CRA has rejected the Goldilocks taxable Canadian property interpretation?

You and other non-resident investors indirectly invest in the equity of a Canadian real estate partnership having a value of $100 by forming a non-resident partnership which invests $70 in interest bearing loans of a non-resident Newco (Foreign Subsidiary) and $30 in common shares of Foreign Subsidiary, which then uses the $100 to acquire the units of the Canadian partnership.

You could argue that your units of the non-resident partnership are not taxable Canadian property.  It holds the loans which in a normal (Goldilocks) range of circumstances will not fluctuate in value irrespective of the value of the underlying real estate and represent more than 50% of its assets (i.e., the underlying Canadian real estate will not depreciate below $70 or appreciate above $140).

On a slightly more complicated structure, CRA ruled that the units of the non-resident partnership were taxable Canadian property.  CRA did not seem to be especially interested in what percentage the loans represented of the total assets, so this may represent an implicit rejection of the above Goldilocks interpretation.

CRA also ruled that the units of the non-resident partnership represented treaty-protected property under four of the relevant treaties (but not the fifth).  This may relate to an exception for non-rental Canadian real estate in which a business is carried on, such as a hotel.  See, for example, Art. 13(4) of the Lux and German treaties, and 20 August 2007 T.I. 2005-011115.

Neal Armstrong.  Summaries of 2013 Ruling 2012-0444431R3 under s. 248(1) – taxable Canadian property and Treaties – Art. 13.