CRA applies the proportionate value approach to determining whether shares of a foreign holding company are derived more than 50% from Canadian immovable property for Treaty purposes

A Netherlands corporation (BVCo) holds 1/3 of its assets as shares of an Australian subsidiary (“AusCo”), whose Australian real estate assets represent 5/6 of the consolidated assets, but also with high liabilities, and holds 2/3 of its assets as shares of a Canadian subsidiary (“TCPCo”) whose Canadian real estate assets represent 1/6 of the consolidated assets, but with low leverage. In determining whether the shares of BVCo are taxable Canadian property, CRA would first apply the “gross asset value method” to determine that 100% and 0% of the gross assets of TCPCo and AusCo, respectively, are taxable Canadian property (“TCP”). Next, it would apply the “proportionate value approach” to multiply such percentages by the FMV of the shares of TCPCo and AusCo to conclude that 2/3 of the FMV of the BVCo shares was derived from TCP, so that the BVCo shares were themselves TCP.

CRA concluded that the same methodology should also be applied in determining that more than 50% of the value of the shares of BVCo held by a UK company were derived from Canadian immovable property, so that those shares would not be exempted in the UK company’s hands under the Canada-UK Treaty.

Neal Armstrong. Summary of 22 September 2017 External T.I. 2016-0668041E5 under s. 248(1) – taxable Canadian property – (d) and Treaties – Articles – Art. 13.