16 February 1994 GST/HST Interpretation 11585-13[2] - Limited Partnerships and Entitlement to Input Tax Credits

This is in reply to the issues raised in the telephone conversation between XXXXX and John Sitka of this office concerning the entitlement to input tax credits of a Canadian limited partnership.

Our understanding of the situation is as follows:

(1) A Canadian limited partnership raises capital by selling its units.

(2) The capital raised is used to acquire units in a U.S. limited partnership which it has established.

(3) The U.S. limited partnership is involved in acquiring rights to feature films.

(4) The U.S. limited partnership does not undertake to seek out film rights to be purchased. This activity is done by the Canadian limited partnership.

(5) The Canadian limited partnership is not a financial institution under section 149.

(6) The Canadian limited partnership has registered and filed a claim for input tax credits with respect to GST incurred on expenses that relate to the raising of capital and the establishment of the U.S. limited partnership.

(7) The input tax credit claim has been denied.

(8) The registrant's position is that it is entitled to input tax credits for the following reasons:

(a) it is involved the commercial activity of seeking out film rights;

(b) this activity has no output and as a result it does not fall under proposed section 141.01 since it is not an "endeavour";

(c) since it does not fall within proposed section 141.01, the definition of commercial activity in subsection 123(1) is applicable and this definition includes "a business carried on by the person ...";

(d) the definition of "business" in subsection 123(1) includes "... an undertaking of any kind whatever ...";

(e) since the seeking out of films for the U.S. limited partnership to invest in is an undertaking, it falls within the definition of commercial activity;

(f) the financial services with respect to the partnership units relate to the commercial activities of the Canadian limited partnership and since subsection 185(1) deems property and services acquired or imported for consumption, use or supply in the course of making supplies of those related financial services to have been acquired or imported for consumption, use or supply in the course of those commercial activities, input tax credits are claimable with respect to the GST incurred on those property and services.

Based on the above information without review of any documents, our view is as follows:

(1) Proposed subsection 141.01(1) defines "endeavour" of a person to mean, "a business of the person, other than a business in the ordinary course of which the person has not made, and does not intend to make, supplies;".

The Canadian limited partnership is not correct when it states that its activities do not have outputs. As stated above, the Canadian limited partnership seeks out films in which the U.S. limited partnership will invest. The U.S. limited partnership does not undertake this activity. As a result, the information with respect to viable film investments must be supplied at some point to the U.S. limited partnership in order for it to invest in the film. Notwithstanding that the information is supplied for no consideration, it is still a "supply" within the meaning of that term in subsection 123(1). In addition, since it is not included in Schedule V to the ETA, it is a taxable supply.

In addition to the above supply, the Canadian limited partnership is also making supplies of financial services. It supplies financial services to the investors in the Canadian limited partnership (raising of funds) and the U.S. limited partnership (investment of funds).

Since the business of the Canadian limited partnership involves the making of supplies, it falls within the definition of "endeavour" in proposed subsection 141.01(1) and is subject to the provisions of section 141.01.

(2) Proposed section 141.01 deals with the determination of the extent inputs are used in commercial activity versus use in exempt activity. It does not say anything about what constitutes a commercial activity but merely reinforces the requirement to allocate inputs between taxable and exempt supplies. Under proposed subsection 141.01(2) properties and services acquired or imported for consumption or use in the course of an endeavour must have been so acquired or imported for the purposes of making taxable supplies in order to give rise to an input tax credit. In this particular case, to the extent property or services are acquired or imported for the purposes of making the taxable (zero-rated) supply of information or advice by the Canadian limited partnership to the U.S. limited partnership, input tax credits are claimable.

(3) Paragraph 141(5)(c) prior to October 1992 and paragraph 141.1(3)(a) after September 1992 are in the legislation to provide greater certainty that activities done in connection with the acquisition, establishment, disposition or termination (and reorganization in the case of paragraph 141(5)(c)) of a commercial activity are done in the course of that commercial activity. It is our view that even in the absence of such provisions, activities done in connection with the acquisition, establishment, disposition or termination (and reorganization in the case of paragraph 141(5)(c)) of a commercial activity are still part of the commercial activity. However, to the extent there is doubt, the above provisions clarify that the activities are part of the commercial activity.

Paragraph 141.1(3)(b) which is effective October 1, 1992, has also been added to provide greater certainty that to the extent that a person does anything (other than make a supply) in connection with the establishment of an activity of the person that is not a commercial activity, the person is deemed to have done that thing otherwise than in the course of a commercial activity.

Once it is established that the activities are in the course of the commercial activities of the person, input tax credits may be claimed with respect to property and services acquired for consumption, use or supply in the course of those activities subject to the normal rules concerning input tax credits and the use of property and services, e.g. proposed section 141.01, subsection 169, section 185, section 198, section 199.

(4) Subsection 185(1) provides that a non-financial institution can claim input tax credits with respect to property and services acquired for use in the course of making supplies of financial services, e.g. raising capital, that are related to its commercial activities.

(5) In this specific case, it is our view that the financial services provided by the Canadian limited partnership are not related to its commercial activity of seeking out films for the U.S. limited partnership to invest in.

Whether there is a relationship between the financial services provided in the raising and investing of funds and the commercial activity of the seeking out films and recommending which ones to invest in to the U.S. limited partnership will be a question of fact. In Nowegijick v The Queen et al (1983), 37 D.T.C. 5041 (S.C.C), an income tax case in which the Supreme Court of Canada reviewed the phrase "in respect of" as it was used in the Indian Act, the court made the following comments at 5045:

The words "in respect of" are in my opinion words of the widest possible scope. They import such meanings as "in relation to", "with reference to", or "in connection with". The phrase "in respect of" is probably the widest of any expression intended to convey some connection between two related subject matters.

As the term "related to" is similar to "in respect of", and although the context of the use of the term will play a part in how it is interpreted, it is likely that it will be given a broad interpretation by the courts. In our view even with a broad reading of "related to", the Canadian limited partnership will have difficulty establishing a connection between the activity of seeking out and recommending films to invest in and the financial services provided to Canadian investors and the U.S. limited partnership with respect to the raising and investing of funds.

The fact that the funds raised from Canadian investors are invested in the U.S. limited partnership suggest that the raising of funds is not related to its commercial activities but relates to the financial service provided to the U.S. limited partnership. In addition, the financial service supplied to the U.S. limited partnership by investing funds raised from Canadian investors is too far removed from the commercial activity to be said to be related to it.

(6) It is our view therefore that the registrant should be denied input tax credits to the extent that property and services were used to make supplies of exempt financial services, i.e., the raising of capital and the investing of funds in the U.S. limited partnership. To the extent that property and services were used in the taxable (zero-rated) supply of providing the U.S. limited partnership with information or advice as to what film to invest in, the registrant is entitled to input tax credits.

If you have any questions, please contact P. Roach at (613) 952-9214 or J. Sitka at (613) 952-9219.

J. Daman
Director
Financial Institutions/
Corporate Reorganizations
Policy and Legislation Excise/GST