23 September 1998 GST/HST Interpretation HQR0000265 - Entitlement of a Member of a Partnership to Claim Input Tax Credits

                                                                        GST Rulings and Interpretations
Directorate
Place Vanier, Tower C, 10th Floor
25 McArthur Avenue
Vanier, Ontario
K1A 0L5

Dear XXXXX

I am writing in response to your requests for interpretations concerning two issues pertaining to the Goods and Services Tax (GST)/Harmonized Sales Tax (HST): the claiming of input tax credits on costs incurred in acquiring interests in limited partnerships; and, the claiming of input tax credits in respect of management services acquired by a partner for use in the limited partnerships.

With respect to the initial issue concerning the availability of input tax credits on costs incurred in acquiring interests in limited partnerships, upon reviewing the file, the relevant documentation originally submitted in respect of the issue, and your concerns raised in our meetings of November 24, 1997, and March 31, 1998, I want to confirm that the interpretation that input tax credits would not be available pursuant to paragraph 272.1(2)(b), and subsections 185(1) and 169(1) of the ETA in respect of the proposed transactions in question is correct.

In your initial submission, you state that a limited partnership (to which you referred to as "the Offering Partnership") is a member of other limited partnerships (to which you referred to as "the Services Partnerships") and that the activities of the Offering Partnership generally relate to the raising of funds to finance activities of the Services Partnerships. The Offering Partnership issues its own limited partnership units to the public. The majority of the proceeds from the issuance of these units would be used to invest in limited partnership units of one or more Services Partnerships.

The Services Partnerships are involved in the production of feature films and television programs under agreements with studios.

Generally, paragraph 272.1(2)(b) of the ETA provides that where a property or service is acquired or imported by a member of a partnership on its own account for consumption, use or supply in the course of activities of the partnership, for the purpose of determining an input tax credit or rebate of the member, the member is deemed to be engaged in those activities of the partnership.

Where a member of a partnership acquires or imports property or services related to the raising of funds that the member will use to acquire an interest in a partnership, such property or services will not be considered to have been acquired or imported for consumption, use or supply in the course of activities of the partnership. The deeming provision in paragraph 272.1(2)(b) of the ETA would, therefore, not apply for the purposes of determining an input tax credit of the member in respect of such property or services.

Further, where all the requirements are met, subsection 185(1) of the ETA provides for input tax credits for a particular person in respect of supplies of financial services relating to the person's commercial activities. Where funds are used for acquiring partnership units, the supply of a financial service, the costs are incurred in relation to an exempt activity of the member and not to a commercial activity of the member, and as such the requirements of subsection 185(1) of the ETA are not met.

During our meeting of March 31, 1998, the issue concerning input tax credits on costs related to acquiring interests in the limited partnerships as addressed above was discussed. It is our understanding that this issue has been resolved and you agree with our interpretation of the relevant provisions of the ETA. However, you raised a second issue at that time concerning the actual use of management services acquired by the Offering Partnership. You subsequently made a submission in that regard and provided a sample of the agreements for our review (including agreements involving one of the Services Partnerships of which the Offering Partnership is a member).

In your letters of April 30, 1998, and July 30, 1998, you stated that the majority of management services acquired by the Offering Partnership pursuant to the Management Agreement were in respect of film production services for the Services Partnership and were not related to financing activities of the Offering Partnership, and that the provision of these services is supported by section 3.1(b) of the agreement. You wish confirmation that input tax credits may be claimed by the Offering Partnership in respect of tax paid on management services acquired by it for use is assisting the Services Partnerships with the production of films and programs.

Section 3 of the Management Agreement does include the provision of these services among the list of duties to be performed by the Manager to the Offering Partnership. Therefore, to the extent the Offering Partnership, in capacity as member of the Services Partnership, acquired the services for use in the commercial activities of the Services Partnership, it may claim input tax credits in respect of the services by virtue of Paragraph 272.1(2)(b) of the ETA, provided the general input tax credit requirements of section 169 of the ETA are met. However, the determination of the allocation of input tax credits between exempt and commercial activities is based on a question of fact, and as such can only be verified at time of audit by the Department.

I would like to thank you for bringing your concerns to my attention. I trust the above information clarifies our position with respect to your requests for the interpretations.

Yours truly,

J. Sitka
A/Director
GST/HST Rulings and Interpretations
Directorate
Policy and Legislation Branch