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Canada: Finance Canada releases proposed investment limited partnership rules

26 October 2017

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The Department of Finance (Canada) released proposed draft legislation on September 8 2017 to amend the Excise Tax Act (Canada) (the ETA) in order to provide new investment limited partnership rules (the proposed rules). These rules would deem general partners that provide management and administrative services to such partnerships to have made taxable supplies subject to goods and services tax/harmonised sales tax (GST/HST).

The proposed rules may have a significant impact on the investment fund industry, notably in the manner in which the remuneration of a fund manager is structured.

Investment funds (funds) are commonly structured as a limited partnership with usually one general partner and many limited partners. The limited partners contribute cash and/or property and receive limited partnership interests entitling them to receive an agreed portion of any distributions. The general partner normally subscribes for a general partnership interest for a nominal amount. The general partner interest usually entitles the general partner to an agreed share of distributions, which could include a priority distribution (which is distributed in priority to any distribution that a limited partner may receive and would generally be a fixed percentage amount) and/or a carried interest that is a portion of the profit above some agreed threshold.

Under the proposed rules, an investment limited partnership is broadly defined to include, among other things, a limited partnership, the primary purpose of which is to invest funds in property consisting primarily of financial instruments if the partnership itself, or the arrangement or structure of which it forms a part of, 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.

Management or administrative services include asset management services, which are defined to mean services of managing or administering the assets or liabilities of another person, providing research, analysis, advice or reports in respect of such assets or liabilities, determining which assets or liabilities are to be acquired or disposed of, or acting to realise performance targets or other objectives in respect of the assets or liabilities.

Often, the powers, duties and obligations of a general partner of a fund include all the services mentioned in the definition of the asset management service. Therefore, the proposed rules could effectively deem the general partner to be making taxable supplies to the fund with respect to such services and, in conjunction with existing provisions of the ETA, deem such supplies to have been made by the general partner to the fund for a fair market value consideration.

It is unclear how the fair market value consideration would be determined and whether funds and their general partners would have to conduct studies in order to determine the fair market value consideration for the asset management services rendered. There is also a real risk that the proposed rules will lead to greater audit scrutiny of distributions to the general partner (i.e. whether such distributions (or a portion thereof) would be viewed as part of the fair market value consideration for such services). In addition, the timing of such determination is unclear as the general partners may receive their distributions in different periods than when the asset management services are rendered.

As input tax credits would generally be unavailable for GST/HST paid by an investment limited partnership on these deemed taxable supplies, the proposed rules will result in a material increase to unrecoverable GST/HST paid by such partnerships. Although the proposed rules are not enacted yet, funds and their general partners must take into consideration these rules immediately as any consideration for management and administrative services performed by a general partner would be subject to GST/HST if such consideration becomes due on or after September 8 2017, or is paid on or after that day without having become due. The Canada Revenue Agency can also retroactively apply the proposed rules if all of the consideration for management or administrative services provided by a general partner became due or was paid before September 8 2017 and the general partner charged, collected or remitted any amount as or on account of GST/HST in respect of such services, on or before September 8 2017. The purpose of this retroactive application of the proposed rules is to eliminate any potential rebate claims for GST/HST paid in error on any management or administrative services provided by a general partner to an investment limited partnership for periods prior to September 8 2017.

François Auger   Julia Wang

François Auger ( and Julia Wang (, Montréal
Blake, Cassels & Graydon LLP
Tel: +1 514 982 4117 and +1 514 982 4052

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