28 February 2019 CBA Roundtable, Q.15

1. Does CRA have a definition of “management or administrative service” that it applies for purposes of s. 272.1(8) (other than the inclusion of an “asset management service” as defined in s. 123(1))?
2. If the consideration paid for such a service is based on an industry standard of say X%, would that constitute the fair market value (FMV), even if between related parties?

CRA responded:

(a) … [Such] a management or administrative service would typically include managing or administering the day-to-day business and affairs of the partnership.

This could include, for example, organizing, monitoring, planning and coordinating the activities of the partnership, making decisions and directing resources to assist the partnership in achieving its defined objectives, as well as maintaining records, and preparing reports. …

(b) … The CRA recognizes that there are various methods that may be used and the appropriateness of any valuation methodology used in a particular case is a matter of valuation principles and practice. …

[T]he FMV of a supply of a management or administrative service may not necessarily always correspond to the consideration paid for such a service. …

General partners can use whichever method they would like to determine FMV. However, they must be able to support it. The CRA is under no obligation to accept the value used by the general partner if it is determined to be over or under valued but it will consider the general partner’s FMV determination, as well as other approaches in determining the appropriateness of the FMV used.

In the context of ss. 272.1(8) and (3) effectively indicating that management or administrative services rendered by a general partner to an investment limited partnership (ILP) are taxable based on the fair market value of such services rendered in each month (or other billing period). CRA did not provide specific guidance on how such FMV was to determined, and stated:

The CRA recognizes that there are various methods that may be used and the appropriateness of any valuation methodology used in a particular case is a matter of valuation principles and practice. …

[T]he FMV of a supply of a management or administrative service may not necessarily always correspond to the consideration paid for such a service. …

General partners can use whichever method they would like to determine FMV. However … [t]he CRA is under no obligation to accept the value used by the general partner if it is determined to be over or under valued but it will consider the general partner’s FMV determination … .