9 July 2003 GST/HST Interpretation 45377 - Partnership Issues - Interpretative Concerns/Legislative Deficiencies

Dear XXXXX:

Thank you for your letter XXXXX with attachments concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) on various partnership issues. We appreciate your input.

As you are aware the interpretation of subsection 272.1(1) is being reviewed, any specific comments on the draft policy would be welcomed. As discussed in February we understand you will be providing further information and examples related to these issues. In the meantime thank you for your comments on the application of section 272.1 with regards to administrative services (Case A), the acquisition of assets for a partnership (Case B) and the availability of an election under subsection 177(1.1) (Case C).

Case D - Successor Partnerships

You have expressed concerns regarding a possible deficiency in subsection 272.1(7) due to the absence of a provision which deems no supply of assets from the dissolved partnership to the partners or to the new partnership. You suggest that perhaps legislative amendments should be explored.

CCRA has issued a draft policy statement, which provides that where subsection 272.1(7) of the ETA applies, the supplies of property from the predecessor partnership to the partners, and from the partners to the new partnership are subject to the normal GST/HST rules in the ETA. Any specific comments on the draft policy would be welcomed. However, as you are aware the CCRA is responsible for administering the ETA. (I note that you sent a copy of your letter to the Department of Finance, which is the department responsible for legislative amendments.)

Case E - Partnership Dissolution

You asked CCRA to revisit the issue of whether the election under section 167 would be available on the dissolution of a partnership. You state that P-103R "Transfer of an undivided interest in a joint venture" supports the view that a section 167 election should be potentially available on the wind-up of a partnership.

To be eligible to use the election under subsections 167(1) and 167(1.1) of the ETA, the parties to the transaction must meet certain conditions including the two following tests: first, the supplier must sell a business or part of a business that was established or carried on; second, the recipient must be acquiring, under the agreement, ownership, possession or use of all or substantially all of the property that can reasonably be regarded as being necessary for the recipient to be capable of carrying on the business or part as a business.

While the applicability of an election pursuant to subsection 167(1) is a question of fact in each case, the supply by a partnership of an undivided interest in the partnership property to one of the partners would generally not be considered to be a supply of a business or part of a business because it can't operate on its own and as a result, the election under subsection 167(1) would not be available.

P-103R "Transfer of an undivided interest in a joint venture" refers to a different fact situation than a partnership dissolution and the conclusion in that fact situation does not apply to partnerships.

Case F - De Minimis Financial Institution Test and Subsection 272.1(3) Valuation Issues

You have indicated your concern on the application of subsection 149(4), which in determining the total financial revenue of a person excludes interest and dividends from a corporation related to the person but does not exclude interest received from a partnership. You recommend it be corrected by a legislative amendment.

You have also indicated your concerns about the two different rules in subsection 272.1(3) where a member of a partnership supplies property or a service to a partnership. Each of the rules deems the value of the consideration, and the time the consideration becomes due. You suggest that CCRA recommend that all transfers be recorded at fair market value at the time the contribution is made.

Both of the above issues deal with changes to the existing legislation which, as you are aware, is the Department of Finance's responsibility.

We look forward to discussing these issues further. Please do not hesitate to contact me at (613) 952-9248.

Yours truly,

Ivan Bastasic
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
Policy and Legislation Branch