Canadian private equity investors often prefer to invest in a parallel Canadian fund to that used by foreign investors

A non-Canadian private equity fund that expects to have significant investor capital sourced in Canada and to invest in Canadian portfolio companies should consider forming a separate fund restricted to Canadian investors that would invest in parallel with the main fund. If the Canadian fund sells taxable Canadian property, it will not be subject to the s. 116 withholding requirements. In addition, it will not be subject to Part XIII withholding, which might be a concern where an exit strategy entails an asset sale which would give rise to a substantial dividend or deemed dividend. CRA has indicated that no amount in respect of the portion of such payments allocable to a Canadian resident partner of a non-Canadian fund would be required to be withheld by a Canadian portfolio company.

“However, this policy, for which there is no legislative basis, does not expressly supersede past contrasting published positions. Some Canadian investors have expressed uneasiness with this uncertainty and are not receptive to investing jointly with non-Canadians in a fund that is subject to Canadian withholding tax.” Where there is a resulting insistence on the use of a parallel fund, “this is typically easier for Canadian private equity fund sponsors to accommodate than for non-Canadian sponsors, who would otherwise not consider forming a Canadian partnership having a Canadian resident general partner.”

Neal Armstrong. Summaries of Timothy Hughes, Matias Milet and Marc Richardson-Arnould, "Private Equity Funds – Selected Canadian Tax Issues,” Tax Management International Journal, 2016, p.84 under Treaties - Art. 10, s. 115.2(2)(b) and s. 248(1) - taxable Canadian property.