16 July 1985 Income Tax Severed Letter A-1559

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Dear Sirs:

This is in reply to your letter of June 7 concerning interest payments by a limited partnership to non-residents of Canada. You describe the situation as follows:

• 1. In the year 1981, a limited partnership (the "Partnership") was organized under the laws of Ontario to acquire and own a parcel of land located in the Province of Ontario and an office complex under construction thereon (the "Property").
• 2. The Property was owned by a Canadian corporation ("Canco") and was constructed to be used as its corporate headquarters.
• 3. Canco ultimately sold the Property to the Partnership and leased the same back from the Partnership under a long term lease (the "Lease").
• 4. The Partnership has elected to be taxed in Canada under section 216 of the Income Tax Act (the "Act") in respect of its rental income.
• 5. Prior to the sale to the Partnership, Canco had mortgaged the Property in favour of a Canadian mortgage company ("Cancor") to secure construction loan advances and issued a promissory note (the "Note") to Cancor in respect thereof. The Partnership assumed the liability under the mortgage and the Note upon acquisition of the Property from Canco.
• 6. Upon completion of the Property and after its sale from Canco to the Partnership, Cancor sold the mortgage and the Note to a United States tax exempt pension fund (the "Pension Fund") which, at that time and today, has a certificate of exemption under subsection 212(14) of the Income Tax Act (the "Act").
• 7. The Lease of the Property from the Partnership to Canco is triple net, i.e. the Partnership has no responsibility thereunder and all obligations in respect of taxes, operating expenses, etc., are the responsibility of the tenant.
• 8. The limited partners of the Partnership are all individuals, or estates or trusts, resident in the United States of America and not residents of Canada. The general partner is an Ontario general partnership, all of whose general partners are individuals resident in the United States and not residents of Canada. It is not known whether any of such individuals have any other connection with Canada.
• 9. The Partnership does not have an office in Canada and all rental payments are made from the tenant to a paying agent. The paying agent makes all required payments under the mortgage and other payments as may be required under a paying agency agreement.
• 10. For Canadian tax purposes, it is not likely that the Partnership will have any taxable income prior to the 25th year of the Lease.
• 11. The Pension Fund intends to sell the Note, or a participation in the Note, to one or more investors who may not be residents of either Canada or the United States. If it does so, you ask us to confirm your view that pursuant to the provisions of parts 2, 6 and 8 of Article XI of the Canada-United States Income Tax Convention 1980 (the "Treaty"), there will be no Part XIII tax exigible under the Act in respect of interest paid by the Partnership to persons who are not residents of Canada.

Our Comments

In the type of situation described above, the deeming provisions of paragraph 212(13.1)(a) of the Act would not be applicable. However, the deeming provisions of paragraph 212(13)(f) of the Act would be applicable with the result that Part XIII tax would be exigible on the gross interest paid by the non-resident partners to other non-residents of Canada, unless a provision of a reciprocal tax treaty dictates otherwise. Since the partners in question are residents of the U.S., the subject interest will be exempt from Part XIII tax if, pursuant to the provisions of parts 6 and 8 of Article XI of the Treaty, it is concluded that the interest is considered to arise in the U.S. and the Note is not considered to be effectively connected with a permanent establishment or a fixed base situated in Canada. The interest will be considered to arise in the U.S. if the U.S. resident partners do not have in Canada a permanent establishment or a fixed based which bears the interest on the Note.

Whether or not the subject interest is borne by a permanent establishment or fixed base in Canada, or whether or not the Note is effectively connected with a permanent establishment or a fixed base in Canada, is a question of fact. However, based on the information available, it is our opinion that neither is the case with the result that interest paid on the Note by the Partnership to non-residents of Canada would not be subject to Part XIII tax.

Notwithstanding the fact that we have related our opinion to the above described situation, this opinion simply reflects our interpretation of the relevant provisions of the Act and the Treaty as they apply generally, and, as stated in paragraph 24 of Information Circular 70-6R, it is not binding on the Department.

We trust that the above comments will be of assistance to you.