Canada: The Second Opinion: BCCA Finds Limited Partners Not Purchasers Of Property Sold To Limited Partnership

A Commentary on Recent Legal Developments by the Opinions Group of McCarthy Tétrault LLP

When a limited partner sells property to the limited partnership, is the limited partner itself a purchaser of that property, or is the only purchaser the general partner on behalf of the limited partnership?  That is the question which the British Columbia Court of Appeal recently addressed in Edenvale Restoration Specialists Ltd. v. British Columbia (Finance), 2013 BCCA 85.

The Edenvale appeal concerned a sale of personal property by Edenvale to an Ontario limited partnership ("EWLP") that also carried on business in British Columbia.  The signatories to the sale agreement were Edenvale and the general partner of EWLP ("212″).  As part of the purchase price, Edenvale received 15% of the outstanding units in EWLP.  It therefore became a limited partner in EWLP simultaneous with the sale.

Under ss. 5 and 6 of the B.C. Social Service Tax Act ("SSTA"), Edenvale as vendor was required to collect sales tax on the transaction from 212.  The B.C. Minister of Finance assessed the tax as payable on the entire value of the transferred property.  Edenvale appealed, arguing that because it became a 15% limited partner of EWLP, it continued to retain a 15% ownership interest in the property after the transaction.  According to Edenvale, this meant that sales tax should only be payable on 85% of the value of the property.

Edenvale's submission was based on the B.C. Court of Appeal's prior ruling in Seven Mile Dam Contractors v. British Columbia, 1980 CanLII 451.  In Seven Mile Dam, two general partners who collectively owned 50% of the units of a general partnership sold property to that general partnership.  Hutcheon J.A. in that case found the sales tax payable on the transaction should be assessed at 50% of value of the property, since the vendor partners retained an ownership interest in the other 50%.

Although Edenvale's argument was accepted by Burnyeat J. at first instance, it was rejected by the Court of Appeal.  Tysoe J.A., who delivered judgment for a unanimous Court, held that Seven Mile Dam was distinguishable since it involved a sale to a general rather than limited partnership:

In my view, the different natures of a general partnership and a limited partnership distinguish the present case from Seven Mile Dam Contractors.  It is necessary to consider the wording of the Tax Act and the Partnership Agreement to determine whether sales tax is payable in respect of the sale effected by the January 10, 2007 agreement. (para. 21)

Importantly, Tysoe J.A. did not reject the proposition that Edenvale as limited partner continued to retain an ownership interest in the property, similar to the general partners in Seven Mile Dam.  However, he held that the following features of the EWLP partnership agreement made the general partner 212, rather than Edenvale, the "purchaser" of that property within the meaning of s. 1 of the SSTA:

• Limited partners were limited in their ability to be involved in the business of EWLP (s. 4.3)
• 212 had the right to acquire assets for the business of EWLP and the right to manage and administer all of its properties (s. 4.5)
• 212 was to be reimbursed for all costs and expenses incurred by it (s. 4.8)
• Nothing in the agreement indicated that 212 was purchasing less than 100% of the property

By virtue of these provisions, Tysoe J.A. concluded that 212 acquired all of the property "on behalf of or as agent for a principal" pursuant to the purchaser definition in s. 1 of the SSTA, and also acquired the right to "use" it (a term defined in s. 1 as well).  Therefore, 212 was required to pay sales tax on the entirety of the transferred property, since it had never previously owned any interest in it.  According to Tysoe J.A., the Chambers Judge fell into error by focusing solely upon Edenvale's retention of an ownership interest in the property after the sale:

In my opinion, the judge erred in his approach by failing to apply the wording of the Tax Act and the provisions of the Partnership Agreement.  Unlike a sale of property to a general partnership (of which the vendor is one of the partners), it is my view that nothing turns on whether the limited partners have an ownership interest in the partnership property.  In Seven Mile Dam Contractors, this Court held that the general partnership was not the purchaser of the property and, as a result, the partners had to be the purchasers.
...
As I have stated, the chambers judge correctly concluded that the General Partner was the purchaser of the property.  He erred by failing to complete the analysis under the wording of the Tax Act to determine whether the General Partner was liable to pay the tax.  Rather, he relied on the fact that the limited partners had an ownership interest in the property to effectively conclude that they were the purchasers of the property and that they only acquired the 85% interest held on behalf of the limited partners other than the vendor, Edenvale.  The fact that the limited partners may have had an ownership interest in the assets did not detract from the conclusion that the General Partner was a "purchaser" within the meaning of the Tax Act and was required to pay tax on the full amount of the purchase price allocated to the tangible personal property. (paras. 25 and 29)

It will be interesting to see whether courts in future cases treat Edenvale as establishing a firm rule for limited partnership transactions, or as merely turning upon the specific provisions of the EWLP partnership agreement and SSTA at issue there.  Regardless, in light of Edenvale, parties should be careful not to assume that a limited partner will always be treated as a partial purchaser of property that it sells to the limited partnership.

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