CRA considers that limited partners of an LP can deal at arm’s length with a Canadian subsidiary of the LP

The 5% Treaty-reduced withholding rate on dividends under Art. 10, subpara. 2(a) of the Canada-UK Treaty applies if the beneficial owner of the dividend “is a company which controls, directly or indirectly, at least 10 per cent of the voting power in the company paying the dividends.” CRA considers that a UK corporation that has a greater than 10% limited partnership interest in a UK LP holding all the shares of Canco will not satisfy this test assuming that only the general partner can vote the Canco shares.

On the other hand, a limited partner which is a UK pension fund with a greater than 10% LP interest will not be considered to satisfy the requirement in Art. 10, para. 3 that it “not own directly or indirectly” more than 10% of the capital of Canco. Although CRA recognizes that, under the partnership law, the pension fund would not be considered to own a particular percentage of the Canco shares of the UK LP, in its view the “own…indirectly” Treaty wording overcomes this obstacle.

A third issue was whether the 99% share of the limited partners in interest paid by Canco to the UK LP would be exempt from interest withholding. Under the ITA, the LP would be deemed to be a non-resident person for Part XIII purposes and that fictional person would be related to Canco under s. 251(2), so that the interest would be considered to be ineligible for the domestic exemption for arm’s length interest. However, Art. 11, subpara. 3(c) also has an exemption for arm’s length interest, and for Treaty purposes the UK LP would be fiscally transparent. Accordingly, the interest paid would be exempt provided that the limited partners were dealing at arm’s length with Canco as a factual matter. In this regard, CRA accepted a submission that referred to the statement in Folio S1-F5-C1 that “when a partner is not in a position to control a partnership…that…partner is dealing at arm's length with the partnership,” and reasoned that a partner who is considered to be dealing at arm’s length with a partnership should also be considered to be dealing at arm’s length with the corporation controlled by the partnership.

Neal Armstrong. Summaries of 7 September 2016 External T.I. 2014-0563781E5 under Treaties, Art. 10, Art. 11 and s. 251(1)(c).