CRA confirms application of proportionate value approach to taxable Canadian property testing

Equity of a private corporation (or other entities such as a partnership) will be taxable Canadian property if at no time during the preceding 5 years has the equity of the entity derived more than 50% of its fair market value from Canadian real estate, resource or timber properties, timber resource properties or related options.  At the recent International Fiscal Association meeting in Ottawa, CRA confirmed (through various examples, which were not provided when this position was previously announced at the Canadian Tax Foundation annual conference in the fall) that it will apply a proportionate value approach for the purposes of applying this test to subsidiaries (whose shares are taxable Canadian property) of the entity being tested -  so that in effect mortgage debt is allocated across all classes of assets rather than being netted against the real estate to which it relates.  CRA also indicated that the same approach will be applied in the case of subsidiary partnerships.

This contrasts with an earlier approach (based on a somewhat similar treaty test) where taxpayers generally were allowed to apply the netting approach if they so chose (see 5 September 2003 TI 2003-002967).

Neal Armstrong.  Summary of 2012 IFA Roundtable Q.5 under s. 248(1) - "taxable Canadian property" [not yet published by CRA].