Cynthia Morin, Suhaylah Sequeira, "Withholding Tax Obligations: Proposed Amendments to Subsections 212(13.1) and 212(13.2)", International Tax Highlights, Vol. 1, No. 2 November 2022, p. 2

August 9, 2022 amendment to s. 212(13.1)(a)

• The August 9, 2022 proposals would amend s. 212(13.1)(a) to deem a partnership to be a person resident in Canada in respect of the portion of payments made by the partnership to a non-resident person that is deductible in computing a partner’s share of the partnership’s income or loss, to the extent that the partner’s share is taxable under Part I of the Act.
• This reference to Part I taxability extends to a partner with Part I income resulting from a s. 216 election.
• This amendment contemplates a partnership having withholding tax obligations when making payments to a non-resident even if the partnership does not have Canadian-source income.

Examples of effect of amendment

• As an example, a foreign private equity partnership with one or more partners that are resident in Canada may now have a withholding tax obligation on management fees paid to a non-arm’s-length foreign manager if Treaty relief is not available.
• Where a foreign fund partnership owns subsidiary foreign partnerships which pay interest to it in order to reduce foreign-country taxation, Part XIII tax will apply to the extent that one or more partners of the fund partnership are Canadian residents.
• The rule does not provide relief for partners who are exempted from Part I tax, and it may impose withholding tax even where Canadian partners are dealing at arm’s length with the payee or have only a de minimis partnership interest.