CRA treats non-resident LPs as conduits for purposes of Treaty interest withholding relief

Four non-resident LPs with the same non-resident corporate general partner (GP Co) collectively control Canco through their majority ownership of its shares and have also made unsecured interest-bearing loans to Canco. The limited partners are unrelated investors who deal at arm’s length with each other and with GP Co as a factual matter, and include both Canadian residents and residents of the U.K. for purposes of the Canada-U.K Treaty (in each case holding a relatively small limited partnership interest).

CRA ruled that Canco was not required to withhold on the U.K. partners’ share of each interest payment since each such share was exempted under Art. 11(3)(c) of the Canada-U.K Treaty, which referenced interest arising in one contracting state and paid to a beneficial owner in the other contracting state who dealt at arm’s length with the payer.

This ruling effectively accepted that each U.K. limited partner dealt at arm’s length with Canco notwithstanding that it was part of a grouping that might be regarded as collectively dealing in concert (through a common general partner) with Canco. The domestic arm’s length exemption in s. 212(1)(b)(i) was not discussed. CRA might have considered the domestic exemption not to be available because a partnership is treated as a person for such purposes under s. 212(13.1)(c), and the four partnerships likely dealt in concert respecting their joint Canco investment.

Neal Armstrong. Summary of 2017 Ruling 2017-0712731R3 under Treaties – Income Tax Conventions – Art. 11.