One of the more notable differences between Income Tax and GST/HST is that for GST/HST purposes partnerships are expressly defined to be “persons” – separate from the partners of the partnership. Most provincial sales tax statues take the same approach and define partnerships to be separate legal persons. However, this is not the case in British Columbia (“BC”), which is the sole Canadian jurisdiction that does not treat partnerships as persons for Provincial Sales Tax (“PST”) purposes.
This could change as the BC Ministry of Finance (the “Ministry”) has released a Consultation Paper seeking feedback on proposed legislative changes to bring BC in line with the rest of Canada. Subject to public support, the Ministry has identified four legislative or regulatory changes which would be required:
- Defining partnerships as separate legal persons for PST purposes;
- Implementing rules on how tax applies to the transfer of assets into a partnership;
- Implementing Rules on how tax applies to the transfer of assets out of a partnership; and
- Implementing transitional rules that prevent an unfair tax burden on existing partnerships.
We anticipate that most professionals will welcome the alignment of the BC rules in this area with other provinces and with the GST/HST.
Background
In 1980, the BC Court of Appeal decision Seven Miles Dam Contractors v. British Columbiaconsidered an argument brought by the Consumer Taxation Branch under the former Social Service Tax Act (the “SSTA”) that the sale of a partnership asset was not a sale by individuals in respect of their interest in the partnership, but a sale by the partnership itself.
The BC Court of Appeal considered the wording in the SSTA, and held that although partners have limited rights in respect of the assets held in partnership, a sale of those assets was a sale by the partners “of their individual interests in the specific asset”.
The result of this approach was that the PST would potentially apply on all partners any time a partner joined or left the firm (or did anything that would change a partner’s interest in the partnership), or whenever the partnership purchased assets!
This was the historical approach in BC until the province joined the HST (briefly from 2010 to 2013). When drafting the new Provincial Sales Tax Act (the “PSTA”) to re-implement a BC PST, the province reverted to the historical approach that partnerships were not separate legal persons.
The proposed approach set out in this new Consultation Paper would create a clearer dividing line between individual partners and the partnership, and allow the potential application of tax exemptions for transfers of assets into, or out of, the partnership.
Takeaways
Partnerships subject to BC PST may want to participate in this feedback process and provide their views on this proposed change, as well as potential Transition Rules.
The deadline to provide feedback is December 29, 2023!