Canada: Budget 2018: Sales And Excise Tax Proposals

The 2018 Federal Budget ("Budget 2018") contains a number of excise and sales tax (GST/HST) proposals and amendments that may be relevant to registrants and practitioners. Each of the proposals below deals with issues that may require significant planning or structuring considerations. Please do not hesitate to contact one of our team members for further discussion or analysis with respect to the proposals in Budget 2018.

The following is a brief summary of the main proposals (not including any tobacco tax proposals).

Investment Limited Partnerships

On September 8, 2017, the Department of Finance (Canada) introduced draft legislation that requires a general partner ("GP") to collect GST/HST for management or administrative services supplied to an investment limited partnership (an "ILP"). The ILP rules apply to impose GST/HST on any consideration for a supply of management or administrative services rendered by a GP to an ILP. The proposals would also make investment limited partnerships "investment plans" for GST/HST purposes and extend special HST rules currently applicable to investment plans to ILPs, effective January 1, 2019.

Budget 2018 reiterated the Government's intention to enact the ILP proposals but with certain changes. One of the changes proposed is that the rule will apply to services rendered by a GP on or after September 8, 2017 unless a GP has been charging GST/HST in respect of its services prior to that date. In addition, Budget 2018 proposes that the GST/HST will be payable on the fair market value of management and administrative services in the period in which these services are rendered.

ILPs will also be permitted to make an election to advance the application of the special HST rules as of January 1, 2018 (these rules are otherwise applicable from 2019).

September 2017 Proposals

The September 2017 draft legislation proposed to add a definition of "Investment Limited Partnership" in subsection 123(1) of the Excise Tax Act (Canada) (the "ETA"). This definition will include any limited partnership whose primary purpose is to invest funds in property consisting primarily of financial instruments, such as shares, debt and partnership interests, and meets either of the following criteria:

(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 the interests in the limited partnership are held by listed financial institutions is 50% or more of the total value of all the interests in the limited partnership.

Pursuant to proposed subsection 272.1(8) of the ETA, the supply of any management or administrative service by a GP to an ILP will be considered a separate taxable supply subject to GST/HST:

272.1(8) For the purposes of this Part, if a general partner of an investment limited partnership renders a management or administrative service to the investment limited partnership,

(a) the rendering of the service is deemed not to be done by the general partner as a member of the investment limited partnership; and

(b) the supply by the general partner to the investment limited partnership that includes the service is deemed to have been made otherwise than in the course of the investment limited partnership's activities.

A proposed definition of "Management or administrative service" is broadly defined under subsection 123(1) of the ETA to include an asset management service, which is further defined to encompass most activities performed by a GP, such as managing, researching or analyzing the assets or liabilities of the ILP, or determining which assets or liabilities to acquire or dispose of. As a result, GPs will have to charge and collect GST/HST on the fair market value of any management or administrative services performed for the ILP and will have to register for GST/HST purposes.

Non-resident ILPs will be provided relief from GST/HST where certain conditions are met. Section 136 of the ETA will be amended to include a provision that will deem an ILP to be a non-resident if, at that time, the total value of all interests in the partnership held by non-resident members of the partnership (other than prescribed members) is 95% or more of the total value of all interests in the partnership.

The ILP proposals must be considered when structuring any private equity or similar investments into Canada and are expected to impact the return on investment in such structures. Appropriate GST/HST advice now becomes necessary when structuring such investments.

Cannabis Taxation

The legalization of cannabis is scheduled for the summer of 2018. Budget 2018 largely reaffirms the proposed excise duty framework for cannabis products released by the Minister of Finance on November 10, 2017 (the "Cannabis Proposals"), with a few variations.

Excise Duties

As outlined in the Cannabis Proposals, the Excise Act, 2001 will be amended to include an excise duty that will generally apply to all products available for legal purchase. However, Budget 2018 proposed that excise duties will generally not be imposed on packaged products that contain concentrations of no more than 0.3% Tetrahydrocannabinol (TCH), the primary psychoactive compound in cannabis, or on pharmaceutical products with a Drug Identification Number (DIN) that can only be acquired through a prescription.

As announced on December 11, 2017, 75% of the excise duty revenues will be allocated to provincial and territorial governments, with the remaining 25% going to the federal government (capped at $100 million annually). The proposed combined excise duty rates are as follows (subject to a province or territory requesting an adjustment):

Product

Higher of:

Flat Rate per Gram

% of Sale Price

Flowering material

$1.00

10%

Non-flowering (trim) material

$0.30

10%

Cannabis seed

$1.00

10%

Cannabis seedling

$1.00

10%

Federally-licensed cannabis cultivators and manufacturers will be required to obtain a cannabis license from the CRA and to remit the excise duty, where applicable. The CRA will begin accepting license applications and will issue excise stamps prior to when cannabis for non-medical purposes is available for retail sale.

GST/HST

Budget 2018 reaffirms that edible cannabis products, when permitted, will be subject to GST/HST. Items that would otherwise be exempt as a basic grocery item will lose that status if it contains cannabis. Further, relieving provisions for agricultural products will be amended to ensure that sales of cannabis products, including seeds and seedlings, will be subject to GST/HST. The ETA will be amended accordingly.

The taxation of cannabis-related products is a rapidly evolving area of law. Excise duties and sales tax will now be an important part of the sale of these products. Our team of lawyers is on hand to explain further the consequences of the cannabis-related changes in Budget 2018.

Consultation on the GST/HST Holding Corporation Rules

Budget 2018 also announced a consultation on certain aspects of the holding corporation rules for GST/HST purposes.

Under the ETA, the holding corporation rules allow a corporation resident in Canada (the parent corporation) to claim input tax credits in respect of GST/HST paid for expenses incurred by another corporation. Generally, these rules deem certain expenses incurred by a parent corporation resident in Canada to be incurred in relation to commercial activities of the parent corporation where the following criteria are met:

  1. the expenses incurred can reasonably be regarded as being in relation to shares or indebtedness of a commercial operating corporation; and
  2. the parent corporation is related to the commercial operating corporation.

The consultation initiated by Budget 2018 will focus on two specific aspects of this rule. On one hand, comments will be sought on limiting the rule to corporations and on the required degree of relationship between the parent corporation and the commercial operating corporation. On the other hand, comments will also be sought with respect to clarifying the types of expenses of the parent corporation that should qualify for input tax credits under these rules.

These consultations are expected to be the first step towards the ultimate reduction of the scope of these rules. Please contact one of our team if you wish to add your views to the consultation process.

The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.

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