited partnership, the general partner is the only person with authority to implement any advice provided by a third party manager and to make decisions related to the business of the limited partnership. The general partner is also typically responsible for overseeing or monitoring the services performed by the third party manager. The actions performed by a third party manager under a contract for services made between the general partner and the manager form part of the management and administrative services rendered by the general partner to the limited partnership pursuant to the terms of the limited partnership agreement.
Therefore, if the general partner acquires a management or administrative service from a third party for consumption, use or supply in the course of the general partner’s responsibilities of managing, administering or operating the business of the investment limited partnership, for GST/HST purposes the actions performed by the third party manager form part of the supply made by the general partner to the limited partnership.
Given the legal structure of a limited partnership where the general partner is responsible for managing and administering the business of the limited partnership and is the only member with the authority to make decisions and implement the advice provided by a third party manager and any other advisors, a general partner actively manages and administers the business of the limited partnership under an agreement for the supply of those services; i.e., the limited partnership agreement. Where the limited partnership is an investment limited partnership for GST/HST purposes, subsection 272.1(8) deems the rendering of these services not to be done by the general partner as a member of the investment limited partnership and the supply by the general partner that includes these services to have been made otherwise than in the course of the investment limited partnership’s activities.
The application of paragraph 272.1(3)(b)
Where a general partner of an investment limited partnership renders a management or administrative service to the investment limited partnership under an agreement for the particular supply of those services, paragraph 272.1(3)(b) provides that:
* If subsection 136.1(2) applies in respect of the particular supply, for each separate supply of those services that is deemed under paragraph 136.1(2)(a) to be made by the general partner for a billing period (as defined in that subsection), the separate supply is deemed, despite paragraph 136.1(2)(c), to be made for consideration that becomes due on the last day of the billing period equal to the FMV of the services rendered during the billing period.
* If subsection 136.1(2) does not apply in respect of the particular supply, the general partner is deemed to have made, and the investment limited partnership is deemed to have received, a separate supply of those services for each reporting period of the general partner during which the services are, or are to be, rendered under the agreement. In addition, each separate supply of those services is deemed to be made on the first day of the reporting period of the general partner for consideration that becomes due on the last day of the reporting period equal to the FMV of the services rendered under the agreement during the reporting period.
In either case, the FMV of the management or administrative service is determined as if the general partner were not a member of the investment limited partnership and were dealing at arm’s length with the investment limited partnership.
The management or administrative service is a taxable supply. Pursuant to subsection 165(1) the investment limited partnership, as the recipient of the supply, is required to pay GST calculated at the rate of 5% on the value of the consideration for the supply. In addition, if the supply is made in a participating province, pursuant to subsection 165(2), the investment limited partnership, as the recipient of the supply, is required to pay tax calculated at the tax rate for that province on the value of the consideration for the supply. Pursuant to subsection 221(1), the general partner as the person who makes the taxable supply shall collect the tax payable by the recipient of the supply. In this case, the value of consideration for the supply of the management or administrative service rendered by the general partner is not based on the actual amount that the investment limited partnership allocates or otherwise pays to the general partner, unless the amount is a reasonable approximation of the FMV of the services.
The Canada Revenue Agency’s (CRA) position is that FMV represents the highest price, expressed in terms of money or money’s worth, obtainable in an open and unrestricted market between knowledgeable, informed and prudent parties acting at arm’s length, neither party being under any compulsion to transact.
The FMV of the management or administrative services rendered by the general partner to the investment limited partnership should take into consideration the industry standard for the management of investments in comparable situations. The industry standard for the management of investments includes management fees and performance fees that may be payable to the manager. These fees represent, for GST/HST purposes, consideration for a supply of management or administrative services provided in relation to the asset portfolio of an investment vehicle. Where the investment vehicle is a limited partnership, these fees will usually be described in the limited partnership agreement, the offering memorandum provided to investors and/or the management agreement.
Typical management fees in the investment industry are taken as a percentage of the total assets under management and cover a variety of expenses, including portfolio management, advisory services, research and administrative costs. The fees vary depending on various factors, such as the size of the investment and whether the investments require passive or active management. An actively managed fund involves a greater effort on the part of the manager to monitor the performance and holdings of the fund and frequently making buy and sell decisions and therefore, would have a higher management fee than a passively managed fund.
A determination of the FMV of the management and administrative services provided to an investment limited partnership is determined on a case-by-case basis based on the facts and with reference to the relevant documents describing the activities of the investment limited partnership, the nature of the management services that are provided and the fee structure for the management and administration of the investment limited partnership.
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(s) given in this letter, including any additional information, is not a ruling and does not bind the CRA with respect to a particular situation. Future changes to the ETA, regulations, or the CRA’s interpretative policy could affect the interpretation(s) or the additional information provided herein.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 613-296-2530. 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,
Susan Eastman
Financial Services Unit
Financial Institutions and Real Property Division
Email this Content