HST/QST Update for Portfolio Managers Michael Friedman , McMillan LLP (Toronto) Michel Ranger , McMillan LLP (Montreal) PMAC Compliance Officers’ Network Meeting Offices of McMillan LLP April 24, 2018 McMillan LLP | Vancouver | Calgary | Toronto | Ottawa | Montréal | Hong Kong | mcmillan.ca
Carried Interests and HST • Investment funds that are structured as limited partnerships (“ LP Funds ”) are often not served by an independent investment manager • Instead, the general partner of the LP Fund provides investment management and administrative services in its capacity as a member of the LP Fund • While the general partner of an LP Fund may receive a fixed management fee in respect of portfolio management services performed for the LP Fund (which is subject to HST), the general partner is typically not entitled to a performance fee • However, if the LP Fund has income in a particular year, the general partner is often entitled to a share of the income (in an amount that is generally computed by reference to the increase in value of the LP Fund’s net assets over a previous period) mcmillan.ca l 2
Carried Interests and HST • Section 272.1 of the Excise Tax Act (the “ ETA ”) provides that “anything done by a person as a member of a partnership is deemed to have been done by the partnership … and not to have been done by the person” unless it entails supplies to the partnership “otherwise than in the course of the partnership’s activities” • The practical result of this section is that the activities of the general partner of an LP Fund, performed without separate remuneration, are generally not considered to be separate taxable supplies subject to HST • The federal government has become concerned that allocations to a general partner from the profits of an LP Fund, which, it could be argued, effectively represent consideration for management services, are escaping HST. mcmillan.ca l 3
Investment Limited Partnerships • Proposed subsection 272.1(8) of the ETA provides that if a general partner of an “investment limited partnership” provides a “management or administrative service” to the investment limited partnership, the service will be treated as a taxable supply subject to HST. • A “management or administrative service” includes an “asset management service” • An “asset management service” is defined broadly in the ETA • The new deeming rule applies in respect of consideration for services that becomes due or is paid on or after September 8, 2017 mcmillan.ca l 4
Investment Limited Partnerships • An “investment limited partnership” is defined as: a limited partnership, the primary purpose of which is to invest funds in property consisting primarily of financial instruments, if (a) the limited partnership is, or forms part of an arrangement or structure that 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, or (b) the total value of all interests in the limited partnership held by listed financial institutions is 50% or more of the total value of all interests in the limited partnership mcmillan.ca l 5
Investment Limited Partnerships Four Key Tests • Character Test: Is the fund a limited partnership? • Purpose Test: What is the primary business objective of the fund? • Investment Test: What is the primary subject of the fund’s investment activities? “Financial instruments” broadly defined in the ETA; yet, notice omission of real property • Representation/ How is the fund represented/promoted? Ownership Test: What is the profile of investors in the fund? “Listed financial institutions” set out in paragraph 149(1)(a) of the ETA mcmillan.ca l 6
QST Registration for Non-Resident Suppliers • Currently, businesses with no physical presence or that do not carry on a business in Québec are not required to register for the Québec Sales Tax (“ QST ”) • As a result, such businesses do not collect QST on taxable supplies of property or services made in Québec • With respect to corporeal movable property supplied by a business that is outside of Canada, the QST is (in theory) collected by the CBSA • In practice, due to the high volume of inbound supplies of corporeal movable property, QST is actually collected on only a small portion of such supplies of property • With respect to corporeal movable property supplied from within Canada but outside of Québec, and in the case of incorporeal movable property and services (whether supplied from outside Canada or from within Canada but outside Québec), Québec consumers are required to self- assess the QST (which almost never happens) mcmillan.ca l 7
QST Registration for Non-Resident Suppliers • The Québec government has identified two main consequences of this “gap” in the current QST rules: • Significant loss of tax revenues due to the fact that Québec consumers generally do not comply with the requirement to self- assess • Competitive advantage for suppliers outside of Québec (not required to collect QST on their supplies to Québec consumers and general absence of Québec consumer self-assessment) vis-à-vis Québec suppliers (required to collect and remit QST on their supplies to Québec consumers) mcmillan.ca l 8
QST Registration for Non-Resident Suppliers • In order to ensure that QST is collected and remitted in the context of the digital economy, the Québec government has introduced a new mandatory registration system for certain suppliers that would not otherwise be required to register under the regular registration system • Specifically, the new specified registration system will apply to (i) suppliers of corporeal movable property that are resident in Canada but have no physical or significant presence in Québec, and (ii) all suppliers of incorporeal movable property or services that have no physical or significant presence in Québec (“ Non-Resident Suppliers ”) • A Non-Resident Supplier will be required to register under the new specified registration system where the aggregate consideration received by the Non-Resident Supplier in respect of taxable supplies made to persons who may reasonably be considered to be specified Québec consumers is at least $30,000 over the previous 12-month period mcmillan.ca l 9
QST Registration for Non-Resident Suppliers • Non-Resident Suppliers registered under the specified registration system will be required to collect and remit QST applicable to taxable supplies made in Québec to specified Québec consumers • This requirement will apply to (i) all supplies of incorporeal moveable properties and services made by Non-Resident Suppliers, and (ii) supplies of corporeal moveable properties by Non-Resident Suppliers that are located in Canada but outside of Québec • For these purposes, a “specified Québec consumer” means a person that is not registered for QST purposes and whose usual place of residence is in Québec • Non-Resident Suppliers registered under the specified registration system will be required to verify a person’s usual place of residence by obtaining two non-contradictory pieces of information (i.e., billing address, personal address, etc.) mcmillan.ca l 10
QST Registration for Non-Resident Suppliers • Non-Resident Suppliers that are registered under the new specified registration system will not be considered registrants for other QST purposes • No ability for Non-Resident Suppliers to claim input tax refunds in respect of QST paid on property and services acquired in the course of their commercial activities • Québec consumers registered under the regular registration system will not be able to claim input tax refunds in respect of QST paid to Non-Resident Suppliers registered under the specified registration system mcmillan.ca l 11
QST Registration for Non-Resident Suppliers • Non-Resident Suppliers registered under the new specified registration system will be required to report on a quarterly basis and remittances will be accepted by electronic payment • A Non-Resident Supplier required to register under the new specified registration system that would also meet the requirements for registration under the regular registration system may instead elect to register under the regular registration system (provided that security satisfactory to the Minister is provided and maintained by the Non- Resident Supplier) mcmillan.ca l 12
QST Registration for Non-Resident Suppliers • Digital platforms that provide services to Non-Resident Suppliers enabling them to make supplies of incorporeal movable property or services to specified Québec consumers will also be subject to the new specified registration system where the platform controls the key elements of the transactions • Exceptions : ISPs providing only a transfer service, services providing access to a payment system, and advertising services that inform and link customers to suppliers’ websites will not be considered to control the key elements of transactions • A digital platform will be required to collect and remit QST in respect taxable supplies the digital platform enables or allows to be made by Non-Resident Suppliers to specified Québec consumers mcmillan.ca l 13
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