CRA denies that a manager can earn a management fee directly from an investment limited partnership rather than its GP

Before discussing the somewhat new rules in ETA ss. 272.1(3)(b) and (8), generally deeming the general partner of an investment limited partnership to be making monthly or other periodic taxable supplies to the ILP for consideration equaling the FMV of its services, CRA seemed to indicate that a similar result would obtain under the more general test in 272.1(1) (regarding whether the partner is relevantly acting qua partner). If the income of the partnership allocated to the GP was disproportionate to the capital that it had invested in the ILP, CRA generally would infer that in substance the “draws” received by it were compensation for its services rather than a return on its partnership capital. (This seems to ignore the proposition that non-equity partners can still receive draws qua partner in recognition of their contribution of services qua partner.)

Regarding the application of ss. 272.1(3)(b) and (8), CRA seemed to indicate, subject to the caveat below, that management fees that the ILP has agreed to pay to the manager should be treated as being payable by the GP to the manager, and by the ILP to the GP (i.e., an inferred double supply) – based on its confidently-expressed views that the manager’s appointment “does not negate the general partner’s responsibilities and fiduciary duties to the limited partnership” and that “the general partner is the only person with authority to implement any advice provided by a third party manager.”

The caveat is that the deemed supply is based on the FMV of the services rendered by the GP rather than the actual quantum of the draws received.

Regarding the determination of such FMV:

  • it “should take into consideration the industry standard for the management of investments in comparable situations” which
  • “includes management fees and performance fees”.
  • these “will usually be described in the limited partnership agreement, the offering memorandum provided to investors and/or the management agreement.”
  • “The fees vary depending on various factors, such as the size of the investment and whether the investments require passive or active management.”

Neal Armstrong. Summaries of 27 July 2021 GST/HST Interpretation 197267a under ETA s. 272.1(1), s. 272.1(3)(b) and s. 123(1) - investment limited partnership.