Partnership not a person prior to enactment of s. 212(13.1)(b) (p. 263)
.. Part XIII tax applies only in respect of payments to non-resident “persons”. Under Canadian law, a partnership is not a “person” as such , even though it is treated as if it were a person for certain purposes in subdivision j of Part I. Where a payment is made to a non-resident partnership, there is thus an argument that the wording of s. 212(1) is inadequate to require that the tax be applied. Were this the case, the Part XIII tax could be avoided by the simple expedient of making all payments to non-resident partnerships.
Whether Part XIII applied on a look-through basis prior to enactment of s. 212(13.1)(b) (p. 263)
It is understood that this loophole was first tested in Ottawa when two non-resident banks formed a foreign partnership for purposes of lending to a Canadian resident. Exemption from the 15% withholding tax on interest was claimed on the basis of Canadian legal opinion that the partnership was not a “person” within the meaning of s. 212(1). While agreeing that the foreign partnership was not a “person”, the Minister held to the view that the interest payment was not to a “partnership”, but was rather a payment to the two non-resident partners. The Minister was apparently successful in this contention.
It is my view that where a partnership is constituted on a basis similar to Canadian law, there is a preponderance of authority for the view that a payment to it is really a payment to the partners [citing Dunbrik, 52 DTC 154 and Lindley on Partnership].
Effect of introduction of s. 212(13.1)(a) (pp. 264-265)
This amendment is expected to stop a fair amount of tax leakage. For example, it is presently possible for a partnership with all non-resident or some non-resident partners, to carry on business in Canada, and be entitled to all the standard deductions under Part I. If such deductions constitute, for example, management fees, royalties or interest paid to non-residents, there would be no Part XIII withholding tax unless the partnership were a resident of Canada. However, if such payments were made by a Canadian subsidiary, they would be subject to such tax. Accordingly, Budget Resolution 117(b) deems the partnership payor of such deductible items to be resident in Canada in respect of such payments. Thus, the Part XIII tax becomes exigible, and the Canadian business operations of such partnership become equivalent, from a tax point of view, to operating in Canada through a subsidiary corporation.
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