21 August 2001 External T.I. 2000-0028475 - Withholding tax - Partnership

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.

Principal Issues: Applicable rate of withholding tax on income of partners

Position: If a partnership for Canadian purposes, income of partnership retains its nature and flows through to partners. If a partner is a resident of a treaty country, that treaty will apply.

Reasons: Partnership is not an entity

		2000-002847
XXXXXXXXXX 	Karen Power, C.A.
(613) 957-8953
August 21, 2001

Dear XXXXXXXXXX:

Re: Treaty Interpretation When Shares of a Canadian Company
are Owned by a Foreign Partnership

We are writing in reply to your letter of May 25, 2000 wherein you have requested a technical interpretation on the application of the gains and dividend articles of the OECD Model Tax Convention on Income and Capital ("OECD Model Tax Convention") in the situation where shares of a Canadian corporation ("Canco") are owned by a foreign partnership in which all of the partners are foreign persons. The foreign partnership may or may not be formed in the same country as the foreign partners. We apologize for the delay in responding to your enquiry.

Specifically you have asked that we reconsider our previous interpretations in light of commentary published by the OECD in its 1999 report entitled "The Application of the OECD Model Tax Convention to Partnerships" ("OECD Report").

The context for which you have requested an interpretation is as follows:

• Canco is a Canadian corporation resident in Canada.
• The partnership is formed under the partnership law of Country B and is considered a partnership under Canadian legal principles. Country B treats the partnership as being fiscally transparent. The partnership owns all of the issued and outstanding shares of Canco. The partnership does not carry on a business in Canada, nor does the partnership have a permanent establishment in Canada. HoldcoA and HoldcoB are the partners of the partnership.
• HoldcoA and HoldcoB are persons as defined in paragraph 1(a) of Article 3 of the OECD Model Tax Convention. HoldcoA and HoldcoB are residents of Country A.
• Country A has a tax convention with respect to income and capital (the "Treaty") with Canada. The Treaty is modeled after the OECD Model Tax Convention.
• During its period of ownership, the partnership receives a dividend from Canco.

Our Comments

For purposes of the Income Tax Act, a partnership is not a person and is not deemed to be a person. However, in determining a member's share of the income or loss of the partnership from a source or from sources in a particular place, the partnership first computes its income as if it were a person. A member's share of the income or loss of the partnership from each source then flows through to him pursuant to paragraphs 96(1)(f) or (g) of the Income Tax Act (the "Act"), retaining its characteristics in respect of its source and nature.

Where Canco pays dividends to the partnership, the pro rata share of such dividends will flow through to both HoldcoA and HoldcoB. Both HoldcoA and HoldcoB will be entitled to the 15% withholding rate in paragraph 2(b), Article 10 of the Treaty. However, HoldcoA and HoldcoB would not qualify for the reduced rate of 5% set out in paragraph 2(a) of Article 10 of the Treaty. Where HoldcoA and HoldcoB are residents of the United States, the dividends paid to the partnership by Canco would be eligible for Canadian withholding tax at the reduced rate of 15% set our in paragraph 2(b) of Article X of the Canada-U.S. Income Tax Convention (1980) (the "Convention"). HoldcoA and HoldcoB would not qualify for the reduced rate of 5% set out in paragraph 2(a) of Article X of the Treaty.

Similarly, on a disposition of the shares of Canco by the partnership, a gain that is subject to tax in Canada would flow through to HoldcoA and HoldcoB. The provisions of Article 13 of the Treaty will be applicable with respect to the gain. Where HoldcoA and HoldcoB are residents of the United States, Article 13 of the Convention will be applicable with respect to the gain.

We trust our comments will be of assistance to you. These comments are provided in accordance with the practice outlined in paragraph 22 of Information Circular 70-6R4.

Yours truly,

for Director
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Legislation Branch