The Private Investor - Spring 2018

At-risk rules for partnerships

The current at-risk rules provide that a partner of a limited partnership cannot access losses of the partnership in excess of their at-risk amount. This can generally be thought of as their contributed capital and income less any partnership allocations of losses and other tax preference items. Losses allocated to a partner in excess of their at-risk amount are not deductible and may be carried forward and deducted in computing taxable income in a future year if the limited partner’s at-risk amount in the partnership has become positive. Any undeducted limited partnership losses of the limited partner are reflected in the adjusted cost base of the partnership ultimately reflected in the capital gain realized on a disposition of the partnership interest.

In a recent case (Canada v. Green), the courts found that where a partnership is itself a partner of a limited partnership, the losses in excess of available at-risk amount by the bottom partnership may be allocated by the top-tier partnership to its partners providing that partners of the top-tier partnership had sufficient at-risk available. Budget 2018 effectively reverses this decision by clarifying the longstanding understanding of the at-risk rules as discussed above will apply even in a tiered partnership structure.

These measures will be effective for taxation years ending before and after Budget Day (i.e., retroactive effect).

GST/HST and investment limited partnerships

Budget 2018 confirms the government’s intention to proceed with
these proposals with the following changes:
Budget 2018 proposes to modify the September 8, 2017, proposal
so that the GST/HST applies to management and administrative
services rendered by the general partner on or after September 8,
2017, and not to management and administrative services
rendered by the general partner before September 8, 2017, unless
the general partner charged GST/HST in respect of such services
before that date.

In addition, Budget 2018 proposes that the GST/HST be generally payable on the fair market value of management and administrative services in the period in which these services are rendered. This addition to the September 8, 2017, proposal effectively adds a measure that ensures the reporting of the tax payable in respect of taxable management and administrative services rendered by the general partner is not deferred beyond the period in which the services were rendered to the investment limited partnership.

Budget 2018 proposes to allow an investment limited partnership to make an election to advance the application of the special HST

rules as of January 1, 2018. This addition to the proposal provides investment limited partnerships with the option to elect to have the special HST rules be applicable a full year earlier than would have been possible under the original September 8, 2017, proposal.

Consultations on the GST/HST holding corporation rules

A Goods and Services Tax/Harmonized Sales Tax (GST/HST) rule,
commonly referred to as the ‘holding corporation rule,’ generally
allows a parent corporation to claim input tax credits to recover
GST/HST paid in respect of expenses that relate to another corpo-
ration. This rule provides that, the expenses are generally deemed
to have been incurred in relation to commercial activities of the
parent corporation, where the parent corporation:
resides in Canada, and
incurs expenses that can reasonably be regarded as being in
relation to shares or indebtedness of a commercial operating
corporation (a corporation where all or substantially all of the
property is for consumption, use or supply in commercial
activities), and
is related to the commercial operating corporation, and the
expenses are generally deemed to have been incurred in relation
to commercial activities of the parent corporation.

The government intends to consult on certain aspects of the holding corporation rule, particularly with respect to the limitation of the rule to corporations and the required degree of relationship between the parent corporation and the commercial operating corporation. At the same time, the government intends to clarify which expenses of the parent corporation that are in respect of shares or indebtedness of a related commercial operating corporation qualify for input tax credits under the rule.

Consultation documents and draft legislative proposals regarding these issues will be released for public comment in the near future.

At RSM Canada, we expect that these changes will be met as largely welcome news. There will be some increase in complexity associated with compliance, but not to the degree forecast with the 2017 version of these proposals.