28 February 2019 CBA Roundtable, Q.25

Each scenario provides a variant of Example 1 in Notice 308 respecting a limited partnership (LP) that is established to offer investment opportunities to investors on a pooled basis under a prospectus, with the partnership agreement stating that the primary purpose of LP is to invest directly or indirectly in real property.

Scenario 1. LP uses all the capital raised to acquire interests in other limited partnerships which invest in commercial and residential real property. The only difference with Example 1 in Notice 308 is that the partnership agreement stating that the primary purpose of LP is to invest directly or indirectly in real property.

Scenario 2. On day one, LP uses all of the capital raised to acquire interests in other limited partnerships which invest in commercial and residential real property. On day 180, LP sells all those interests and invests the proceeds directly in real property.

Scenario 3. The reverse of Scenario 2.

Scenario 4. On day one, LP uses 40% of the capital raised to acquire interests in other limited partnerships which invest in commercial and residential real property; and on day two, it uses the remaining 60% to invest directly in real property. On day 180, due to market shifts, the interests LP owns in the limited partnerships are now worth $1,200,000, while the direct investments in real property (acquired with 60% of the original capital) are now worth $800,000.

Scenario 5. On day one, LP uses 40% of the capital raised to invest directly in real property. On day two, LP uses the remaining 60% to acquire interests in other limited partnerships which invest in commercial and residential real property. On day 180, due to market shifts, the interests in the limited partnerships are now worth $800,000, while the direct investments in real property are worth $1,200,000.

Is LP an ILP on day 1 and, where applicable, does its status change on day 2 or 181? CRA commented:

A determination of the LP’s primary purpose would generally reflect its main or fundamental purpose at the time it was established – and may be reassessed later on. The … primary purpose [would not] be affected solely by short-term changes in the value of investments due to market shifts. In addition, the … statement … is not in itself sufficient to exclude the LP from being an ILP.

[T]he CRA may consider …:

• the business of the LP as set out in its LP agreement and other relevant documents;
• the investments that generate the major revenue and the ones in which most funds are allocated;
• the time, attention and efforts directed towards an activity as opposed to the other(s).

[W]e would likely conclude that the LP in scenarios 1 and 2 are ILPs and further information would be required to determine if the LP in scenario 2 is no longer considered to be an ILP.

With respect to scenario 4, we would likely conclude that the LP is not an ILP and further information would be required to determine if the LP in scenario 4 is considered an ILP at a later time.

After expanding on its comments in Notice 308 as to what was an “investment limited partnership,” CRA stated:

If an LP is not an ILP, as indicated at the 2006 CRA CBA Commodity Taxes Roundtable and in Notice 308, the management or administrative services provided by the general partner (GP) to the LP may be taxable supplies. A fee received by a GP for the provision of services, such as a fee based on the net value of the partnership assets, is an indicator that the GP is providing services in the course of its own business activity rather than for something done as a member of the LP, even if the agreement to provide such services is included in the LP agreement.