Section 272.1

Points of interest include:

• A partnership cannot come into existence prior to the time that its partners commence to carry on business in common with a view to sharing profits of the business, so that, for example, a limited partnership which has been registered as such is not a partnership if it has not commenced to carry on business [accord D Marks cf. Bank of Beirut SAL v Prince Adel El-Hashemite].
• Consistent with Backman, a business must actually be carried on for more than a brief moment in time before being disposed of in order for an alleged partnership to in fact be formed.
• For purposes of the requirement that there be a sharing of profits, the ordinary commercial meaning of profit can include an increase in the value of assets (which suggests that profits for this purpose can include mark-to-market profits, such as under a carry).
• Where a person receives a salary or other remuneration that is not based on its interest in the partnership, then that person is not considered to be acting in partnership with the other parties engaged in the subject activity [per contra, Zahid Solicitors].
• Events that may result in a partnership ceasing to exist include:
  • the conversion of a general partnership to a limited partnership such that the general partnership ceases to exist [cf. 2016-0660321R3 and 1992 Corporate Management Tax Conference Report (CTF), Q.11]
  • a change in the members of a partnership, such as when a person ceases to be a member or a new person is admitted as a member [even though most partnership agreements expressly provide the opposite?]
  • an event occurs that makes the partnership business illegal [cf. Continental Bank]
• Somewhat contrary to the above position, that reference should be made to whether a business in fact is carried on, it is stated that until dissolution of a partnership is evidenced by duly-filed declaration, the dissolution is not effective with respect to third parties (presumably including CRA).
• Where a foreign jurisdiction permits a person to be admitted to a limited partnership as a general partner or as a limited partner without obligation to make a contribution, this is inconsistent with provincial partnership law, so that in such circumstances a determination must be made, under the two-step approach to entity classification, as to whether the entity is closer to a partnership than some other form of organization recognized under Canadian law.
• There is a detailed description of the differences between a co-ownership arrangement and a partnership

CRA ruled that distributions made by a limited partnership, which held investments, to its general and limited partners were exempt from GST/HST pursuant to para. (f) of the financial services definition, with no mention of s. 272.1 (other than to state that its letter did not address the recent amendments to s. 272.1). Thus s. 272.1(1) does not oust the application of the financial services definition.

A limited partnership (the “Partnership”) engaged in lending money and received “Set-Up” fees from the borrower, which were considered by CRA to be part of the consideration for its supply of financial services. All Set-Up Fees, up to an aggregate of x% of the principal amount was required by the Partnership Agreement to be paid to the General Partner, which was registered. After ruling that these amounts were subject ot GST/HST, CRA stated:

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 XX, state that the Limited Partnership is responsible for and will reimburse the General Partners for organizational (partnership) expenses, section XX 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.

Where a corporate general partner receives reimbursements from a partnership for employee compensation costs incurred by the general partner in providing services to the partnership, such reimbursement will be subject to GST even if the employment compensation that is being reimbursed is, itself, tied to the net asset value of the partnership.

Where the general partner of an investment limited partnership is entitled to proportionate sharing of profits with limited partners (based on respective units held) together with an amount equal to 2% of the net asset value of the assets of the partnership, the 2% amount (described by CRA as a "fee") generally will be considered to be remuneration for services provided by the 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.

Example 1 re single-purpose GP manager of retirement home LP

Under the written limited partnership agreement, A Co, who is the general partner and sole manager of the partnerships's asset (a retirement home) and does not provide services to any other persons, is entitled to x% of the partnership's profits.

CRA comments

Managing the residence is directly related to the business purpose of the partnership and A Co does not receive any separate consideration for doing so. Generally s.272.1(1) would deem there to be no supply of A Co's management services to the partnership.

In indicating that fixed fees received by a partner for providing accounting and administrative services to the partnership would be subject to GST, CRA stated that "where a corporation that is a member of a partnership supplies property or services for a fee in the course of its business to the partnership, it is supplying the property or services otherwise than in the course of the partnership's activities. Where that is the case, subsection 272.1(3) would apply, not subsection 272.1(1)."

Before indicating that a partner of a partnership would be required to charge GST on amounts received by it from the partnership reimbursing it for expenses incurred by it in providing administrative services to the partnership, CRA stated that "where a corporation who is a member of a partnership supplies property or a service from its business to the partnership for consideration, the supply would be otherwise than in the course of the partnership activity ... ."

When asked to provide an example of the application of s. 272.1(2), CRA responded:

Partner Inc. is a partner of Partnership A (not a limited partnership). Partnership A is a GST/HST registrant and is engaged exclusively in commercial construction activities (i.e. in commercial activity). Partner Inc. acquires certain construction equipment that is used 100% in the construction activities of Partnership A. Partner Inc. has no activities other than holding its partnership interest in Partnership A and using its equipment in Partnership A’s construction activities. Partner Inc. receives no remuneration from Partnership A other than a distribution of partnership profits based on its original investment under the Partnership Agreement. The provisions of the Partnership Agreement also state that Partner Inc. will not be reimbursed… .

Partner Inc. acquired the equipment for use in the course of the partnership’s activities but not on the account of the partnership. Pursuant to subsection 272.1(2), for the purpose of determining ITCs in relation to the equipment, Partner Inc. would be deemed to be engaged in the construction activities of Partnership A. … Partner Inc. may.. claim ITCs in relation to the GST/HST it incurred on the acquisition of the equipment that it used in Partnership A’s commercial activities, provided all the other requirements for claiming ITCs are satisfied.

The registered general partner (GP) of a limited partnership (LP A) engaged exclusively in commercial activity received supplies of services performed by executive employees of LP A (who also provided management and direction of R&D activities of two other partnerships of which GP ws the general partner). Although the partnership agreement provides that GP will be reimbursed by LP A for all expenses incurred by GP in the performance of its duties, no such reimbrusement has been received to date in relation to such executive employees. Opinion:

Since [GP] is responsible under the Agreement for operating the business of [LP A], it would be reasonable to regard the services of the executives as being acquired by [GP] on its own account for use in the course of the activities of [LP A] - notwithstanding that the services are supplied by [LP A]. Consequently, [GP] would be entitled to claim ITCs with respect to the GST/HST that [GP] paid to [LP A] for the salaries of the executive employees and associated costs provided the requirements of section 169 and related provisions are met (i.e., to the extent that the ITCs claimed relate to supplies acquired for consumption, use, or supply in the commercial activities of [LP A]).

An LP incurs expenses in identifying and acquiring the real estate properties. Once a potential property is identified, the LP determines the manner in which the real property will be held. In this case, the property is acquired by P2, a partnership of which the LP is a partner. Is the LP entitled to claim ITCs for such expenses?

CRA responded:

Subsection 272.1(2) does not apply to expenses incurred with regard to the partner's own activities. …On the basis of the facts provided, it would appear that the LP incurred the expenses relating to investigating and identifying potential properties on its own account but other than for consumption, use or supply in the course of the activities of the P2.

The making of a capital contribution to a partnership (an individual supplying a vacant lot to the partnership) would not be included in the application of s. 272.1(1). The contribution of capital to the partnership in consideration for a partnership interest would not be considered to have been done in the course of the partnership's activities.

GST on cost incurred in acquiring interests in a limited partnerships would not be eligible for tax credits given that "where a member of a partnership acquires or imports property or services related to the raising of funds that the member will use to acquire an interest in a partnership, such property or services will not be considered to have been acquired or imported for consumption, use or supply in the course of activities of the partnership."

Reduction for partnership reimbursements

A partner's entitlement to ITCs is subject to the restrictions as set out in subsection 272.1(2). Where a member of a partnership (other than an individual) incurs an expenditure in relation to the activities of the partnership and the partner is reimbursed by the partnership, the partner's claim for ITCs will be reduced to the extent of the ITC portion of the reimbursement and the partnership will be entitled to claim an ITC for the GST included in the reimbursement.

A partnership will not be entitled to claim an ITC in respect of an expense reimbursed to a partner where the partner has already claimed an ITC in respect of the same expense by virtue of paragraph 272.1(2)(b).

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.

General partner may be providing its management services to LP in its separate capacity (p. 19)

[W]here a general partner of a limited partnership provides a management or administrative service to the limited partnership, the general partner may be providing this service to the limited partnership otherwise than in the course of the limited partnership’s activities. As such, existing subsection 272.1(3) may have application. In such cases where existing paragraph 272.1(3)(b) applies, the general partner is required to account for GST/HST calculated on the FMV of the management or administrative service provided to the limited partnership at the time the supply is made (that is, when the agreement to provide the service was entered into, unless subsection 136.1(2) applies). The proposed amendments clarify this position with respect to ILPs.

Example 7, Scenario 2 respecting admin and management services provided to ILP ("LP Fund") by its GP ("Aco") (which is entitled, at the beginning of each month, to a monthly percentage of NAV, and also to an annual carry), were taxable even before s. 272.1(8) (p. 26)

As Aco did not charge, collect or remit any tax in respect of any of the prior services, proposed subsection 272.1(8) would not apply to the prior services. Nevertheless, in accordance with existing paragraph 272.1(3)(b) and subsection 136.1(2), Aco was required to make a determination, on the first day of each billing period, of the FMV of the management and administrative services rendered to LP Fund during each billing period determined as if Aco were not a member of LP Fund and were dealing at arm’s length with LP Fund. Aco is required to amend its returns for those periods to account for this tax that was collectible by Aco.

The September 1 to 7, 2017 period would be a billing period for purposes of subsection 136.1(2) and based on the application of existing paragraph 272.1(3)(b), Aco would be required to make a determination, on the first day of that billing period, of the FMV of the management and administrative services rendered to LP Fund during that billing period.

(c) if a partnership is dissolved;

• A partnership's registration will be cancelled upon dissolution of the partnership. Partnership Acts of provincial jurisdictions generally require the filing, in a local registry office, of a declaration of the dissolution of a partnership.
• Where a partnership ceases in law to exist (e.g., when one of the two members of the partnership dies), the partnership is deemed not to have ceased to exist until the registration of the partnership is cancelled.

One of the three partners (A) of a registered partnership operating a retail store dies. The partnershp agreement has no continuance provision so that the partnership is dissolved. The two other partners (B and C) each buy 1/2 of the former partnership property received on dissolution by A's estate, and contribute all the former partnership property to a new partnership.

By virtue of s. 272.1(7), the new partnership is deemed to be a continuation of the original partnership, so that it can use the same business number as the original partnership.

The supplies of property from the original partnership to the surviving partners and to the partner's estate, from the partner's estate to the other two partners, and from the two partners to the new partnership, are subject to the normal GST/HST rules. Hence, the supplies of property by the partnership to the surviving partners and the estate are subject to GST/HST. The estate cannot claim ITCs in this regard because it is not engaged in commercial activity, although it also does does not collect GST/HST on the supplies of that property to B and C; and, similarly, B and C cannot claim ITCs nor do they collect GST/HST on their property contribution to the new partnership.

In the context of ss. 272.1(8) and (3) effectively indicating that management or administrative services rendered by a general partner to an investment limited partnership (ILP) are taxable based on the fair market value of such services rendered in each month (or other billing period). CRA did not provide specific guidance on how such FMV was to determined, and stated:

The CRA recognizes that there are various methods that may be used and the appropriateness of any valuation methodology used in a particular case is a matter of valuation principles and practice. …

[T]he FMV of a supply of a management or administrative service may not necessarily always correspond to the consideration paid for such a service. …

General partners can use whichever method they would like to determine FMV. However … [t]he CRA is under no obligation to accept the value used by the general partner if it is determined to be over or under valued but it will consider the general partner’s FMV determination … .

Example 7, Scenario 1 respecting admin and management services provided to ILP ("LP Fund") by its GP ("Aco") for a monthly fee (taxable) and with annual performance fee (not directly taxable) (pp. 22-24)

Where Aco accounted for the GST/HST charged on the monthly payments with respect to the subsequent services in determining its net tax, Aco may be required to make an adjustment to its net tax [Footnote 5: Given the annual payment that Aco may be entitled to receive from LP Fund, the monthly payment may not be reflective of the FMV of the management and administrative services rendered in a particular month.] Where Aco did not calculate the GST/HST on the FMV of the services rendered during a billing period, Aco would need to make a determination, on the last day of each billing period, of the FMV of the management and administrative services rendered to LP Fund during each billing period determined as if Aco were not a member of LP Fund and were dealing at arm’s length with LP Fund.

To the extent that the total GST/HST on the FMV of the supplies made on or after September 8, 2017 and before February 27, 2018, exceeds the total GST/HST deemed collected on those supplies before that day, Aco would add the excess amount in determining its net tax for its reporting period that includes February 27, 2018.