CRA ruling contemplates the operation of the s. 212.3(9)(b)(ii) PUC restoration for upper-tier QSCs on the payment by a U.S. LLP of a “dividend” to lower tier CRIC partners

A U.S. corporation will indirectly subscribe for units in a (presumably U.S.) limited liability partnership (FA1) by subscribing for preferred shares in its two immediate Canadian subsidiaries (Canco1, the general partner of a Canadian LP (“LP1”), and Canco2, the limited partner), with those funds going down through a long stack of Canadian subsidiary LPs (starting with LP1) and corporations as preferred unit and preferred share subscription proceeds, so as to land in FA1. A number of months later, FA1 will pay a distribution proportionately to its partners, who directly comprise (i) a limited partner corporation (Canco9), and (ii) a general partner which is a general partnership (“GP”) - whose partners on a s. 212.3(25) look-through basis are two other indirect Canadian corporate subs in the group (Canco7 and Canco8).

Consistently with the CRA policy on LLPs (see 2016 IFA Roundtable, Q. 1), the CRA ruling letter described FA1 as a (non-resident) subject corporation rather than as a Canadian partnership, and described the distribution as being deemed by s. 90(2) to be a dividend.

S. 212.3(3) provides for the making of an election for a dividend to be deemed to be paid by “the” qualifying substitute corporation which is party to the election. The first CRA ruling was simply that Canco1 and Canco2 (atop the Canadian stack) will each be considered to be a QSC. The letter does not specify how the s. 212.3 effect of the investments made by the three CRICs (namely, the three direct or indirect partners of FA1 – or one CRIC if the partnership interests of Canco7 and Canco8 are nominal) is effectively allocated to the one or both of the QSCs – which may imply that there was flexibility as to how that could be done. But maybe there was no practical significance to this. If all the relevant general partner interests were nominal, there effectively would be only one significant CRIC (Canco9) and only one significant QSC (Canco2).

The second CRA ruling was that the distribution will be considered to be received as a dividend in respect of a class of shares of capital stock of FA1 by Canco7, 8 and 9 for the purposes of s. 212.3(9)(b)(ii) – A(B). This is the same allocation issue in reverse – it appears to be contemplated that the “dividend” received by the three (or one) CRIC can effectively be allocated to restore the cross-border PUC in the QSCs under s. 212.3(9)(b)(ii). The wording of this ruling treats the distribution paid by FA1 to its limited partner (Canco9) and general partners (being effectively Canco7 and Canco8) as the payment of a dividend on a single class of shares to those three shareholders - so that each of Canco 9, 7 and 8 will qualify under s. 212.3(9)(b)(ii) – A(B) as having received a dividend in respect of that single class of shares.

Neal Armstrong. Summaries of 2015 Ruling 2014-0541951R3 under s. 212.3(9)(b)(ii), s. 212.3(3), s. 90(2) and s. 248(1) – corporation.