Please note that the following document, although correct at the time of issue, may not represent the current position of the Canada Revenue Agency. / Veuillez prendre note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'Agence du revenu du Canada.
Excise and GST/HST Rulings Directorate
Place de Ville, Tower A, 15th floor
320 Queen Street
Ottawa ON K1A 0L5
[Addressee]
Case Number: 136499
Business Number: [...]
December 30, 2013
Dear [Client]:
Subject: GST/HST RULING
Application of GST/HST to fees related to loans provided by a limited partnership
Thank you for your fax of [mm/dd/yyyy], concerning the application of the Goods and Services Tax (GST)/Harmonized Sales Tax (HST) to fees related to loans provided by a limited partnership. We apologize for the delay in responding.
The HST applies in the participating provinces at the following rates: 13% in Ontario, New Brunswick and Newfoundland and Labrador, 14% in Prince Edward Island (effective April 1, 2013) and 15% in Nova Scotia. The GST applies in the rest of Canada at the rate of 5%.
Effective April 1, 2013, the 12% HST in British Columbia has been replaced by the 5% GST and a provincial sales tax.
All legislative references are to the Excise Tax Act (ETA) unless otherwise specified.
Statement of Facts
Our understanding of the facts based on your fax dated [mm/dd/yyyy], subsequent telephone conversations, and the [...] (the Partnership Agreement), a sample Loan Agreement and a sample Forbearance Agreement is as follows:
1. [...] (the General Partner) is registered for purposes of the GST.
2. [...] (the Limited Partnership) is a limited partnership (BN[...]) formed under the Partnership Agreement, dated [mm/dd/yyyy], between the General Partner and each of the Limited Partners.
The following is set out in the Partnership Agreement:
3. Section [...] states that the purpose of the Limited Partnership is to make loan transactions in a [...] located primarily in Canada. The Limited Partnership consists of several individuals and companies who have invested money for the purpose of providing [...] loans to various companies.
4. Under section [...], Definitions:
"Distribution Proceeds" means the proceeds of the disposition by the Partnership of all or any portion of a loan in respect of a loan transaction.
"General Partner Distribution" means the distribution to be made by the Partnership to the General Partner to cover the costs of operating and administering the Partnership, including rent, office expenses, general marketing and other overhead expenses, and compensation of investment and administrative personnel, as determined pursuant to section [...]
"Organizational Expenses" means the capital costs, organizational and start-up expenses incurred in organizing and financing the Partnership, [...].
"Partner" means any Limited Partner or the General Partner.
"Partnership Expenses" (in part) means all expenses related to the operation of the Partnership, including [...] .
"Transaction Costs" means all costs and expenses incurred by the General Partner in connection with locating, identifying and pursuing any Loan Transaction for the Partnership, [...].
"Unit" means the limited partnership units into which the Interests of the Limited Partners are divided as provided for in Section [...].
"Unit Certificate" means a certificate of ownership of Units issued in accordance with Section [...]. The Unit Certificate certifies the registered holder of Limited Partnership Units.
"Set-up Fees" means all customary or like transaction fees earned as a result of a loan made by the Partnership.
5. Section [...] provides that the capital commitment of each Limited Partner shall be equal to $[...] multiplied by the number of units ([...]), whereas the capital commitment of General Partner in respect of the interest of the General Partner is $[...].
6. Based on [...], the interests of the Limited Partners are represented by limited partnership units issued in accordance with the Partnership Agreement, whereas [...] sets out that the General Partner shall hold an interest in the Partnership on the terms and conditions set out in the agreement.
7. Based on section [...], the net income of the Partnership for each Fiscal Year shall be allocated to the [...] Accounts of the Partners consistent with the distribution procedures outlined in [...]. Subject to the foregoing, the amount of net income or loss of the Partnership for a Fiscal Year allocated to the Limited Partners shall be allocated to the Limited Partners in proportion to their respective Funded Commitments.
8. [...], Distributions, includes inter alia the following sections:
* Section [...] explains that disposition proceeds received by the General Partner [...] [mm/dd/yyyy], may be retained by the General Partner and used to fund Loan Transactions, failing which such proceeds are required to be distributed by the General Partner to the Partners together with any other income generated from the loan. Current income, net of any required withholdings or other amounts required to meet ongoing obligations of the Partnership, shall be distributed to the Partners [...]
* Section [...] state that all distributions to the Partners, after payment of the General Partner Distributions, shall be made in accordance with a certain order of priority: [...][list of priorities].
9. [...], Expenses explains the following:
* Sections [...], state that the Limited Partnership will be responsible for all organizational expenses and shall reimburse the General Partner for all expenses incurred. The Limited Partnership will pay all Partnership Expenses, but shall not be liable for transaction costs.
* Section [...], states that the General Partner will be responsible for all its day-to-day operating expenses and administrative expenses including rent, office expenses, general marketing and other overhead expenses and compensation of investment and administrative personnel and is not entitled to any reimbursement other than that described in section [...].
* Paragraph [...] provides the specific timeframes and calculations used by the Limited Partnership to make General Partner Distributions to the General Partner.
* Section [...] Set-up Fees provides that:
i. Under [...] all Set-Up Fees, up to an aggregate of [...]% of the principal amount of the aggregate of all loans made by the Limited Partnership shall be for the account of, and paid over to, the General Partner.
ii. Based on [...] all other fees, equity participation rights, warrants, performance warrants together with all Set-Up Fees in excess of the aggregate of [...]% of the principal amount of the aggregate of all loans made by the Partnership shall be for the account of, and paid over to, the Limited Partnership as soon as practicable and shall be allocated and distributed to the Partners in accordance with this Agreement.
10. Based on [...], the General Partner is vested with the authority or power to manage the operations and affairs of the Limited Partnership, to make all decisions regarding the activities of the Limited Partnership [...]. More specifically, the General Partner has the authority to perform certain functions set out in [...].
11. Based on [...], Unit Certificates, the Partnership issues certificates to evidence the issued and outstanding Units and such certificates are annexed to the Partnership Agreement as [...].
The Loan Agreement entered into between the Lender (the Limited Partnership), a Borrower(s) and a Guarantor(s) sets out the following:
12. Section [...] provides that the proceeds of the loan shall be used by the Borrowers for firstly, payment of the set-up fee payable to the Limited Partnership pursuant to section [...] and [...] other expenses of the Limited Partnership in connection with the Loan pursuant to Section [...].
13. Section [...] states that the loan is interest only until the Maturity Date or such later date to which the term of the Loan may be extended pursuant to the Loan Agreement. Unless the Loan becomes repayable earlier in accordance with the terms in the Loan Agreement, [...] on the Maturity Date the Borrowers shall repay the principal amount of the Loan then outstanding to the lender.
14. Under section [...], a Set-Up Fee is paid by the Borrower(s) to the Limited Partnership in return for providing the loan. The Limited Partner will deduct the Set-Up Fee from the amount of the loan granted to the Borrower(s) and shall be deemed to be an amount payable under the Loan Agreement. Pursuant to this section and section [...], the Borrowers shall be responsible for out of pocket costs, [...] and other miscellaneous costs incurred by the Partnership in relation to the loan.
15. After the Set-Up Fee and other fees are deducted, the remainder of the loan may then be disbursed to the Borrower(s).
16. When the loan matures, the Limited Partnership may provide an extension of the loan if the full amount cannot be repaid immediately. In return, an extension fee (Forbearance Fee) is charged for extending the loan beyond its original term.
The Forbearance Agreement explains the following:
17. The Forbearance Fee is entered into between the Limited Partnership (the Lender) and the Borrowers. Section [...] provides that the Agreement is intended to provide the Borrowers with further opportunity to eliminate the default and to fully repay the entirety of the debt.
18. Section [...] provides that in consideration of the Lender's forbearance and other accommodations provided by the Lender to the Borrowers, the Borrowers shall pay a specified Forbearance Fee being [...]% of the outstanding amount of the debt plus GST. The same section states that the Forbearance Fee is deemed to be earned immediately and is added to the amount of the debt.
Rulings Requested
You would like to know
1. Are the Set-Up Fees charged by the Limited Partnership to the Borrowers for providing loans by virtue of the Loan Agreement subject to GST/HST?
2. Are the Forbearance Fees charged by the Limited Partnership to the Borrowers for extending loans by virtue of the Forbearance Agreement subject to GST/HST?
3. Are amounts transferred from the Limited Partnership to the General Partner in accordance with [...] of the Partnership Agreement subject to GST/HST?
Rulings Given
Based on the facts set out above, we rule that
1. The Set-Up Fee charged by the Limited Partnership to the Borrower under the Loan Agreement is consideration for a supply of a financial service which is exempt pursuant to section 1 of Part VII of Schedule V, unless it is zero-rated under Part IX of Schedule VI.
2. The Forbearance Fee charged by the Limited Partnership to the Borrower under the Forbearance Agreement is consideration for a supply of a financial service which is exempt pursuant to section 1 of Part VII of Schedule V, unless it is zero-rated under Part IX of Schedule VI.
3. Amounts transferred from the Limited Partnership to the General Partner in accordance with [...] of the Partnership Agreement are subject to GST/HST.
These rulings are subject to the qualifications in GST/HST Memorandum 1.4, Excise and GST/HST Rulings and Interpretations Service. We are bound by these rulings provided that none of the above issues are currently under audit, objection, or appeal, that no future changes to the ETA, regulations or our interpretative policy affect its validity, and all relevant facts and transactions have been fully disclosed.
Explanation
An exempt supply is defined in subsection 123(1) to mean a supply included in Schedule V to the ETA. Supplies of financial services are exempt under Part VII of Schedule V unless they are zero-rated under Part IX of Schedule VI. A service is a financial service where it is included in any of paragraphs (a) to (m) of the definition of financial service in subsection 123(1) and is not otherwise excluded by any of paragraphs (n) to (t) of that same definition.
Part VII of Schedule V lists a supply of a financial service that is not included in Part IX of Schedule VI. Supplies of financial services included in Part IX of Schedule VI are zero-rated, i.e., taxed at 0%, if they are made by a financial institution to a non-resident person, and the exclusions in section 1 do not apply. Specifically, paragraphs 1(a) to (e) of Part IX of Schedule VI exclude from zero-rating supplies of financial services relating to:
* A debt arising from a negotiable instrument issued in respect of a deposit in Canada.
* A debt arising from the lending of money where the loan is primarily for use in Canada.
* A debt for all or part of the consideration for a supply of (i) real property situated in Canada, (ii) personal property for use primarily in Canada, or (iii) a service to be performed primarily in Canada.
* A financial instrument (other than an insurance policy or a precious metal) acquired, otherwise than directly from a non-resident issuer, by the financial institution acting as principal.
When examining fees levied in conjunction with the lending of money (including the aforementioned Forbearance Fees), it must be determined whether the fees form part of the consideration for the exempt supply of a financial service or are consideration for a separate supply. GST/HST Policy Statement P-077R2, Single and Multiple Supplies, provides guidance on whether there is a single supply or multiple supplies.
With respect to the Set-Up Fees and other amounts that the Borrower is responsible for paying under the Loan Agreement, since each element is intricately linked to each other, it is determined that the Limited Partnership is providing a single supply to the Borrower, with the predominant element of the supply considered to be the lending of money (a loan) which is a financial service.
The Forbearance Fee is a fee that must be paid by a Borrower to the Lender to extend the loan beyond its original term. The extension of the loan, for which the Forbearance Fee is paid, is linked to the supply of the loan and would not exist without this first supply. Therefore, the Forbearance Fee forms part of the consideration for the supply of the loan.
When examining the amount paid by the Limited Partnership to the General Partner, it is necessary to take section 272.1 into consideration. Subsection 272.1(1) provides that anything done by a person as a member of a partnership is deemed to have been done by the partnership in the course of the partnership's activities and not to have been done by the person.
Where property or a service is acquired or imported by a corporation that is a member of a partnership, for consumption, use or supply in the course of activities of the partnership but not on account of the partnership, unless the partnership reimburses the corporate partner, subsection 272.1(2) deems the partnership not to have acquired the property or service. In this situation, for the purpose of determining ITCs of the partner, the partner is deemed to be engaged in the activities of the partnership. Where a corporate general partner of a limited partnership makes a supply of property or a service to the partnership otherwise than in the course of the partnership's activities, the supply will be subject to subsection 272.1(3).
The determination of whether a general partner does something in the course of its own activities or as a member of a partnership depends on the applicable provincial partnership law and the facts of the particular situation. As discussed in policy statement P-244 Partnerships - Application of subsection 272.1(1) of the Excise Tax Act, a number of factors must be considered. Factors to consider include, but are not limited to, the following:
• the terms of the partnership agreement;
• the nature of the action undertaken by the partner; and
• the partner's ordinary course of conduct.
Where a corporate general partner of a limited partnership receives a fixed fee (for example, a percentage of the net value of partnership assets) for services it provides to the partnership, generally the amount would be considered to be remuneration for services provided by the general partner on its own account and not for something done as a member of the partnership even if the agreement to provide the services is included in the partnership agreement.
[...] sets out that certain fees including all Set-Up Fees in excess of the aggregate of [...]% of the principal amount of all loans are paid to the Limited Partnership and then allocated/distributed to the Partners.
In addition to the amounts above, [...] of the Partnership Agreement sets out that all Set-Up Fees, up to an aggregate of [...]% of the principle amount of is paid to the General Partner.
The General Partner receives amounts for a capital commitment of $[...] whereas, each Limited Partner's capital commitment is $[...] multiplied by the number of units, [...].
The payment of these amounts to the General Partner is not linked to profit / loss from the business of the Limited Partnership. Rather, a fixed fee is paid by the Limited Partnership to the General Partner for providing property or services otherwise than in the course of partnership activities. Where a partner makes a taxable supply of property or a service to the partnership in the course of its own commercial activity, subsection 272.1(3) will apply.
Moreover, while sections [...], state that the Limited Partnership is responsible for and will reimburse the General Partners for organizational (partnership) expenses, section [...], sets out that the General Partner is responsible for its operating and administrative expenses including rent, office expenses, general marketing, other overhead expenses and compensation of investment and administrative personnel.
The General Partner may be entitled to claim ITCs for the GST/HST paid on expenses that are incurred for consumption, use or supply in the provision of a taxable service made to the Limited Partnership provided all of the requirements under section 169 for claiming ITCs are met.
ADDITIONAL INFORMATION
Please note, any amounts a person collects as or on account of GST/HST, including tax collected in error, are deemed to be held in trust for the Crown and must be included in determining the person's net tax for the reporting period in which the tax became collectible or collected.
When a particular person has, in error, charged to, or collected from another person GST/HST in excess of the tax that was collectible, the particular person may, pursuant to subsection 232(1), refund or credit the excess amount of tax to the other person within two years after the day the amount was so charged or collected. Additional information concerning this subsection of the ETA may be found in GST/HST Memorandum 12.2 - Refund, Adjustment, or Credit of the GST/HST under Section 232 of the Excise Tax Act, which is available on the Web site given below.
It should be noted that where a person pays an amount as or on account of tax in error, they may claim a rebate for tax paid in error. However, if they have claimed an input tax credit with respect to an amount of GST/HST paid in error, they cannot also claim the same amount as a rebate. Further information regarding rebate claims is set out in Form GST 189, General Application for Rebate of Goods and Services Tax (GST)/Harmonized Sales Tax (HST), and the related Guide RC4033, General Application for GST/HST Rebates.
In addition, where a person has refunded or credited tax to a recipient because the supply was found to be exempt, the person would also be required to repay any ITCs claimed in error on expenses which were for use, consumption or supply in the course of the person's exempt activities.
If you require clarification with respect to any of the issues discussed in this letter, please call me directly at (902) 426-6940. Should you have additional questions on the interpretation and application of GST/HST, please contact a GST/HST Rulings officer at 1-800-959-8287.
Yours truly,
Nancy Jardine
Special Provisions - FI Unit
Financial Institutions and Real Property Division
Excise and GST/HST Rulings Directorate
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