14 July 2005 External T.I. 2003-0048251E5 - Partnership as a taxpayer

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.

Principal Issues: (i) Whether 93.1(2)(d) deals with the deductibility of the gross amount of dividend or the net amount? (ii) Whether a partnership would have a qualifying interest in respect of a foreign affiliate? (iii) Whether 85.1(3) would apply to a partnership? (iv) Whether paragraph 5905(5)(a) of the Income Tax Regulations would apply where a partnership transfers shares of a foreign affiliate to a taxable Canadian corporation which is 100% owned by the partnership, provided that the other conditions are met?

Position: (i) Yes. (ii) Yes. (iii) Yes. (iv) Yes.

Reasons: (i) Finance's intention. (ii) 95(2)(m) is relevant to the computation of income from a source of a partner of the partnership such that 96(1) applies to treat the partnership as a person resident in Canada for FAPI computation purposes. By virtue of subsection 93.1(1) the shares of the foreign corporation are owned by the partners for purposes of determining whether the foreign corporation is a foreign affiliate of the partners for purposes of section 113 and related Regulations as well as section 95 to the extent that it is applied for purposes of section 113 and related Regulations. However, subsection 93.1(1) does not apply for the purposes of determining whether a partner has a qualifying interest in respect of the foreign affiliate. This is the work of subparagraph 95(2)(m)(iv). By virtue of that subparagraph, the shares of the foreign affiliate are deemed to be owned by the partners for the purposes of paragraph 95(2)(m). (iii)By virtue of subsection 96(1) as discussed in (ii) above. (iv) Regulation 5905(5)(a) is relevant to the deduction in subsection113(1) (i.e., the computation of taxable income) and is not relevant to the computation of income of a partner of the partnership. Therefore, subsection 96(1) would not apply. However, subsection 93.1(1) would apply.

XXXXXXXXXX 2003-004825
S. Leung
July 14, 2005

Dear XXXXXXXXXX:

Re: Various Issues Regarding Partnerships and Foreign Affiliates

We are writing in reply to your letter of November 5, 2003 in which you requested technical interpretations as to whether certain provisions of the Income Tax Act (the "Act") would apply when a partnership "owns" shares of a controlled foreign affiliate as described in the situation below.

Hypothetical Situation

1. Two taxable Canadian corporations, which are related to each other, are equal (i.e., 50%-50%) members of a partnership (the "Partnership").

2. The Partnership borrowed $1,000 and used the borrowed money to acquire all the shares of a corporation that is not resident in Canada ("CFC").

3. The Partnership annually pays interest of $80 on the debt described in 2 above and this interest expense is deductible under paragraph 20(1)(c) of the Act.

4. CFC annually pays $100 of dividends to the Partnership.

5. Under subsection 96(1) of the Act, income is computed at the Partnership level resulting in net income of $20 with $10 being allocated to each member of the Partnership.

6. The Partnership may transfer the shares of CFC to a new wholly-owned subsidiary of the Partnership that is not resident in Canada ("ForeignCo") in exchange for shares of ForeignCo.

7. Alternatively, the Partnership may transfer the shares of CFC to a new wholly-owned subsidiary of the Partnership that is a taxable Canadian corporation ("CanCo") in exchange for shares of CanCo.

Your Enquires

You requested our opinions on the following:

(a) Whether paragraph 93.1(2)(d) of the Act would apply such that the amount that is deductible by each member of the Partnership under section 113 of the Act is $50 (i.e., the amount of the dividend included in computing each member's income from the CFC shares held by the Partnership) and not $10 (i.e., the "net" income attributable to the CFC shares allocated to each member)?

(b) Whether the Partnership has a "qualifying interest" in respect of CFC as determined under paragraph 95(2)(m) of the Act?

(c) Whether the Partnership is a "taxpayer" for the purposes of subsection 85.1(3) of the Act if the Partnership transfers the CFC shares to ForeignCo as described in 6 above?

(d) Whether paragraph 5905(5)(a) of the Income Tax Regulations ("ITR") would apply in determining the applicable surplus accounts of CFC in respect of CanCo if the Partnership transfers the CFC shares to CanCo as described in 7 above?

Our Comments

It is a question of fact whether the Partnership is a valid partnership for the purposes of the Act. Assuming that it is, in the hypothetical situation described above, based on the general principle that a partnership is not a separate person when subsection 96(1) does not apply (unless it is otherwise specified in the provisions of the Act), it is our views that

(i) for the purposes of subparagraph 93.1(2)(d)(i) of the Act, it is the gross amount of dividend the would be deductible under section 113 rather than the net amount.

(ii) The Partnership would be considered to have a "qualifying interest" in respect of CFC by virtue of subparagraph 95(2)(m)(i) of the Act only for the purpose of computing the income of the partners (i.e., whether the income is FAPI or not). The partners also have a "qualifying interest" in respect of CFC by virtue of subparagraph 95(2)(m)(iv) of the Act for the purpose of section 113 (and any regulations made for the purposes of that section) and section 95 (to the extent that it is applied for the purpose of section 113);

(iii) The Partnership would be considered to be a "taxpayer" for the purposes of subsection 85.1(3) of the Act with respect to its transfer of the CFC shares to ForeignCo; and
(iv) Paragraph 5905(5)(a) of the ITR would apply in determining the applicable surplus accounts of CFC in respect of CanCo with respect to the transfer of the shares of CFC by the Partnership to CanCo.

As stated in paragraph 22 of Information Circular 70-6R5 dated May 17, 2002, the opinions expressed in this letter are not rulings and are consequently not binding on the Canada Revenue Agency.

Yours truly,

Olli Laurikainen
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch

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