3 July 2002 External T.I. 2002-0122185 - TWO TIERED 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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

Whether interest paid to a non-resident under an obligation that otherwise satisfies the requirements of subparagraph 212(1)(b)(vii) is not, by virtue of the CCRA's administrative position set out in paragraph 19 of IT-361R3, disqualified from the exemption where the borrower is a partnership and all the members of which deal at arm's length with the lender and all the members are, with one exception, corporations resident in Canada. The sole exception is a limited partnership organized under the laws of a province all the partners of which are corporations resident in Canada.

Position TAKEN:

Yes, generally.

Reasons FOR POSITION TAKEN:

Generally, with the exception for the limited purpose of determining income of the individual partners pursuant to section 96, we look through the two tiered partnership arrangement.

XXXXXXXXXX 							2002-012218
P. Diguer
July 3, 2002 

Dear XXXXXXXXXX:

Re: Subparagraph 212(1)(b)(vii) of the Income Tax Act (Canada) (the "Act")

This is in reply to your letter dated February 6, 2002, in which you request our views on the applicability of the withholding tax exemption provided in subparagraph 212(1)(b)(vii) of the Act in respect of interest paid by a limited partnership to a non-resident lender.

In particular you describe a situation where a limited partnership (Partnership A) organized under the laws of a province borrows money (the "Loan") from a non-resident lender. With one exception (Limited Partnership B), all the partners of Partnership A are corporations resident in Canada. Limited Partnership B is itself a limited partnership organized under the laws of a province. All the partners of Partnership B are corporations resident in Canada.

You ask:

Will the fact that one of the partners (Partnership B) of Limited Partnership A is itself a partnership (two-tier partnership arrangement), in and of itself, not disqualify interest paid on the Loan by Limited Partnership A to the non-resident lender from the withholding tax exemption provided in subparagraph 212(1)(b)(vii) of the Act?

Our comments

The situation that is described in your letter appears to involve a series of actual completed transactions involving specific taxpayers. Written confirmation of the tax implications inherent in particular transactions are given by this Directorate only where the transactions are proposed and are the subject matter of an advance ruling request submitted in the manner set out in Information Circular IC-70-6R5 dated May 17, 2002. Where the particular transaction is completed, the inquiry should be addressed to the relevant Tax Services Office. Although we are unable to provide any opinion in respect of the specific transactions described in your letter, we have set out some general comments which we hope are of assistance to you.

Although the CCRA will carefully review the purpose for creating a two-tier partnership arrangement, interest paid to a non-resident under an obligation that otherwise satisfies the requirements of subparagraph 212(1)(b)(vii) of the Act will not generally be disqualified from the exemption where the borrower is a partnership all the members of of which:

(a) deal at arms length with the lender;

(b) (i) are corporations resident in Canada, non resident corporations whose business is carried on principally in Canada, or a combination of both; and/or

(ii) are other partnerships, all the members of which are corporations described in (i) above.

We trust our comments will be of assistance to you.

Yours truly,

Steve Tevlin
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch