CRA finds that a financial institution’s investment in a non-resident partnership generally does not give rise to zero-rated supplies after the initial investment

A Canadian financial institution made a capital contribution to a “Non-Resident Partnership”) between a general partner and a limited partner, with a resulting credit to its capital account. Could it claim ITCs for its related inputs on the basis that its investment was a zero-rated financial service under ETA s. VI-IX-1?

CRA noted that applying the two-step approach in Folio S4-F16-C1, the Non-Resident Partnership might not be a partnership for Canadian tax purposes, given that the general partner did not have an interest in the “partnership,” and the limited partners and general partner had no obligation for its liabilities. If not a partnership, the consideration received for the investment (the “partnership” interest) might not be a financial instrument, in which case, that investment would be excluded from being the supply of a “financial service” by virtue of the exclusion in para. (n) of the definition thereof. [This possibility seems unlikely. If not a partnership, the consideration received presumably would qualify as a share.]

CRA indicated that the acquisition of the initial investment likely was a zero-rated supply, namely, a payment of money in consideration for the partnership interest, so that the related inputs could potentially qualify for input tax credits (ITCs).

Regarding the subsequent holding of the partnership interest, they would not represent the making of a supply. Furthermore, even if the receipt of monthly partnership distributions constituted the making of a supply (in which case, it would be an exempt supply under para. (f) of the financial services definition), it would not constitute the making of a supply for consideration (i.e., the financial institution would not receive consideration in return for receiving such distributions) so that no related ITC claims could be made. [CRA apparently did not regard the monthly distributions as deferred zero-rated consideration for the investment, even though the entitlement thereto was part of the bundle of rights (the partnership interest) received in consideration for the investment.]

Finally, the making of an additional capital contribution by all partners would not be a taxable supply made for consideration, as no consideration (i.e., partnership interest, further right or enhancement) would be received in return for doing so – so that, again, this could not generate ITCs. [This seems questionable. A partner has a deferred undivided interest in the partnership property and a capital contribution credited to its capital account would increase the quantum of that entitlement.]

Neal Armstrong. Summaries of 30 May 2024 GST/HST Interpretation 246958 under ETA s. VI-IX-1, s. 141.02(1) - non-attributable input, s. 123(1) – financial service - (n), and (f).