Canada Carried Interest Taxation
Are any Canadian PE folks able to share how Carried Interest is taxed in Canada?
Based on the below guide from DLA, do you have a taxable event every time you raise a fund and are granted carry? Do only Canadian based companies have preferential capital gains tax treatment or does the holding company set up by the PE fund only have to be a Canadian company? Would appreciate any and all insights into Canadian carry tax treatment.
Thanks for the help!
Bump! PLEASE also curious! VP @ LMM in Red Deer
There technically isn't "carried interest" in Canada, it goes by a different tax code. The CRA takes the view that you can't generate a capital gain without having capital at-risk, so being granted carry with no dollars out the door from your pocket doesn't work. Effectively they need to do a Monte Carlo analysis to find the appropriate price for you to buy into the carry pool, even if the fund hasn't signed any sub docs or done any investments. That being said, it isn't uncommon for people at like Northleaf to be paying like 100k to be able to buy into their carry pool.
In the U.S. you can simply be granted a carry interest without having to pay any money.
In short, Canada sucks ass and this is just one of the many reasons.
Interesting. Appreciate the colour.
So basically every time you raise a fund you will have a massive taxable event (and given Partner PE salaries at the MMs is probably $500-$600k MAX, you probably end up with zero or negative cash income in those years)? Seems wild that some of the Partners at the Toronto MMs are probably paying multi million $ tax bills in the year they are raising funds, probably negating the preferential tax treatment on the capital gains too.
I suppose the main point to clarify is if you have to buy in at every fund raise or just when you are admitted to the carry pool? If the latter then I can definitely understand the economic upside, if the former... man that is tough.
This is interesting… So why couldn’t my carry trigger a taxable event as business income upon realization? This seems like something people would put into a private corporation at T-0 for the fund anyway.
I’m also not 100% understanding why you would need to buy in vs being granted carry and taxing the tax hit
Responding to you both:
I used to work for a Canadian fund and since moved to the states, so we had the top carry tax guy in the country (Jocelyn from KPMG) look into this and structure our fund. The way they explained it is if you work for a fund of prominence (e.g., Birch Hill / Onex) and not a startup, and have a high probability of raising some capital, the CRA takes the view that the carry % you have been granted HAS VALUE at T-0 even if no investments have been made. The example KPMG used was that if someone randomly offered to buy out your carry stake (maybe the DAW is 2mm) but you hadn't done any investing you would be expecting them to pay you something. Now, that something maybe be like 25k or it might be 300k - depends on so many factors. For this reason, I know for a fact that some Canadian principals that "paid nothing" and were simply granted carry got absolutely f'd from a tax perspective years later when carry started to pay out.
Typically the carry pool is on a fund by fund basis, so you pay in each time you enter the carry pool for the specific fund you are raising.
There are funds that are willing to take the risk by not having staff pay in or even they go as far as indemnifying them in their carry agreement regarding the lack of paying in.
So if a Canadian fund were designed such that individuals were able to buy in for say, $100K, would that make their entire carry proceeds taxed at the capital gain level?
Or, as you said, would a Monte Carlo analysis have to be done to back into the amount each partner would have to invest such that their carry would be taxed as a capital gain? I imagine at certain fund sizes this would result in people needing to invest millions (which they don't have)?
commies
Yep. Get out if you can. Country is a nightmare.
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