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: 246958
[Dear Client:]
SUBJECT: [GST/HST interpretation]
Zero-rated Supplies of Financial Services and Eligibility for Input Tax Credits
This […] is in response to your […][correspondence] of [mm/dd/yyyy], […] concerning the eligibility for input tax credits (“ITCs”) of […] (the “Investor”) in respect of its investment in a non-resident partnership. […].
All statutory references below are to the Excise Tax Act (ETA).
[STATEMENT OF FACTS]
Based on the information that was provided to us […], we understand the following:
1. The Investor is a Canadian-resident corporation that is 100% owned by […], which in turn is 100% owned by […][“the Parent”].
2. The Investor became registered for GST/HST purposes […] effective [mm/dd/yyyy].
3. The Investor has at all relevant times been a financial institution, within the meaning of the ETA, by virtue of being a party to a joint election under section 150 […].
4. […] (the “Non-resident Partnership”) was formed [outside of Canada] on [mm/dd/yyyy], under […][the relevant Act] as a limited partnership between […][“GP”], and […][“LP”].
5. The Non-resident Partnership was formed for the purpose of investing, through other entities, in […][a country outside of Canada] […] properties. At all relevant times, it has been a non-resident person within the meaning of the ETA.
6. Effective as of [mm/dd/yyyy], the Investor entered into the Amended and Restated Limited Partnership Agreement (“LPA”) for the Non-resident Partnership with […] GP and […] LP.
7. […][quote from agreement]
8. […][quote from agreement]
9. Pursuant to the LPA, the Investor became a limited partner in the Non-resident Partnership and, in connection therewith, the Investor made an initial Capital Contribution of money to the Non-resident Partnership (the “Initial Investment”).
10. The initial Capital Contribution of each Partner was credited to the capital account of each Partner, as set forth on Schedule […] of the LPA, which lists the Investor as holding a […]% Interest in the Non-resident Partnership, […] LP as holding […]% Interest and […] GP as holding 0% Interest.
11. […][quote from agreement]
12. […][quote from agreement]
13. During the time leading up to making the Initial Investment, the Investor acquired certain advisory and support services (the “Acquisition Services”). The Investor acquired the Acquisition Services from […][Buyco] a company that centrally procures and resupplies services for [the Parent’s] affiliates. [Buyco] charged Goods and Services Tax/Harmonized Sales Tax (“GST/HST”) on the Acquisition Services, as it was not a party to the Investor’s election under section 150.
14. After having made the Initial Investment, the Investor will continue to hold its Interest (“Partnership Interest”) and may receive monthly […] (“Profit Distributions”) or pay dividends to its shareholders. During this period, the Investor may also acquire other property or services in conjunction with its business (“Ongoing Inputs”).
15. The Investor claimed ITCs in respect of Acquisition Services and/or Ongoing Inputs in its monthly returns for reporting periods ending […].
INTERPRETATION REQUESTED
You have asked for our views on the following:
(i) Whether the Initial Investment made by the Investor constituted a zero-rated supply of a financial service by the Investor to the Non-resident Partnership, which gave rise to an eligibility of the Investor to claim ITCs in respect of the Acquisition Services; and
(ii) Whether the Investor’s ongoing holding of the Partnership Interest for the purpose of earning income therefrom in the form of profit distributions from the Non-resident Partnership, and any actual receipt of such distributions or payment of dividends, may give rise to eligibility for the Investor to claim ITCs in respect of its Ongoing Inputs.
INTERPRETATION GIVEN
It is not clear whether the Non-resident Partnership would constitute a partnership for Canadian tax law purposes. However, on the assumption that the Non-resident Partnership is a partnership for Canadian tax law purposes, we view the Investor as having made a taxable (zero-rated) supply of a financial service for consideration when it made the Initial Investment. The consideration for this supply was the Partnership Interest the Investor received in return. The Investor may be eligible to claim ITCs in respect of the Acquisition Services, to the extent that such Acquisition Services were acquired for consumption or use in making this taxable supply for consideration, provided that the Investor also satisfies all of the other conditions for claiming ITCs.
It is a question of fact, […] the extent to which the Acquisition Services were acquired for consumption or use in making zero-rated supplies of financial services for consideration, and to what extent they were acquired in the course of other activities (such as holding the Partnership Interest). For example, we note that the Initial Investment was made in [mm/yyyy], but ITCs were claimed during monthly reporting periods subsequent to the making of that supply […].
Neither the Investor’s receipt of any distribution of profit from the Non-resident Partnership in respect of its Partnership Interest, nor any payment of dividend to its shareholders, would constitute the making of a taxable supply for consideration by the Investor. Consequently, the Investor will not be eligible to claim an ITC in respect of an Ongoing Input to the extent that such Input is acquired (and further references to acquisition include importation, or bringing into a participating province, as necessary) in the course of the activities of holding the Partnership Interest, receiving profit distributions from the Non-resident Partnership, or paying dividends to its shareholders.
EXPLANATION
The legislative framework
Financial services
A “financial service”, as defined in subsection 123(1), includes a payment of money as consideration for a financial instrument. This is by virtue of the fact that inclusionary paragraph (a) of the financial service definition refers to, among other things, the payment of money and the exclusion, under paragraph (n) of the definition, for a payment of money as consideration for property does not apply when the property in question is a financial instrument. A financial instrument, as defined in subsection 123(1), includes an interest in a partnership.
In relevant part, the financial service definition also includes, under paragraph (f) thereof, the receipt of money as dividends, interest or any similar receipt of money in respect of a financial instrument. This includes a person’s receipt of money as a profit distribution from a partnership in respect of the person’s interest in the partnership.
A supply of a financial service is an exempt supply under Part VII of Schedule V to the ETA, unless it meets the conditions for being a zero-rated supply under Part IX of Schedule VI to the ETA.
Foreign entity
For paragraph (n) of the definition of financial service not to apply, the Investor must have received a financial instrument as consideration for making the Initial Investment. As such, it must have received either an equity security or an interest in a partnership. We must therefore determine whether the Non-resident Partnership is a partnership for Canadian tax law purposes.
When considering the character of a foreign entity, the question of whether a partnership exists for Canadian tax law purposes is a question of mixed fact and law. Paragraph 1.3 of the Income Tax Folio S4-F16-C1, What is a Partnership?, states that:
1. 3 In the case of a foreign entity or arrangement, the CRA takes the following two-step approach to determine whether such entity or arrangement should be treated as a partnership for Canadian tax purposes:
i. Determine the characteristics of the foreign business entity or arrangement by reference to any relevant foreign law and the terms of any relevant agreements relating to the entity or arrangement; and
ii. Compare the characteristics of the foreign business entity or arrangement to the characteristics of business entities or arrangements under Canadian law in order to see which Canadian entity or arrangement it most fundamentally resembles.
Paragraph 1.15 of the Income Tax Folio also states that where the participants in a business arrangement are not jointly and severally liable for the debts of the business, it generally indicates that a partnership does not exist.
The fact that […] GP does not have an interest in the Non-resident Partnership and the debts, obligations and liabilities of the Non-resident Partnership, are solely the debts, obligations and liabilities of the Non-resident Partnership and the limited partners and the general partner are not obligated for any such debt, obligation or liability of the Non-resident Partnership, the criteria of in common, with a view to profit and being jointly and severally liable for the debts of the business would not appear to be met.
Where there is concern on the existence of a partnership, only the courts can make that determination. […]. […][The information provided in this interpretation] is based on the assumption that the Non-resident Partnership is a partnership for Canadian tax law purposes. If the Non-resident Partnership is not a partnership for Canadian tax purposes, the Initial Investment may fall within the exclusionary paragraph (n) of the definition of financial service.
The basic rules relating to ITCs that pertain to all registrants are contained in sections 169 and 141.01. Additionally, section 141.02 contains specific rules that persons who are financial institutions within the meaning of the ETA must follow in order to be eligible to claim an ITC.
Pursuant to section 169, a registrant is generally eligible to claim an ITC in respect of property or a service (i.e., an input) acquired, to the extent that it did so for consumption, use or supply in the course of its commercial activities, where all of the other conditions for claiming ITCs are met.
As a result of the application of sections 141.01 and section 141.02, generally a financial institution is deemed to have acquired an input for consumption or use in the course of its commercial activities, to the extent that the financial institution acquired the input for the purpose of making taxable supplies for consideration. Generally, the financial institution is deemed to have acquired an input for consumption or use otherwise than in the course of its commercial activities to the extent that the financial institution acquired the input for the purpose of making supplies that are not taxable supplies for consideration, or for a purpose other than the making of supplies. Section 141.02 applies in conjunction with subsection 141.01(2) to determine the extent to which an input is acquired by a financial institution for consumption or use for the purpose of making taxable supplies for consideration or otherwise, such that the financial institution may be eligible to claim an ITC under section 169. Section 141.02 requires a financial institution to first categorize its inputs, and then follow specific rules for apportioning the use of its inputs based on that categorization, to determine the extent to which the consumption or use of each input is for making taxable supplies for consideration or otherwise.
The Initial Investment
We view the Investor as having made a supply of a financial service for consideration in undertaking the Initial Investment (i.e., the payment of money to the Non-resident Partnership in return for the Partnership Interest). The payment of money is a financial service pursuant to paragraph (a) of the financial service definition, and the consideration paid to the Investor for the supply of that financial service was the Partnership Interest received by the Investor in return for the payment of the money.
As noted above, a supply of a financial service is a zero-rated supply if it is included in Part IX of Schedule VI to the ETA. The relevant zero-rating provision in this case is section 1 of that Part. Under that section, a person’s supply of a financial service that relates to a financial instrument is a zero-rated supply where the following conditions are met:
(i) The person is a financial institution within the meaning of the ETA.
(ii) The supply is made to a non-resident person.
(iii) None of the exceptions specified in the section apply.
All of the above zero-rating conditions were met in the case of the Investor’s supply of the Initial Investment. Firstly, the Investor was a financial institution by virtue of its being a party to an election under section 150, which results in the Investor being deemed under section 151 to be a financial institution throughout the period that the election is in effect. Secondly, the supply was made to a non-resident person, the Non-resident Partnership (being the person to which the money was paid). Finally, none of the exceptions under the zero-rating provision applied.
In the circumstances, the only relevant exception to consider is the one provided under paragraph (e) of the zero-rating provision, for the situation where the financial institution, acting as principal, acquired the financial instrument in question otherwise than directly from a non-resident issuer. That exception does not apply in the present case. the Investor did acquire the Partnership Interest directly from the non-resident issuer, the Non-resident Partnership.
Since, in undertaking the Initial Investment, the Investor is making a taxable (zero-rated) supply of a financial service for consideration, the Investor may be eligible to claim ITCs in respect of the Acquisition Services, to the extent it acquired them for the purpose of undertaking the Initial Investment (which is a matter for verification […][upon] Audit), where all of the other conditions for claiming an ITC are met.
The extent to which a particular input is acquired for the purpose of undertaking the Investment is a question of fact. As mentioned, section 141.02 requires a financial institution to first categorize its inputs, and then follow specific rules for apportioning the use of its inputs based on that categorization, to determine the extent to which the consumption or use of each input is for the purpose of making taxable supplies for consideration or otherwise. Each particular input must be carefully considered in light of the categorization rules of section 141.02 and the purpose for which it was acquired.
In situations such as these, an investor may capitalize certain inputs incurred in order to acquire equity securities or partnership interests, where such securities or interests themselves are also capitalized. If that is the case for any of the Acquisition Services, those inputs must be categorized as excluded inputs of the Investor, as excluded inputs are generally defined to mean property that is for use by the person as capital property or a property or service acquired by the person for use as an improvement thereto. The Investor would be required to allocate its excluded inputs using a specified method, which must conform to the criteria, rules, terms and conditions specified by the Minister, in order for the Investor to be eligible to claim the ITCs related to those excluded inputs.
Alternatively, the Investor may have acquired certain of the Acquisition Services exclusively for the purpose of effecting the Initial Investment (and not also in relation to later holding the Partnership Interest). Such inputs may be categorized as exclusive inputs, if they were not excluded inputs and were acquired for consumption or use directly and exclusively for the purpose of making taxable supplies for consideration (i.e., to make the initial investment). If that is the case, subsection 141.02(6) will apply to deem the Investor to have acquired them for consumption or use exclusively in the course of its commercial activities.
Some Acquisition Services may be categorized as direct inputs and may be partially attributable to the Initial Investment, but might also be partially attributable to the Investor’s later ongoing investment activity which includes the acquiring and holding of the Partnership Interest for the purpose of earning profit distributions from the Non-resident Partnership. Such direct inputs must be allocated in the most direct manner using a direct attribution method that conforms to the criteria, rules, terms and conditions specified by the Minister in order for the Investor to be eligible to claim ITCs in respect of them.
Lastly, the Investor may have acquired non-attributable inputs, being inputs that are not attributable the making of any particular supply. An example of this might be the acquisition of services related to the preparation of its annual financial statements. Such inputs would be allocated using a specified method that conforms to the criteria, rules, terms and conditions specified by the Minister and allocates in a more indirect manner, generally allocating such inputs based on all of the activities of the Investor in order to claim ITCs.
In determining ITC eligibility, the purpose for which a particular input was acquired must be thoughtfully considered based on all of the facts in the situation, including the timing of the acquisition of the input and the supply to which it is purported to relate. We note that the Initial Investment occurred in [mm/yyyy], and the Investor claimed ITCs subsequent to that, in reporting periods ending in […]. In this particular situation, we would not expect that the Investor would have acquired many Advisory Services in those reporting periods for the purpose of making the Initial Investment, as that supply would have already been made at the time of their acquisition.
The criteria, rules, terms and conditions applicable to these allocation methods are explained in GST/HST Memorandum 17-12, Input Tax Allocation Methods for Financial Institutions for Purposes of Section 141.02.
In addition to these requirements, the Investor must, of course, also satisfy all of the other conditions for claiming ITCs.
The subsequent holding of the Partnership Interest to receive Profit Distributions from the Non-resident Partnership, the actual receipt of any such distributions, or payment of dividends to shareholders
The Investor may, from time to time, receive a Profit Distribution from the Non-resident Partnership in respect of its Partnership Interest. We view the receipt of the Profit Distribution as being a separate activity from the Initial Investment undertaken by the Investor - it does not form part of that supply. Although the receipt of such a distribution falls within the definition of a financial service under paragraph (f) of that definition, it is questionable whether such activity constitutes the making of a supply in this particular context. Even assuming it does constitute a supply, it does not constitute the making of a supply for consideration (i.e., the Investor would not receive consideration in return for receiving the Profit Distribution).
We also note that the payment by the Investor of any dividend to its shareholder would not constitute the making of a taxable supply for consideration. Similarly, the making of an additional Capital Contribution by all partners is not a taxable supply made for consideration, as no consideration (i.e., partnership interest, further right or enhancement) is received in return for doing so. Lastly, the holding of the Partnership Interest is not the making of a supply.
When the Investor acquires Ongoing Inputs, it will only be eligible to claim ITCs in respect of such inputs to the extent it acquired them for consumption or use for the purpose of making taxable supplies for consideration, in accordance with the rules in section 141.02 regarding the categorization of inputs and appropriate allocation methods explained above. To the extent that the Investor’s ongoing activity is limited to the holding of the Partnership Interest, the receipt of partnership distributions or paying dividends, or if it makes an additional capital contribution, the Investor will be deemed to have acquired the Ongoing Inputs for consumption or use otherwise than in the course of commercial activity, and the Investor would not be eligible to claim ITCs.
[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 Canada Revenue Agency (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 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.]
Sincerely,
Frankie Fenton
Industry Sector Specialist
Financial Services Unit
Financial Institutions and Real Property Division
GST/HST Rulings Directorate
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