News of Note

Where a private foundation or persons with whom it does not deal at arm’s length own more than 20% of the shares of any class of shares of a corporation (the “excess corporate holdings percentage” as defined in s. 149.1(1)), it is obligated to divest itself of the excess shares (the “divestment obligation percentage.” Mr. A, who does not deal at arm’s length with private foundation, settles his freeze shares of a private corporation on an alter-ego trust under s. 73(1), with the trust terms providing that the residue of the trust will be distributed to the private foundation on his death. Will the private foundation will be subject to s. 188.1(3.5) such that it will be treated as owning a portion of the freeze shares?

Along with conditions of a more mechanical nature, CRA noted the purpose test in s. 118.1(3)(d) and (e) – which applied inter alia if it may reasonably be considered that a purpose of the acquisition of a property by the trust was to hold shares and such shares, if they were held by Mr. A, would cause the private foundation to have a divestiture obligation percentage. Perhaps in recognition of potential ambiguities as to how to apply this purpose test to what essentially is a donee, CRA gave the following somewhat muffled response:

…Whether subsections 188.1(3.3) to (3.5) apply to a particular situation is a mixed question of fact and law … . Given the broad nature of these provisions, where a private foundation is a beneficiary under an alter-ego trust, consideration must be given to subsections 188.1(3.3) to (3.5) for the purposes of determining the private foundation’s excess corporate holdings percentage and divestment obligation percentage for a taxation year.

Neal Armstrong. Summary of 8 May 2018 CALU Roundtable Q. 5, 2018-0745861C6 under s. 188.1(3.3).

S. 98(4) provides that s. 98(3) is not applicable “in any case” where s. 98(5) is applicable. Thus, if s. 98(5) applies on the basis of one former partner using any property in the business that was the partnership business, s. 98(3) will not apply to the other partner even where the parties filed a joint s. 98(3) election.

Neal Armstrong. Summary of Paul Cormack and Janette Pantry, “Partnership Reorganizations,” Canadian Tax Highlights, Vol. 26, No. 6, June 2018, p. 5 under s. 98(5).

CRA has released Notice 308 discussing the new investment limited partnership (ILP) rules (which were effective as early as September 8, 2017, subject to some detailed transitional rules). Noteworthy points include:

• CRA effectively takes the position that under the previous rules (i.e., before taking into account the ILP amendments) most general partners were required to charge HST on the fair market value of the periodic admin and management services provided by them to an investment limited partnership (i.e., a partnership that will be an ILP under the amendments.) In an example dealing with such a partnership, it states that the general partner (GP) is required to amend its returns to show GST/HST as having been collectible by it on the fair market value (FMV) of the monthly management fees provided by it before the effective date of the new rules. Given the predominant view in the industry, CRA thus is effectively declaring that most general partners of ILPs are delinquent in their filings under the old rules. This is not the last you will hear of this.
• There is no discussion of carries/promotes. However, a variant of the above example deals with the situation where the GP charges both a monthly fee calculated as a percentage of NAV and an annual fee based on the “performance” of the LP fund.
  • The only comment made by CRA on the performance fee was "given the annual payment that [GP] may be entitled to receive from LP Fund, the monthly payment may not be reflective of the FMV of the management and administrative services rendered in a particular month."
  • This may indicate that CRA considers that where the GP makes regular charges (e.g., takes monthly GP draws) for its management and admin services, a less frequent performance fee, carry or promote will not per se be subject to GST/HST – but the fact that the limited partners were willing for their partnership to bear this less frequent charge may indicate that the regular actual charges were less than the FMV of the GP’s monthly services.
  • Although there are other rules that turn on FMV (e.g., the self-supply rule for new apartment complexes on first occupancy or substantial completion), in practice it would be very difficult to determine a notional FMV for a GP’s monthly services.
• CRA indicates that a real estate fund which for limited liability or financing reasons invests in real estate through subsidiary LPs is an ILP even if most of its investors are not financial institutions.
• New s. 132(6) deems an ILP with a Canadian-resident GP but with mostly non-resident members to be a non-resident person (so that, for example, manager services supplied to it could be zero-rated.) However, s. 132(2) deems a non-resident to be resident respecting the activities that it carries on through a Canadian permanent establishment. CRA appears to implicitly accept that such an ILP will not nonetheless be deemed by s. 132(2) to be resident in Canada by virtue of carrying on all its activities through the GP, who presumably would have an office in Canada that might be considered to be a Canadian PE of the ILP. CRA instead only references the situation where there is a Canadian PE maintained on behalf of the ILP in its own right, e.g., an office that it rents out.

Neal Armstrong. Summaries of GST/HST Notice 308 GST/HST and Investment Limited Partnerships July 2018 under ETA s, 272.1(3), s. 272.1(8), s. 132(6), s. 123(1) – investment limited partnership, s. 225.2(2), s. 240(3)(c), 238(2), 238(2.1), Selected Listed Financial Institutions Attribution Method (GST/HST) Regulations, s. 3(e), s. 54(1), s. 55(2), s. 55(4)(c) and s. 73(1).

The table below provides descriptors and links for six Interpretation released in July 2013, as fully translated by us.

These (and the other full-text translations covering all French-language Interpretations released in the last 5 years by the Income Tax Rulings Directorate) are subject to the usual (3 working weeks per month) paywall.