CRA rules that the s. 115.2 safe harbour applied to partnerships providing mezzanine financing, and receiving profit participations though a Canadian corporate sub

The exclusion in s. 115.2 on specified conditions can provide comfort that a non-resident investor will not be considered to be carrying on a business in Canada by virtue of the provision of “designated investment services” by a Canadian manager to a Canadian partnership of which the non-resident is a “member.” The definition of designated investment services includes the “purchasing and selling” of qualified investments such as “indebtedness” and many types of shares, and investment management and advice respecting the qualified investments.

CRA ruled that this exclusion was available, respecting the acquisitions and dispositions by, and management/advice of, the Canadian manager, where a non-resident (the “Taxpayer”) invested in units of a top-tier LP which invested in project-specific subsidiary LPs that, in turn, granted mezzanine financing to borrowers and, through a Canadian taxable corporate subsidiary, were granted profit participations in the borrowers. CRA accepted that the Taxpayer not being a direct member of the lower-tier project partnerships did not jeopardize the s. 115.2 safe harbour, and also accepted that the Taxpayer being a non-resident subsidiary of a Canadian corporation that had exactly a 50% voting and equity interest in the wholly-owning Canadian parent of the manager did not engage the exclusions in s. 115.1(2)(c)(ii).

Neal Armstrong. Summary of 2017 Ruling 2017-0699531R3 under s. 115.1(2)(1) - designated investment services.