4 April 1991 Ministerial Correspondence 910554 F - Partnership and Sales Tax

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Subject: Partnership and Sales Tax

Attached is our response to your memo of February 25, 1991 wherein you requested our comment on the proposed answer to question 14 at the November 1990 meeting of the TEI.

DirectorReorganizations and Non-Resident DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch

Memo to file

Question 14 Tax Executives Institute   November 1990

Partnership and Sales Tax

A.  Problem

Pursuant to a partnership agreement.  A contributes property worth $2,000,000 and B contributes cash of $2,000,000.  A and B are equal partners.  As described in the Appendix, B is required to pay a 6% sales tax on B's share for the property contributed by A.  The following questions have been posed:

1.        Can the sales tax paid by B be added to the partnership's cost of acquiring the property?

2.        Will the sales tax paid by B be considered an additional capital contribution to the partnership and be added to the ACB of B's partnership interest?

B.   B.C. Social Service Tax

The sales tax is imposed under subsection 2(1) of the Social Service Tax Act (the "SSTA") on all purchases of tangible personal property for consumption or use by the purchaser.  For purposes of the SSTA, where the purchaser is a partnership, the individual partners rather than the partnership are liable for the tax to the extent that each partner is considered to have acquired an interest in the property.  The sales is payable on the actual value of the property..

C.   The SSTA and the Income Tax Act (the "ITA").

The SSTA and the ITA differ in their treatment of a partnership.  The SSTA does not recognize the partnership as an entity capable of owning property; it considers that the partners have a proprietary interest in the partnership assets.  Under the ITA, the partnership calculates its income as if it were a separate person (paragraph 96(1)(a) and each partnership activity including ownership of property is considered to be carried on by the partnership as a separate person (paragraph 96(1)(c).

D.   Conclusion

The cost of property to a person is, generally, the fair market value of what is given up to acquire the property.  To this amount may be added outlays, like legal expenses, that were incidental to the acquisition of the property.  If the partnership were liable. under the SSTA for the sales tax and the sales tax was paid by the partnership, then the amount of the sales tax paid would be added to the cost of the property acquired by the partnership.

However, if the partnership agreement provided that the partnership pay the individual partner's liability on the acquisition of the property, the amount so paid would not form part of the cost of the property to the partnership since it is not consideration for the acquisition of the property.  The payment of the tax by the partnership would be a payment of a personal liability of partner B and would be considered a distribution of property by the partnership to partner B.

In order for there to be an increase in the ACB of B's partnership interest, B would have to make a contribution of property to the partnership.  A contribution would be made when a partner contributed cash to the partnership or paid a liability of the partnership.  In this situation the liability for sales tax in respect of the transfer of the property is a liability of the partner, not the partnership.  Therefore, the payment of the liability by the partner would not be a payment of a partnership liability and would not constitute a contribution of property for the purposes of subparagraph 53(1)(e)(iv).

If the parties restructured the transactions, their goal would appear achievable. If A sold a 50% interest in equipment to B, the sales tax paid by B would be added to his cost of the equipment.  Then if both A and B contributed their interests in the equipment to the partnership, the cost of the equipment to the partnership would include the tax paid by partner B.

QUESTION 14 *Appendix *

For the purposes of British Columbia social service tax (the "Sales Tax") a partnership is not a taxpayer and there is no exemption for property transferred in the formation of a partnership.  Consequently, the Sales Tax is levied at the individual partners level when property located in British Columbia is peeled together for a partnership.  The actual computation of the Sales Tax payable by each partner is done under a trade-in concept and is fairly complicated because only the tangible personal property ("TPP") is subject to the Sales Tax.  The amount of Sales Tax payable by each partner may differ significantly depending on how much of the assets contributed by him and by other partners into the partnership is TPP verses non taxable items.

For example, a 50:50 partnership is formed by two partners with partner A contributing a TPP worth $2 million and partner B contributing $2 million cash.  The entire $2 million TPP is subject to Sales Tax.  Under the above example partner A will not be assessed with any Sales Tax, whereas partner B will be liable to pay a 6% Sales Tax or 50% of the $2 million TPP . ie $60,000.

It appears that the Sales Tax should be treated as a part of the partnership's acquisition costs of the TPP.  Will the $60,000 Sales Tax paid by partner B be added to the partnership's acquisition cost of the TPP?  Will the Sales Tax paid by partner B be treated as an additional capital contribution to the partnership and be added to his adjusted cost base of his 50% partnership interest.