General Partner Distributions And New GST/HST Rule

SEPTEMBER 24, 2017

On September 8, 2017, the Ministry of Finance continued the onslaught started earlier this summer by releasing additional draft changes to legislation with part of the focus being on the Excise Tax Act which governs GST/HST.

Under the proposed legislation certain limited partnership cash distributions may be subject to GST/HST.

Proposed Changes

The government is proposing to tax cash distributions made from an investment partnership to a general partner if the general partner is rendering “management or administrative services”. The general partner would collect HST from the limited partnership. The limited partner is not able to claim the HST paid back from the government because it is not allowed to register for HST because it is an investment partnership.

The amount of HST charged would not depend on the cash distributed to the general partner but the fair value of the services performed. Therefore, it is possible for a small cash distribution to be made but have significant HST charged if the fair market value of the services is substantial.

Current Rules

A general partner that is performing activities in capacity as a general partner is not considered to be making a supply to the partnership provided such activities were not “otherwise than in the course of the partnership’s activities” and as such, no GST/HST applied to distributions compensating the general partner for those activities.

Who May Be Impacted

In order to be impacted by these rules a partnership has to be classified as an investment partnership. The government has provided a very broad definition of investment partnership. Generally, it is a partnership that holds investments and not a partnership that’s primary goal is directly acquiring and managing real estate properties, would fall under this definition. Therefore a partnership that holds REIT may fall under this definition but a partnership that directly holds the real estate may not.

However, it is good reason to review all partnership arrangements carefully to see if the partnership may be affected.

Effective Date

Comments on the proposals may be made until October 10, 2017 after which the legislation would move forward, but be aware that the effective date in the legislation is announcement day, September 8, 2017. Given the effective date, it is possible CRA may start to administer based on the proposed legislation.