The expanded s. 212(13.1)(a) could impose Part XIII tax on transactions with minimal connection to Canada and could be problematic to foreign fund partnerships

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.

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.

Neal Armstrong. Summaries of Cynthia Morin and 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 under s. 212(13.1)(a) and s. 212(13.2).