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.
GST/HST Rulings Directorate
5th floor, Tower A, Place de Ville
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 246006
Business Number: […]
Dear […]:
Subject: GST/HST ruling
Tax status of management services supplied to limited partnership
Thank you for your correspondence of [mm/dd/yyyy], concerning the application of the goods and services tax/harmonized sales tax (GST/HST) to services supplied by […] (the Manager) to certain limited partnerships and other persons. We apologize for the delay in this response.
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.
STATEMENT OF FACTS
We understand the following:
1. The Manager is a corporation resident in Canada. It wholly-owns various corporations that, as general partners, enter into Partnership Agreements with the Manager and other unrelated limited partners for the purpose of investing in a portfolio of residential properties through co-ownership agreements with homebuyers who have income levels that qualify them for conventional mortgage financing but have inadequate financial resources for a down payment (Shared Equity).
2. The limited partners of each partnership contribute funds to the partnership in exchange for a share in income distribution. The partnerships, in turn, use the contributed funds to acquire and hold interests in residential properties jointly with homebuyers as tenants in common. When the properties are sold, proceeds are split between the homebuyer and the investing partnership. Partnership income is then distributed back up to the limited partners.
3. This arrangement is [...] offered through an online Shared Equity platform.
4. In accordance with each Partnership Agreement, the Manager provides various services to each limited partnership, and may also provide certain services to other parties. You have provided and example of one such Partnership Agreement [...] (Agreement #1).
5. In accordance with [...] of Agreement #1, the Manager generally provides the following services to the limited partnership:
a. Certain investment management services
b. Assistance in financing of the partnership
c. Marketing services
d. Administration, bookkeeping, maintenance of books, records, and unit registrar
e. Preparation and distribution of information to partners
f. Tax and regulatory filings
g. Monitoring capital requirements
6. In exchange for performing the above services, […] of Agreement #1 generally entitles the Manager to earn from the partnership an annual investment management fee […]. The Manager is also entitled to an annual property oversight fee […], pursuant to […] Agreement #1. It may also be entitled to other fees in relation to specific properties or prospective properties held or pursued by the partnership. You have indicated that the Manager earns mortgage referral fees from mortgage brokers, for which it is not directly involved in arranging for the mortgage but merely provides referral services. The Manager also earns realtor marketing fees from realtors for promoting and training realtors in respect of these Shared Equity arrangements. You have indicated that the income from these 4 types of fees currently constitutes 100% of the Manager’s income.
7. The Manager incurs the following expenses:
a. Marketing – advertising and online publications generally aimed at promoting the Shared Equity arrangement
b. Rent
c. Professional services – legal, accounting and consulting in relation to meeting tax and regulatory requirements, as well as for marketing strategy and investment management.
8. The Manager became registered to collect GST/HST effective [mm/dd/yyyy], and treats its supplies as being taxable supplies.
RULING REQUESTED
You would like to know the following:
1. Whether GST/HST applies to the Manager’s services, namely:
a. Investment management;
b. Property oversight;
c. Mortgage referral; and
d. Realtor marketing
2. If all of the above services are taxable supplies made by the Manager in the course of its commercial activity, whether the Manager is eligible to claim input tax credits (ITCs) in respect of all HST paid or payable by it in respect of its expenses itemized in fact #7 above.
RULING GIVEN
In respect of your first question and based on the facts set out above, we rule that the Manager’s supplies of services to limited partnerships and other third parties are taxable (not zero-rated) supplies subject to the GST/HST at the applicable rate based on the place of supply rules.
You have also asked whether the Manager is eligible to claim ITCs in respect of all HST paid or payable by it in respect of its expenses.
As noted in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service, a ruling provides the Canada Revenue Agency's (CRA) position on a specific provisions of the legislation as these relate to a clearly defined fact situation of a particular person, and where all of the relevant facts and supporting documentation have been presented in writing. As we are not in possession of all of the information and supporting documentation in respect of the Manager’s expenses, we are unable to provide a ruling in respect of your second question. However, we are pleased to provide the following interpretation as guidance, as discussed under the heading Interpretation Given, below the Explanation.
EXPLANATION
Generally, all supplies of property and services made in Canada are taxable unless they are exempt. Taxable supplies are those made in the course of a commercial activity and may be taxable at 5%, 13%, 15%, or 0% (zero-rated supplies). Exempt supplies are listed in Schedule V and are not subject to the GST/HST.
“Commercial activity” is defined in subsection 123(1) to mean, in part, a business carried on by a person, except to the extent the business involves the making of exempt supplies.
In this particular case, none of the services supplied by the Manager fall within any of the exemptions listed in Schedule V. Accordingly, the services supplied by the Manager are all subject to GST/HST.
INTERPRETATION GIVEN
Where a person acquires or imports property or a service, or brings it into a participating province and, during a reporting period of the person in which the person is a registrant, the GST/HST in respect of the property or service becomes payable by the person or is paid by the person without having become payable, that person may be eligible to claim an ITC in respect of the tax to the extent (expressed as a percentage) the property or service was acquired, imported or brought into a participating province for consumption, use or supply in the course of the person's commercial activities.
Subsection 141.01(2) provides that the extent to which a property or service is considered to be acquired for consumption or use in a person's commercial activities is generally based on the extent to which the property or service is acquired for the purpose of making taxable supplies for consideration. Further, where substantially all (i.e., 90% or more) of a property or service is consumed or used in commercial activities, subsection 141(1) deems all of it to be consumed or used in commercial activities.
As such, a person may generally be able to claim an ITC with respect to property or a service if all the following criteria are met:
• the property or service must be acquired, imported or brought into a participating province by a person for consumption, use or supply in the course of the person's commercial activities;
• tax must be payable by the person in respect of the supply, importation or bringing in, or be properly paid by the person prior to its becoming payable;
• the person must be a registrant during the reporting period in which the GST/HST on the property or service becomes payable by the person or is paid without having become payable;
• the person must have obtained sufficient documentary evidence to substantiate the ITC prior to making the claim in a GST/HST return; and
• the ITC must be claimed in a return filed within the time limit for claiming the ITC.
However, ITC restrictions may apply in respect of certain specific types of property or services acquired (e.g. club memberships).
Accordingly, generally where a registered person has acquired property or services for the purpose of making taxable supplies for consideration, and has paid tax in so doing, the person may be eligible to claim ITCs in respect of all or a portion of the tax paid, provided all other conditions for claiming an ITC have been met. Whether a particular property or service was acquired all or substantially all for consumption or use in such commercial activity is a matter subject to verification upon audit.
DISCLAIMER
In accordance with the qualifications and guidelines set out in GST/HST Memorandum 1-4, Excise and GST/HST Rulings and Interpretations Service, the Canada Revenue Agency (CRA) is bound by the ruling(s) given in this letter provided that: none of the issues discussed in the ruling(s) are currently under audit, objection, or appeal; no future changes to the ETA, regulations or the CRA’s interpretative policy affect its validity; and all relevant facts and transactions have been fully and accurately disclosed.
CONTACT
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at 236-330-8100.Should you have additional questions on the interpretation and application of the GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287 or by fax to 1-418-566-0319.
Sincerely,
Frankie Fenton
Industry Sector Specialist
Financial Services Unit
Financial Institutions and Real Property Division
GST/HST Rulings Directorate
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