News of Note

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.

As amended, para. (d) of the capital dividend account definition now provides that the addition to the CDA for life insurance proceeds is reduced by the adjusted cost basis (ACB) of the policy to any policyholder (rather than only any ACB of the policy to the corporate recipient of the insurance proceeds). In 2017-0690311C6, CRA indicated that where there are two corporate beneficiaries (B and C) of a policy owned by a third corporation (A), the addition to the CDA of B and C on their receipt of the proceeds will be reduced by the full (rather than equitably pro-rated) ACB of the policy to the policyholder (A).

CRA has now indicated that essentially the same anomaly arises in the situation where A (a.k.a., Opco) and B (a.k.a., Holdco A) are the joint owners of a life insurance policy under which A is the beneficiary of $1 million of the death benefit and B as to any excess, and with A paying the premium relating to the $1 million of death benefit coverage, and B making additional deposits on an annual basis.

On the death of the named individual (B’s sole shareholder), the total death benefit is $1.2 million and the policy’s ACB is $150,000. CRA indicated that A’s and B’s CDA additions were $850,000 ($1,000,000 - $150,000) and $50,000 ($200,000 - $150,000), respectively, i.e., the $150,000 ACB was required to be deducted twice.

Neal Armstrong. Summary of under 8 May 2018 CALU Roundtable Q. 2, 2018-0745811C6 under s. 89(1) – capital dividend account – s. (d)(iii).

In 2017-0690691E5 F, a 50% limited partner (Ms. X) funded her investment in an LP jointly owned with her husband through a $3M bank loan that was secured by a pledge to the bank of a $3M term deposit of the bank held by a corporation (Corporation B) equally owned by her and her husband. In finding that the back-to-back loan rules in s. 15(2.6) et seq. deemed her to owe $3M to Corporation B, CRA indicated that:

• Ms. X had an amount outstanding ($3M) to an “immediate funder” (the bank),
• an amount (the $3M term deposit) was owing by the immediate funder to an “ultimate funder” (Corporation B), and
• "the condition in clause 15(2.16)(c)(i)(B) would be satisfied" (e.g., the $3M loan was permitted to remain outstanding because the term deposit was outstanding).

CRA was subsequently asked about a variation of these facts in which, rather than the $3M term deposit being used, the bank was granted a right to encumber one of Corporation B’s properties. CRA confirmed that in this situation, s. 15(2.16)(c)(i) would not apply, i.e., there no longer were back-to-back amounts owing. Respecting whether the specified right rule in s. 15(2.16)(c)(ii) applied, CRA stated that this would require a comprehensive review, but noted that:

If, under the arrangement between the parties, the bank can only exercise its right to encumber in order to secure payment of Ms. X’s $3M shareholder debt (for example, by placing a lien on the encumbered property to ensure that Corporation B cannot dispose of it without the bank’s consent), then the exception in parentheses would be met and the right to encumber would not constitute a specified right.

Neal Armstrong. Summary of 8 May 2018 CALU Roundtable, Q.1, 2018-0745491C6 under s. 15(2.16)(c).