CRA now treats a payment of withholding tax by a partnership “on behalf of” its partners as an ACB-reducing distribution to them
Would the allocation of foreign tax by a partnership to a partner be regarded as a withdrawal by the particular partner that reduced the ACB of its partnership interest? CRA stated:
If the partnership pays the foreign tax on behalf of the partner or the foreign tax is withheld on behalf of the partner in accordance with foreign law from the foreign income paid to the partnership, such amount would be considered [for purposes of s. 53(2)(c)(v)] to be received by the partner on account or in lieu of payment of, or in satisfaction of, a distribution of the partner’s share of the partnership profits or partnership capital. Consequently, subparagraph 53(2)(c)(v) of the Act would reduce the ACB of the partner’s interest in the partnership for the amount of any non-business income tax paid by the partnership on behalf of the partner. …
CRA went on to note that such ACB reductions could trigger negative ACB gains under s. 40(3.1).
This position on s. 53(2)(c) overruled 2004-0075931E5, which stated that “paragraph 53(2)(c) does not provide for a deduction in computing the adjusted cost base of a taxpayer's interest in a partnership for the amount of any non-business income tax paid to a foreign country through the accounts of the partnership that was allocated to the particular partner… .”
CRA is effectively treating such an imposition of withholding tax on the income of a partnership the same as if the partnership had distributed those amounts to its partners in order for them to satisfy their personal liability. It is unclear which foreign jurisdictions treat such taxes as pro rata liabilities of the partners rather than of the recipient of the income (the partnership). On the other hand, if the foreign taxes are income taxes imposed on the income of the partnership (e.g., for a US partnership that has checked the box), then presumably it would be clear that those taxes were not partner liabilities.
Neal Armstrong. Summaries of 10 April 2024 External T.I. 2021-0919231E5 under s. 53(2)(c)(v) and s. 40(3.1).