Section 272.1

Subsection 272.1(1)

Administrative Policy

17 September 2018 Ruling 182403

partnership draws exempted under (f) of financial service

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.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Financial Service - Paragraph (f) partnership draws generally exempted under para. (f) without regard to s. 272.1(1) 297

30 December 2013 Ruling 136499

distributions to GP of portion of LP set-up fees were taxable

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.

25 April 2013 Internal T.I. 2013-0478511I7 F - Distribution à un commanditaire

distinction between return on partnership investment and services rendered by partner in the course of a separate business

After addressing the usual case where a capital gains distribution by a limited partnership (“SEC”) would be respected as such for ITA purposes, CRA went on to state:

Alternatively, a review of the partnership agreement and all relevant facts may allow us to conclude that the distribution of the amounts by the SEC to the Limited Partner represents consideration for services rendered by the Limited Partner to the SEC. In this regard, we note the answer … from the 2003 [Annual CTF] Roundtable …:

…[W]e would be prepared to allow a deduction in computing the income of a partnership for fees paid to a partner if the fees are paid in consideration for services provided to the partnership by the partner acting other than in his or her capacity as a partner (i.e., the services are not related to the ownership of the partnership interest). That is, the services are provided by the partner in the course of carrying on a business separate from the business carried on by the partnership.

Thus, if the partnership agreement and all other relevant facts are such that it can be concluded that the amounts paid by SEC to the Limited Partner are in return for services rendered, it would be possible at that time to consider the inclusion of such amounts in computing the partner's business income pursuant to subsection 9(1) to the extent that the services are provided by the Limited Partner in the course of carrying on a business that is separate from the business operated by the SEC. Otherwise, the fair market value of any service contribution by the Limited Partner would be added to the ACB of its partnership interest.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Real Estate real estate capital gains flowed through to limited partner retained character 216
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) allocated capital gains retained their character unless re services performed by partner in course of separate business 381
Tax Topics - Income Tax Act - Section 53 - Subsection 53(1) - Paragraph 53(1)(e) - Subparagraph 53(1)(e)(iv) services rendered by limited partner to LP gave rise to ACB increase if no s. 9 income inclusion for fee income 127

Canadian Bar Association CRAG ST Round Table 9 March 2006, Q. 13

employee reimbursement included

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.

30 June 2005 Headquarters Letter RITS No. 57840

2%-of-NAV component of GP's compensation subject to s. 272.1(3)

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.

P-244 - "Partnerships - Application of Subsection 272.1(1) of the Excise Tax Act", 9 August 2004

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.

26 May 2004 Interpretation RITS No. 49475

fixed fees received by partner within s. 272.1(3) rather than (1)

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)."

26 May 2004 Interpretation RITS No. 36728

GP reimbursements were taxable

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 ... ."

P-216 - "Registration of a Partner", 8 April 1998

Subsection 272.1(2)

See Also

FP Newspapers Inc. v. The Queen, 2013 TCC 44 (Informal Procedure)

s. 272.1 did not apply to limited partner

The registrant, which was the corporate successor to an income fund, acquired, as essentially its only asset, a 49% limited partnership interest in a partnership that carried on a newspaper business. It appealed the denial of $5,039.77 in ITCs which it had claimed in its return for its three-month reporting period ending on March 31, 2011 in connection with various of its costs including fees paid in connection with the income fund conversion and in connection with news releases regarding its dividends. Pizzitelli J. found, before turning to s. 272.1, that all of the the registrant's consumption or use of services was deemed by s. 141(3) to be not in the course of commercial activities, given that it received substantial partnership drawings ($3,865,500 for a six-month period) for distribution it to shareholders, and its only identified commercial activity in that period was providing advice to the partnership for fees of $1,212.75.

Pizzitelli J. rejected the registrant's argument that, pursuant to s. 272.1, it was deemed to carry on the commercial (publishing) activities of the partnership, and should be considered to have acquired the services for which it claimed the ITCs in the course of such deemed commercial activities.

First, the registrant, as a limited partner had "no legal capacity to act on behalf of the Partnership nor [was] required to provide any property or services other than the negligible advisory services contracted for" (para. 33). Second, none of the invoices for which it claimed ITCs were for services that were consumed, used or supplied in the course of the Partnership's newspaper publishing business (para. 35).

B.J. Northern Enterprises Ltd. v. The Queen, [1995] GSTC 12 (TCC)

A partnership that was engaged in commercial activity had three corporate partners (including the appellant) with each partner being owned by a holding company that provided the services of its individual shareholder to the partnership and received consulting fees from the partner. The appellant was registered by Revenue Canada. Rip TCJ. applied former s. 145(2) in finding that the appellant was entitled to input tax credits for the GST on the consulting fees so charged to it.

Administrative Policy

May 2016 Alberta CPA Roundtable, GST Q.2

s. 272.1(2) applicable to single-purpose corporate partner of commercial general partnership

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.

26 June 2013 Opinion Case No. 144410

ITC for incestuous HST

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]).

CBAO National Commodity Tax, Customs and Trade Section – 2013 GST/HST Questions for Revenue Canada, Q. 29 ("Real Property Investment")

pre-investment expenses did not qualify
available with membership password at http://www.cba.org/CBA/sections_NSCTS/main/GST_HST.aspx

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.

1 August 2003 Ruling Case No. 39572

capital raise and acquisition expenses excluded

An income fund incurred legal fees respecting negotiating the acquisition of partnership units and respecting an initial public offering of trust units, as well as incurring audit fees. Its revenues consist of interest and dividends. CRA stated:

Where a member of a partnership acquires or imports property or services related to the raising of funds, negotiation or legal services that the member will use to acquire or maintain 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.

27 September 2002 Headquarter Letter Case No. 39625

contribution of capital excluded

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.

23 September, 1998 Headquarters Letter RITS No. HQR000265

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."

Subsection 272.1(3)

Commentary

Relationship between s. 272.1(3) and (1)

S. 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.

As the partner is thus deemed not to have carried out such activity, it follows that the performance by it of that activity does not represent a supply made by it to the partnership, so that no GST/HST is collectible. Conversely, s. 272.1(3) provides that a supply of services made by a member of a partnership otherwise than in the course of the partnership's activities is deemed to have been supplied for consideration equal to the fair market value of the supplied services, so that such deemed fair market value consideration generally is subject to GST/HST at the applicable rate.

There could be argued to be a contradiction between the tests in ss. 272.1(1) and (3), in that one test refers to whether a service provided by the general partner is provided qua partner whereas the second test refers to whether it is provided in the course of the partnership's activities.

Common law test of receiving qua partner

The "qua partner" test appears to look to guidance under the general partnership law. At common law, a partner was considered to be incapable of contracting with a partnership, so that, for example, a member of a partnership was incapable of receiving rent from the partnership (see, e.g., Rye v. Rye) or employee remuneration (see Winkelhof v. Clyde) or amounts received as creditor (see Storrar Dunbrik Ltd. v. MNR).. (To be more precise, the "common law" authorities generally are ones interpreting the definition of partnership contained in the (English) Partnership Act 1890, and the identically worded definition appearing in provincial Partnership Acts. In fact, the discussion in Young v. Zahid suggested that there are differences between this statutory definition of partnership and the common law which this definition was largely intended to codify - see the discussion of the "with a view to profit" requirement further below).

The above "common law" position was applied by the Tax Court in Crestglen, where Hamlyn J noted that a partner of a partnership could not also legally be an employee of the partnership. This common law position was effectively overruled by s. 12 of the Limited Partnerships Act (Ontario), which provides that "A limited partner may loan money to and transact other business with the limited partnership" - and similarly for other common law provinces. These provisions do not affect a general partner. Thus, it could be considered respecting a general partner that all of its purported contractual dealings with a partnership are legally to be treated as dealings with the partnership qua partner.

Respecting the somewhat contrasting test in s. 272.1(3), there may be regulatory or other reasons (e.g., the general partner but not the partnership being licensed by a regulatory authority to carry on a particular activity) why particular activities should be carried on by the general partner as principal rather than as agent for the partnership - but, at the same time, for the benefit of the partnership. In order that the two provisions (the no-supply rule in s. 272.1(1), and the taxable-activity rule in s. 272.1(3)) are to be read harmoniously, it likely would be appropriate to consider the latter type of situation as one in which the partner is carrying on its activities as principal but nonetheless in the course of the partnership's activities.

Relationship between s. 272.1 and financial services definition

In 182403If, CRA appeared to consider that partnership draws generally are exempted under para. (f) of the definition in s. 123(1) of a financial service, without regard to s. 272.1(1) or 272.1(3). Para. (f) extends to all returns on a financial instrument (whose definition includes an interest in a partnership.) Such a view would imply that s. 272.1 is not an exclusive code governing the treatment of consideration received by a partner from a partnership.

Thus, it could be considered that a partner whose relevant transactions are not explicitly rendered taxable by s. 272.1(3) can access the exemption for financial services. However, where the partnership in question is an investing partnership described in para. (q) of the financial services definition, para. (q) then operates to exclude certain services from the exempted financial service category. In particular, para. (q) excludes:

the provision, to…any…partnership…whose principal activity is the investing of funds, of…any…service…if the supplier is a person who provides management or administrative services to the…partnership….

The "management or administrative services" referred to in bold above are deemed to include an activity engaged in by a particular person of "managing the assets or liabilities [of another person] irrespective of the level of discretionary authority the particular person has to manage some or all of the assets or liabilities." (See the definitions of "asset management service" and "management or administrative service" in s. 123(1).) An asset management service also is part of the list of exclusions as to what is a "financial service" in the definition of that term.)

S. 272.1(8) also renders most or all services rendered by a general partner to an investment limited partnership to be taxable.

CRA positions outside and in ILP context

In Policy Statement P-244 dated August 9, 2004, CRA discusses its interpretation of ss. 272.1(1) and (3). All of the factors discussed in the Policy Statement which seem to have significance would typically appear to point to s. 272.1(1) applying to the services provided to one or more limited partnerships (LPs) by their general partner (GP) where it is a special-purpose entity (i.e., it does not carry on any other activity than of general partner) and it receives a fixed or calculated percentage of the LP profits (e.g., a fixed percentage of net asset value plus an incentive draw (or “carry”) calculated as a percentage of the appreciation in the LP’s net asset value.)

Some of the subsequent statements of CRA suggest that, even before the introduction of s. 272.1(8), if GP was entitled only to receive partnership draws calculated mostly as a percentage (e.g., 2%) of the net asset values of the Fund LPs, such fees could be viewed as being consideration for taxable supplies rather than being exempted by subsection 272.1(1).

In 2004, CRA stated (May 26, 2004, Interpretation RITS No. 36728):

Generally, 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.

A June 30, 2005 Interpretation (RITS No. 57840) described a general partner of an investment partnership who held Class B units which participated in partnership profits or losses pro rata (based on the number of units) with the Class A units of limited partners and who also was entitled pursuant to the limited partnership agreement to receive a fee, calculated as a percentage of the net asset value of the partnership, in consideration for the services it provided to the partnership. CRA took the position that the fee was subject to GST/HST.

In a follow-up comment on this Interpretation, CRA stated (CBAO 2006 Round Table, Q.21):

"In the fact situation presented in this question, the corporate general partner of the limited partnership receives a fee for services it provides to the partnership (e.g., the fee based on the net value of partnership assets), which is in addition to its share of the profits or losses from the business of the partnership. This is an indication that the amount is remuneration for services provided by the corporate partner on its own account, i.e., in the course of its own business, and not for something done as a member of the partnership, even though the agreement to provide such services is included in the partnership agreement."

Example 7 of Notice 308 dealt with an Ontario limited partnership (LP Fund) whose general partner (Aco) was entitled to monthly “compensation” equal to a percentage of the partnership net asset value from time to time as well as an annual amount based on the LP Fund performance (i.e., a “carry” based on cumulative mark-to-market profits). CRA indicated that even under the rules applicable prior to the effective date of the introduction of s. 272.1(8), “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 [monthly] billing period determined as if Aco were not a member of the LP Fund and were dealing at arm’s length with LP Fund.”

It is implicit in Policy Statement P-244 (e.g., Example No. 1 thereof) that the application of s. 272.1(1) to amounts paid to a partner by a partnership is not significantly affected by their labelling as "fees" or "partnership distributions." This is consistent with the general partnership law which as discussed above, will generally recharacterize fee income as having been received qua partner.

Whether partner draws must vary with profits

In Lindley & Banks on Partnership, 17th edition, 1995, para. 10-70, there was a statement that where, on the true construction of a partnership deed, a junior partner's salary is payable only out of profits, he will be respected as a partner, whereas if the agreement may be construed as providing for a guaranteed salary as well as an indemnity against losses, then "the supposed 'partner' will, it is conceived, be no more than an employee of the firm". Accordingly, even in 1995, the labelling of a distribution as salary would not necessarily cause the recipient to not be considered a partner.

The more recent decision in M. Young Legal v. Zahid Solicitors, found that “the words of the core definition [of partnership in the Partnership Act 1890] are wide enough to render the recipient of payments in a fixed sum a partner provided that there is a business, that it is carried on with a view to profit and, crucially for present purposes, that he is carrying it on in common with another or others.” This decision was followed in Rowlands v Hodson, [2009] EWCA Civ 1042 and Bates van Winkelhof v. Clyde & Co LLP. Similar to the English law before these decisions, there are sparse indications in the Canadian jurisprudence that a failure to share in profits is an important, and perhaps even critical, consideration pointing to such person not being a partner. (See for example, Alison R. Manzer, A Practical Guide to Partnership Law at 2.354: “As the natural opposition to sharing of profit indicating partnership, the absence of evidence as to profit participation suggests strongly that no partnership exists: Big Bend Construction Ltd. v. Donald (1958), 1958 CarswellAlta 33, 25 W.W.R. 281 (Alta. T.D.), rev’d on other grounds 1958 CarswellAlta 52, 26 W.W.R. 336 (Alta. C.A.).” A more recent Alberta Provincial Court decision, Foothills Dental Laboratory Ltd. v. Naik, 1996 CarswellAlta 553, at para. 24 stated that “the sharing of profits is merely one of the many indicia set out in s.4 of the Partnership Act indicating that a partnership exists.”) However, given that these English decisions are based on the same statutory definition of partnership and constitute a discussion of the point at some length by a preeminent court, one might expect a court in a common law province to be receptive to the proposition that, although an indication of partner status, a sharing of profits by a mooted partner is not essential to its status as a partner.

Relevance of question

The question of whether the partnership draws (or fees) received by a GP are subject to GST/HST is most relevant where the LP is making predominantly exempt supplies, so that it would have little or no entitlement to input tax credits if the draws or fees paid by it to the GP were subject to GST/HST.

The most common situation where this is the case is where the LP is an investment limited partnership, whose draft definition in s. 123(1) requires inter alia that the partnership invest primarily in financial instruments. As is discussed below under s. 272.1(8), that provision effectively treats partnership draws received by the general partner of an investment limited partnership as consideration for taxable supplies by it. However, there are other situations where partner draws received by the GP of an LP engaged exclusively in exempt activities may still potentially be exempted under s. 272.1(1), for example, where the LP directly operates a retirement home, assisted living facility, nursing home, apartment building or medical or dental services business.

Administrative Policy

28 February 2019 CBA Roundtable, Q.25

fees of general partner are taxable even if not charged to ILP

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.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 123 - Subsection 123(1) - Investment Limited Partnership ILP test is not a day-by-day numerical test 485

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

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") for monthly NAV-calculated fees, which 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.

Paragraph 272.1(3)(b)

Administrative Policy

28 February 2019 CBA Roundtable, Q.15

FMV of services rendered may differ from the consideration
  1. Does CRA have a definition of “management or administrative service” that it applies for purposes of s. 272.1(8) (other than the inclusion of an “asset management service” as defined in s. 123(1))?
  2. If the consideration paid for such a service is based on an industry standard of say X%, would that constitute the fair market value (FMV), even if between related parties?

CRA responded:

(a) … [Such] a management or administrative service would typically include managing or administering the day-to-day business and affairs of the partnership.

This could include, for example, organizing, monitoring, planning and coordinating the activities of the partnership, making decisions and directing resources to assist the partnership in achieving its defined objectives, as well as maintaining records, and preparing reports. …

(b) … 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, they must be able to support it. The 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, as well as other approaches in determining the appropriateness of the FMV used.

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 272.1 - Subsection 272.1(8) CRA will look at GP's determination of FMV 164

Subsection 272.1(5)

Cases

Canada v. Raposo, 2019 CAF 208

s. 272.1(5) did not apply to debt of a partnership that was void for carrying on an illicit activity

The taxpayer and the three other members of the “Raposo clan” were involved in the sale of cocaine in the Gatineau area. CRA took the position that, as a member of a partnership, the taxpayer was solidarily liable under ETA s. 272.1(5) for uncollected GST on the cocaine sales. This rested on the proposition that in order for there to be a partnership, it was sufficient for the elements of the definition of a contract of partnership in Art. 2186 of the Civil Code to be satisfied, and that it did not matter that Art. 1413 provided: “A contract whose object is prohibited by law or contrary to public order is null." It considered that it was contrary to the principle of “tax neutrality” that the consequences of the activities should be affected by whether or not they were unlawful and by in which province they were carried out.

Montigny JA considered these contentions to be contrary to s. 8.1 of the Interpretation Act, which provided that a federal provision referencing property law rules should reference those of the applicable province “unless otherwise provided by law.” Examples of federal provisions which effected such ouster “by law” were ss. ITA s. 160 and ETA s. 325, which through using the broad term “transfer” rather than “sale,” “the legislator was assured that any activity, lawful or not, was covered”, whereas the legislator “did not do the same in section 272.1” (TaxInterpretations translation, para. 56).

He noted that not respecting the void character under the Civil Code of a partnership contract for carrying out an illegal activity would have the “absurd consequence” that, on the one hand, the taxpayer would be held liable for the entirely of the uncollected GST of the unlawful activity, whereas, on the other hand, “given the illegality of those activities, the taxpayer would not have any recourse … to reclaiming, from the co-debtors, their respective portion of the total debt before a civil court” (para. 37).

The Crown’s s. 272.1(5) claim failed.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality voidness of a partnership with an unlawful activity in Quebec applied for ETA purposes 465
Tax Topics - Statutory Interpretation - Interpretation Act - Section 8.1 presumption of complementarity in s. 8.1 must be overridden by expansive wording in the ETA provision in question 284
Tax Topics - Income Tax Act - Section 96 Civil Code and common law elements of partnership are similar 90

See Also

Raposo v. The Queen, 2018 CCI 81, aff'd 2019 CAF 208

alleged partnership was void as having an illegal purpose contrary to public policy

The appellant and the three other members of the “Raposo clan” were involved in the sale of cocaine in the Gatineau area. The Crown took the position that he was solidarily liable under ETA s. 272.1(5) for uncollected GST on the cocaine sales.

In rejecting this position, Paris J referred to Article 1417 of the Civil Code (“A contract is absolutely null where the condition of formation sanctioned by its nullity is necessary for the protection of the general interest”), and stated (at paras. 26, 34, TaxInterpretations translation):

On numerous occasions, the jurisprudence has reiterated that a purpose which is contrary to the public order and which contravenes a penal provision, in the current case, of the Criminal Code, engages the absolute nullity of the contract in accordance with Article 1417 … .

It therefore follows that under Quebec law the Raposo clan did not constitute a partnership.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Illegality partnership for illegal activity was void under Art. 1417 of the Civil Code 148
Tax Topics - Income Tax Act - Section 96 illegality of partnership business voided the partnership 131

Subsection 272.1(6)

Administrative Policy

GST/HST Memoranda Series 2.7 Cancellation of Registration May 2005

(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.
Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 271 79

Subsection 272.1(7)

Administrative Policy

1 May 2003 Draft Policy P-XX5

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.

Articles

Brent Murray, "Partner Changes: Have the 'Simplified' Partnership Rules Gotten More Complicated?", GST & Commodity Tax, Vol. XVII, No. 5, June 2003, p. 37.

Subsection 272.1(8)

Commentary

Draft s. 272.1(8)(b) provides that if the general partner (GP) of an investment limited partnership provides a management or administrative service to the partnership, the supply of such service is deemed to have been made otherwise in the course of the partnership’s activities. This deemed result then engages the application of s. 272.1(3)(b), which deems the investment limited partnership to have received a supply of the GP’s services for their fair market value. As discussed above under s. 272.1(3), the management or administrative service of the GP would not be expected to be an exempt financial service, so that such deemed fee would be subject to GST/HST.

This provision does not apply to a limited partner.

The draft definition of “investment limited partnership” is discussed above under s. 123(1). As noted, that definition is quite broad, and might include LPs that would be viewed commercially as being engaged in a real estate or operating business, rather than being restricted to private equity or portfolio investment LPs.

Example 1 (real estate holding partnership held by LFI)

A Canadian REIT carries on a portion of its activities through an LP (“Holdco LP”) of which a wholly-owned corporation of the REIT (“Holdco GP”) is the general partner. In addition to the Class A LP units of Holdco LP held by the REIT, third parties hold Class B LP units of Holdco LP representing a minority interest. Holdco GP is entitled to a “carry,” i.e., a draw that is calculated based on the degree of appreciation in the net asset value of Holdco LP above specified benchmarks.

Holdco LP does not carry on its commercial real estate business directly, but instead does so through project-specific subsidiary LPs.

Holdco LP arguably is an investment limited partnership because it intends to invest directly in LP units, so that it may be considered that its primary purpose is to invest primarily in financial instruments (although, as noted in the discussion of the ILP definition, there is a significant basis for considering that this is not the case). Furthermore, the majority of the interests in Holdco LP are held by listed financial institutions, given that the REIT is a mutual fund trust.

Thus, if the above interpretation of the primary purpose test is correct, the partnership draws (including carry) receivable by Holdco GP would be subject to GST/HST.

A “management or administrative service” is defined to “include” an “asset management service” (both defined in s. 123(1)). The definition of “asset management service” is a “means” definition having various listed components including managing or administering the assets or liabilities of another person, irrespective of the level of discretionary authority held, and determining which assets or liabilities are to be acquired or disposed of. Most or all of the normal responsibilities of a GP would typically come within these defined terms.

S. 272.1(8)(a) provides that the provision of the GP’s management or administrative service to the investment limited partnership is deemed not to be done by it as a member of the partnership. This provision may not have been necessary in order to engage s. 272.1(3) as described above, and may only have been drafted for greater certainty.

The first branch of the effective-date rule for the application of s. 272.1(8) provides that it applies in respect of the provision of a management or administrative service if any consideration for a supply of the service became due on or after the September 8, 2017 announcement date (or was paid on or after that day without having yet become due). This effective-date rule will have the effect in many instances of making the introduction of s. 272.1(8) retroactive to the beginning of 2017 or even earlier. Profits of a partnership for a year are not finally determined until after the year in question. Although partners often receive interim draws during the year, the final amount of the consideration for the supply of their services to the partnership for the year (in the form of a final determination of their respective entitlements to partnership profits) will not be determined until the accounts of the year are finalized.

Example 2 (residual draw entitlements after announcement date)

The GP of an investment limited partnership with a calendar fiscal period receives monthly interim draws during 2017 and a final “truing up” distribution in February 2018, when the 2017 accounts are finalized. If this final payment were considered to be part of the consideration for the services it rendered prior to September 8, 2017, the draws received by it in 2017 prior to that date very well might be retroactively subject to s. 272.1(8).

The second branch of the effective date rule indicates that s. 272.1(8) would apply even if all of the consideration for the supply became due (or was paid) before the announcement date unless the supplier (the GP) did not, on or before that day, charge, collect or remit any GST/HST in respect of the supply. This rule appears to be directed at situations where the GP of an investment limited partnership charged GST/HST on its draws, and the partnership is now seeking a refund of the GST/HST on the basis that the draws were not subject to GST/HST.

Administrative Policy

28 February 2019 CBA Roundtable, Q.15

CRA will look at GP's determination of FMV

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 … .

Locations of other summaries Wordcount
Tax Topics - Excise Tax Act - Section 272.1 - Subsection 272.1(3) - Paragraph 272.1(3)(b) FMV of services rendered may differ from the consideration 246

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

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.

Articles

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

Self-assessment within a FMV range (p. 14)

[I]f the transfer pricing model … were adopted, a transfer pricing-like study would often generate a range of acceptable arm’s length prices for particular management and administrative services. Would the general partner then be entitled to self-assess any amount of tax within the appropriate range?

Allan Gelkopf, Robert Kreklewich, Zvi Halpern-Shavim, "Finance Canada Seeks Comments on New Tax Proposals Regarding Investment Limited Partnership Rules", Canadian Current Tax, Vol. 28, No.1, October 2017 p. 4

S. 272.1(8) is an FMV-deeming rather than recharacterization rule (p. 5)

The deeming rules do not explicitly require a general partner to charge GST/HST on its "carried interests" or other partnership distributions. The rules simply deem a certain amount of consideration, based on an arm's length fair market value test, to have been paid to the general partner and the partner is required to remit GST/HST on that amount, without regard to the partnership distributions that are paid. That said, the new amendments, in conjunction with the existing rules, will likely lead to increased scrutiny of the activities of investment limited partnerships and may provide additional scope for the Canada Revenue Agency (CRA) to assert on audit that partnership distributions (or portions thereof) should be characterized as taxable fees for services, as well as for disputes regarding the fair market value for such services.