Investment Limited Partnership


3 tests in ILP definition

An “investment limited partnership” is defined in the draft legislation released on September 8. 2017 (and re-released on February 27, 2018) as a limited partnership (LP), the primary purpose of which is to invest funds in property consisting primarily of financial instruments, provided that either or both of the tests in paragraphs (a) or (b) is satisfied.

Paragraph (a) references the situation where the LP is (or forms part of an arrangement or structure that is) represented or promoted as a hedge fund, investment limited partnership, mutual fund, private equity fund, venture capital fund or other similar collective investment vehicle ("CIV'").

Paragraph (b) references the situation where the total value of interests in the LP held by listed financial institutions (defined in s. 149(1)) is 50% or more of the total value of all interest in the LP.

Primary purpose test

Where an LP invests in real estate or operating businesses through subsidiary entities such as partnerships, corporations or unit trusts, its directly held assets will take the form of investments in such subsidiary entities, with such investments being financial instruments. It may be unclear how the primary purpose test should be applied in these circumstances.

Example 1 (investment in business or real estate through subsidiaries)

An LP describes itself as a commercial real estate partnership that invests in strip malls. However, for limited liability reasons and financing reasons (i.e., lenders who want asset segregation and a security interest in the borrower's units), it invests in each mall through a separate subsidiary LP. Given this practice, it might be considered that its primary purpose is to invest its fund primarily in partnership interests, which are financial instruments. However, its investors consider themselves to be investing through the LP in commercial real estate. In light inter alia of the extrinsic evidence discussed immediately below, the latter view would appear to be more appropriate.

The language of the first two of the three tests embedded in the ILP definition (the primary purpose and CIV tests) appears to be modelled on para. (k) of the definition of “listed finanacial institution” in ITA s. 263(1) (which implements the Intergovernmental Agreement with the U.S. for “FATCA” reporting to and by Canada). In Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement - Part XVII of the Income Tax Act, CRA states, respecting this definition, that an entity that primarily conducts, as a business, “investing, administering, or managing non-debt, direct interests in real or immovable property…on behalf of other persons, such as type of real estate investment trust, will not be an investment entity,” and that the Intergovernmental Agreement “provides that the term ‘investment entity’ must be interpreted in a manner consistent with the definition of "financial institution" in the FATF Recommendations,” which is reflected in the ITA s. 263(1) definition.

The definition of financial institution” in that FATF definition is focussed on situations where there is a vehicle for holding relatively liquid investments, including liquid trading assets such as derivatives, and is not directed at situations where the vehicle controls and has ultimate management responsibility for operating businesses or a real estate portfolio – even where they are held through subsidiary entities such as LPs, unit trusts or, perhaps, corporations. (In the case of subsidiary LPs or units trusts, the parent vehicle would in a common law jurisdiction have a beneficial interest in, albeit likely something shy of full beneficial ownership of, the underlying operating or realty assets (see, e.g., Fuller’s Contract, Boyd and Seven Mile), whereas this would not be the case for the operating or realty assets of a corporate subsidiary. This point quite arguably is not relevant to the analysis.)

Interpreting the CIV concept to exclude a holding LP that indirectly controls and operates a business or commercial real estate portfolio (an “Opco holding LP”) accords with a reasonable view of the purpose of the ILP definition. As briefly noted further below, this definition is part of rules that are principally directed at (i) the avoidance of GST/HST on general partner distributions by an LP that, broadly viewed, are akin to management fees that normatively should have been subject to GST/HST for which the LP would not have been eligible for input tax credits, and (ii) the avoidance of HST (or QST) in high-rate jurisdictions through incurring third-party costs in the western provinces (or perhaps in Ontario, viewed as a province with a GST/HST rate of “only” 13%). As partially illustrated in Example 5 below, an Opco holding LP likely should be able to structure its arrangements to reflect the reality that it is indirectly engaged fully in commercial activity, so as to be entitled to full ITCs for its GST/HST costs, so that it should not be an object of the ILP-related rules. However, effectively forcing an Opco holding LP to take such measures would add to its administrative costs and often generate a commercial disadvantage. Furthermore, if such steps were necessary, this would effectively render the ILP rules as a trap for the unwary.

It is understood from a conversation with the Department of Finance that they are intending to address issue of the potential application of the ILP definition to holding partnerships in which the public invests as part of their review of the potential extension of the s. 186 holding company rules to include holding partnerships. This review was briefly described as part of the February 27, 2018 federal Budget papers.

The branch of the ILP definition contained in its preamble does not extend to a limited partnership the principal purpose of which is to provide services (e.g., professional or other non-financial services) rather than to invest in financial instruments.

CIV test

It is quite unclear what is meant by the reference in paragraph (a) to an LP that forms part of an “arrangement or structure” that is, or is represented or promoted as, a collective investment vehicle.

Example 2 (whether investee is part of structure of substantial minority investor)

A Canadian REIT has a 40% interest in the real estate holding LP described in Example 1 as well as 40% of the shares of the LP’s general partner (for which there is a shareholders’ agreement with the other investors). This is sufficient to give the REIT significant influence over the LP, but is not sufficient to make the LP a subsidiary of the REIT. Furthermore, the REIT describes itself as a REIT rather than as a mutual fund trust or a collective investment vehicle although, in fact, it is a mutual fund trust. The LP itself is not a mutual fund trust or other specifically listed entities (although perhaps it is a collective investment vehicle), nor is it a subsidiary of any such entity.

Is the LP part of a “structure or arrangement” that is, or is represented or promoted as, a mutual fund trust or collective investment vehicle?

50% LFI test

The extensive listing in s. 149 of what constitutes a listed financial institution includes investment plans (listed in s. 149(5)) such as registered pension plans, corporations exempt under ITA s. 1491)(o.1) or (o.2) (with most pension fund subsidiaries falling into this category) or that have elected under s. 150, mutual fund trusts or other unit trusts and various benefit plans, as well as the various financial institutions listed in s. 149(1)(a). The effect of paragraph (b) of the investment limited partnership definition is to deem an LP that satisfies the primary purpose test to also be an investment limited partnership if it is owned as to 50% or more by listed financial institutions.

In some situations, an LP and its general partner may have difficulties ascertaining whether the LP is owned as to 50% or more by listed financial institutions.

Example 3 (uncertainty as to whether investors are LFIs)

The real estate holding LP in Example 1 is owned equally by a pension fund subsidiary (described in ITA s. 149(1)(o.2)) and by two Canadian-controlled private corporations which invest funds for their shareholders. The LP will be caught by the paragraph (b) test if, for example, either of these CCPCs is “a person whose principal business is the lending of money or the purchasing of debt securities” (s. 149(1)(a)(viii). Either CCPC could also become a listed financial institution if it amalgamated with one (see s. 149(2).) Furthermore, the business of a limited partner might not be aeven closeing that described in the listed financial institution definition, but it nonetheless will be an LFI under s. 151 if the partner is a current party to a s. 150 election.

Even where it is clear which partners in a limited partnership are listed financial institutions, valuation issues may create uncertainty as to whether their interests meet the relative 50% valuation test.

Example 4 (valuation difficulties where there are priority partnership draws)

A limited partnership agreement among Limited Partner A, Limited Partner B and a GP owned by A, provides that the GP is entitled to 1% of all partnership distributions, that B is entitled to all other distributions until it has achieved an 8% per annum cumulative return on its invested capital of $10 million, that A shall then receive all distributions until it has achieved an 8% per annum cumulative return on its invested capital of $10 million and that thereafter, subject to the general partner share, all distributions shall be shared on a 60/40 basis between A and B, respectively.

Depending on the circumstances, it may be difficult to determine whether the relative value of the partnership interest of B (which is a pension fund subsidiary) is 50% or more of all the partnership interests – and this relative valuation may change from month to month.

Canadian lenders to a limited partnership typically are listed financial institutions. It likely is not intended that they are to be considered to have an “interest” in the borrower partnership.

Potential requirement to buttress a flow-through commercial-activity structure

An expansive interpretation of the ILP definition potentially may require a Opco holding LP to revise its arrangements so that any GST/HST payable by it on general partner distributions (thereby viewed as effectively being a management fee) will qualify as being paid for a management service that is acquired in the course of commercial activity.

Example 5 (ensuring commercial activity of Opco holding LP)

A holding LP is owned equally by a pension fund subsidiary (described in ITA s. 149(1)(o.2)), a Canadian bank and an individual. It accordingly comes within para. (b) of the ILP definition. Its assets are mostly the units of project specific LPs (the Opco LPs) that are engaged in housing subdivision development and whose general partners (GPs) are wholly-owned by it. As is discussed in relation to Example 1 above, there is perhaps a risk that the holding LP would be considered to satisfy the primary-purpose test, so that it would be an ILP, with a commensurate risk that general partner distributions made by it would be subject to GST/HST (as well as mildly onerous SLFI filing and remittance obligations being generated).

If the holding LP is concerned by this risk, it may wish to structure so that it would be able to claim ITCs for any GST/HST payable by it on such draws.

One approach would be for it to agree with the GPs to provide to them, for fees (treated as consideration for taxable supplies by it), most of the management services needed for the management by the GPs of the Opco LPs. The management services received, in turn, by the holding LP from its general partner would likely relate mostly to its obligation to provide its management services to the GPs, so that the GST/HST paid by it on the general partner draws would generally qualify as being paid in the course of its commercial activity of earning management fees. The GPs, in turn, would be expected to be entitled to ITCs based (depending on the circumstances) either on their charging fees to the Opco LPs that were subject to GST/HST, or under s. 272.1(2).

A second approach would be to largely eliminate the distribution entitlement of the holding LP’s general partner and provide for it to instead charge taxable fees directly to the Opco LPs, who would be entitled to ITCs for the GST/HST thereon.

Both alternatives could entail significant commercial complexity associated with sorting out how the fees were to be allocated (especially if there were any minority investors in any of the Opco LPs and, in any event, keeping in mind that lender consents for project-specific lenders very well might be required).

A third approach would be to convert, the Opco LPs to general partnerships, with the holding LP being charged with primary management responsiblility for the Opco partnerships, so that the holding LP could generate ITCs under s. 272.1(2) for the GST/HST charged to it by its general partner. Losing limited liability would be commercially disadvantageous, so that the only function served by the separate existence of the subsidiary partnerships would be to satisfy potential lender requirements.

Uses of ILP definition

The investment limited partnership (“ILP”) definition contained in the September 8, 2017 (and February 27, 2018) draft legislation is one of the building blocks for the proposed ETA s. 272.1(8) rule, which would render many previously-exempt general partner distributions taxable.

It also is the key definition for extending, effective January 1, 2019, the special attribution method (SAM) rules, which currently are applicable to most selected listed financial institutions (SLFIs), to ILPs. These rules, for example, require a distributed investment plan, such as a mutual fund trust with unitholders across Canada, to follow detailed rules for determining the place of residence (under some somewhat artificial definitions of that concept) for the purpose of computing (to speak quite simplistically) a blended rate of provincial HST that reflects that geographic distribution of its unitholders so that if its unitholders were mostly in the west, its blended rate would be close to 0%, whereas if they were mostly in the Maritimes, that blended rate would be close to 10%. This normative blended rate is then compared to the actual rate of provincial HST charged to the MFT on its purchases to determine whether it owes top-up tax or is entitled to an HST refund. (See the Example in the Commentary on s. 32(1) of the SLFI Regs.) If the MFT does not follow safe-harbour procedures for determining the imputed residence of its unitholders on a timely basis, those unitholders may be deemed to be resident in high-rate (15%) provinces for SAM computation purposes.

These SAM rules are being extended to ILPs simply by defining a distributed investment plan (defined in s. 1(1) of the SLFI Regs.) to include an ILP.

Non-resident ILPs

The ILP definition is not restricted to limited partnerships which are resident in Canada. S. 132(1)(a) deems a limited partnership whose sole general partner (having both management and control of the partnership) is resident in Canada to itself be resident in Canada. However, draft s. 132(6) would deem an ILP to not be resident in Canada where the total value of interests therein held by non-resident members (other than prescribed members described in draft s. 4.1 of the Financial Services and Financial Institutions (GST/HST) Regulations) is 95% or more of that for all such interests. Furthermore, under s. 132(3), a partnership that is a resident is deemed to be a non-resident person respecting activities carried on by it through a non-resident permanent establishment (as defined in s. 123(1)), and conversely (under s. 132(2)) respecting activities of a non-resident partnership carried on through a Canadian permanent establishment.

An ILP would be deemed by draft s. 149(5)(f.1) to be a financial institution (and, thus, a “listed financial institution” under the s. 123(1) definition thereof). The SLFI definition in s. 225.2(1) and SLFI Reg. 9 also does not stipulate a residence requirement. Thus, a non-resident ILP can be a SLFI if, for example, it has limited partners resident (as defined in SLFI Reg. 5) in two or more provinces at least one of which is a participating province and accordingly, by virtue of being a distributed investment plan under the draft addition to the SLFI Reg. 1(1) definition of distributed investment plan, has a permanent establishment in those provinces under SLFI Reg. 3(e). (Note that, although under SLFI Reg. 9(b), a listed financial institution that is a quaifying partnrship is a SLFI, under draft SLFI Reg. 2, an investment plan (including an ILP) is excluded from being a qualifiig partnership.)

However, this proposition does not appear to have much substantive significance. The special attribution method (SAM) formula in s. 225.2(2) (as modified by SLFI Reg. 48(3)) computes additional tax or a refund as a function of net federal tax (A-B in the formula), including tax on imported taxable supplies (s. 218) and tax on qualifying consideration (s. 218.01). The definition in s. 217 of an “imported taxable supply,” as it relates to services, references a person resident in Canada (which, as noted, can include a non-resident partnership or other person respecting a Canadian permanent establishment). The s. 218.01 qualifying consideration rule references a qualifying taxpayer which, in the case of a non-resident partnership, includes a person with a permanent establishment (in this context, including a permanent establishment as defined in s. 132.1(2)) in Canada, as well as a non-resident partnership that (as interpreted by CRA in B-095R) is majority-owned by persons who are resident in Canada or carry on business in Canada or conduct activities there. Provided that the non-resident ILP is not majority-owned in this manner and does not have a permanent establishment in Canada, there thus should be no substantive effect of the application to it of the SAM formula.

A non-resident ILP would be subject to return-filing obligations (generally monthly returns, if it is not registered, as well as annual returns) under s. 238(2.1) (as well as remittance obligations under s. 228(2.1), if there is any tax owing under the SAM formula). However, the potentially quite significant penalties for not filing annual returns (on form GST111 or RC7291) under s. 284.1 do not apply to a distributed investment plan (as per s. 273.2(2) and s. 6 of the Financial Services and Financial Institutions (GST/HST) Regulations); and penalties computed under s. 280.1 for failure to file the monthly (e.g., RC7262 or GST62) and annual returns under s. 238(2.1) are calculated as a function of the unremitted tax owing under a monthly and annual application of the applicable SAM formula (i.e., no SAM tax – no s. 280.1 penalty).

Administrative Policy

27 July 2021 GST/HST Interpretation 197267a - Allocation to a general partner

ILP status can be derived from investing in other partnerships

CRA, in commenting regarding the application of GST/HST to allocations of income, dividends and taxable capital gains allocations of income, dividends and taxable capital gains by a limited partnership to its general partner, appeared to indicate that the partnership was an “investment limited partnership” under para. (a) of the definition and stated:

An investment limited partnership is a type of investment vehicle that exists primarily for the purpose of investing in financial instruments, such as holding securities or holding interest in other partnerships.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 272.1 - Subsection 272.1(1) draws to GP disproportionate to partnership capital is indicative of the receipt by it of such draws as consideration for services 288
Tax Topics - Excise Tax Act - Section 272.1 - Subsection 272.1(3) - Paragraph 272.1(3)(b) a manager cannot earn its fee directly from the ILP, and the deemed FMV supply by the GP is based on industry norms 324

28 February 2019 CBA Roundtable, Q.25

ILP test is not a day-by-day numerical test

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.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 272.1 - Subsection 272.1(3) fees of general partner are taxable even if not charged to ILP 120

GST/HST Notice 308 GST/HST and Investment Limited Partnerships July 2018

Example 1 of limited partnership that uses the subscription proceeds raised under a prospectus to invest in other LPs investing in commercial real estate (p. 5)

The interests that LP holds in the other limited partnerships are financial instruments for GST/HST purposes. As the capital that was contributed by the investors was used to acquire interests in other limited partnerships, the funds raised by LP are invested in property consisting primarily of financial instruments. In this tiered partnership structure, LP would be an ILP under paragraph (a) of the definition of investment limited partnership since LP is represented or promoted as a collective investment vehicle, whose primary purpose is to invest funds in property consisting primarily of financial instruments (that is, interests in the other limited partnerships).

Example 7 (respecting " LP Fund [which] is promoted to investors as an investment limited partnership for investing in residential and commercial real estate projects" is similar.

International Standards on Combating Money Laundering and the Financing of Terrorism & Proliferation:The FATF Recommendations June 2017

FATF concept of "financial institution" (referenced by CRA in FATCA context) (pp. 116-7)

Financial Institutions means any natural or legal person who conducts as a business one or more of the following activities or operations for or on behalf of a customer:

1. Acceptance of deposits and other repayable funds from the public. [fn: This also captures private banking].

2 Lending. [fn: This includes inter alia: consumer credit; mortgage credit; factoring, with or without recourse; and finance of commercial transactions (including forfeiting).]

3 Financial leasing.

4 Money or value transfer services.

5 Issuing and managing means of payment (e.g. credit and debit cards, cheques, traveller's cheques, money orders and banker's drafts, electronic money).

6. Financial guarantees and commitments.

7. Trading in:

(a) money market instruments (cheques, bills, certificates of deposit, derivatives etc.);

(b) foreign exchange;

(c) exchange, interest rate and index instruments;

(d) Transferable securities;

(e) commodity futures trading.

8. Participation in securities issues and the provision of financial services related to such issues.

9. Individual and collective portfolio management.

10. Safekeeping and administration of cash or liquid securities on behalf of other persons.

11. Otherwise investing, administering or managing funds or money on behalf of other persons.

12. Underwriting a placement of life insurance and other investment related insurance.

13. Money and currency changing.

Guidance on the Canada-U.S. Enhanced Tax Information Exchange Agreement 20 July 2020

Scope of collective investment vehicle concept

3.20 An entity that primarily conducts as a business investing, administering, or managing non-debt, direct interests in real or immovable property (even if managed by another investment entity) on behalf of other persons, such as type of real estate investment trust, will not be an investment entity.

3.21 The Agreement provides that the term "investment entity" must be interpreted in a manner consistent with the definition of "financial institution" in the FATF Recommendations. Part XVIII takes this into account by ensuring that an entity will not be considered to be a Canadian financial institution unless it is included in the definition of the term "listed financial institution" in subsection 263(1) of the ITA.


PWC, "Tax Insights: Investment limited partnerships ─ GST/HST & QST filing obligations", Issue 2020-27, May 04, 2020

Meaning of “principal activity”

A person’s “principal activity,” as discussed … in College of Applied Arts … depends on how important a particular activity assists the person in achieving its overall business objectives and goals when compared to its other business activities. To determine a person’s principal activity, the Canada Revenue Agency (CRA) generally considers:

  • the relative profits realized by each segment of a person's business
  • the total number of supplies made and the total value of the revenue received from supplies made in each business activity
  • the relative value of the assets employed in each business activity
  • the commercial practices of the person, including the time, attention, and efforts expended by the employees, managers, or corporate officers in each business activity, and
  • the terms of any partnership agreement if the person is a partnership, or corporate objects in the case of a corporation
Words and Phrases
principal activity
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 225.4 - Subsection 225.4(6) 198

Alan Kenigsberg, "Changes to Tax Treatment of ILPs under the ETA", Sales Tax, Customs & Trade, Volume XV, No 2, Federated Press, 2018, p.9

Purpose of ILP rules (p. 9)

We understand that the new measures were aimed at preventing certain investment funds from structuring their affairs as a limited partnership that pays the manager of the fund (acting as the general partner of the limited partnership) an exempt partnership distribution rather than a taxable payment for management and administrative services. However, in practice, the Proposed Legislation has created significant uncertainty as to exactly what it is intended to apply to, and how it is intended to apply….

Difficulties as to time frame in which to apply ILP definition (p. 11)

In a submission dated November 8, 2017, the Canadian Bar Association provided the following example to the Department of Finance to highlight some of the conceptual difficulties raised by the proposed definition of ILPs:

1) Partnership ABC is established on January 1, 2018 with the purpose of investing directly or indirectly in commercial real estate;

2) Partnership ABC's first investment, made on February 1, 2018, is the payment of $1,000,000 to acquire a 99.9% interest in another partnership whose sole asset is a commercial building which the second tier partnership rents to tenants (and charges the applicable GST/HST);

3) On August 1, 2018, Partnership ABC makes a second investment of $2,000,000 directly in commercial real estate;

4) On December 31, 2018, the direct investment in real property had decreased in value to $500,000, while the value of the initial indirect investment in real property (i.e. the partnership interest) remained the same.

This situation shows that depending on the standard used and the timing of the determination, there may be multiple different ways to interpret the primary purpose of an ILP.