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: whether an interest in a partnership, less than 50% of the value of which is attributable to immoveable property situated in a country, will be subject to tax in that country
Position: Generally, no
Reasons: subparagraph 4(b) of Article 13 of the Convention
July 25, 2005
Re: Article 13 of the Canada - Germany Tax Convention
We are writing in response to your email message of March 7, 2005 wherein you requested our comments regarding the interpretation of Article 13 of the Canada - Germany Tax Convention (the "Convention").
You have described two scenarios each involving an individual who is a member of one or more limited partnerships in the contracting state of which the individual is not a resident and have queried the manner in which the Canada Revenue Agency (the "CRA") would interpret subparagraph 4(b) of Article 13 of the Convention to each of these scenarios.
The first situation involves an individual who is a resident of Canada and who is a limited partner in two German limited partnerships. The value of the immoveable property of each of the German partnerships that is located in Germany is less than 50% of the value of the German partnership.
In the second situation, an individual who is a resident of Germany is a limited partner in a Canadian limited partnership. The value of the immoveable property of the Canadian partnership that is located in Canada is less than 50% of the value of the Canadian partnership. In addition, the Canadian partnership has a permanent establishment in Canada and is carrying on business in Canada.
Written confirmation of the income tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request as described in Information Circular IC 70-6R5 ("IC-70-6R5") dated May 17, 2002 issued by the CRA. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we can provide the following general comments that may be of assistance.
Subparagraph 4(b) of Article 13 of the Convention provides that:
"4. Gains derived by a resident of a Contracting State from the alienation of:.....
(b) an interest in a partnership,... the value of which is derived principally from immovable property situated in the other Contracting State, may be taxed in that other State. For the purposes of this paragraph, the term "immovable property" does not include property (other than rental property) in which the business of the... partnership, .... is carried on....
Paragraph 2 of Article 6 of the Convention further provides that the term "immovable property" has the meaning that it has for the purposes of the relevant taxation law of the country in which the property in question is situated. Consequently, pursuant to section 5 of the Income Tax Conventions Interpretation Act, the expression "immovable property" situated in Canada includes:
(a) any right to explore for or exploit mineral deposits and sources in Canada and other natural resources in Canada, and
(b) any right to an amount computed by reference to the production, including profit, from, or to the value of production from, mineral deposits and sources in Canada and other natural resources in Canada.
Generally, the Canada Revenue Agency considers that the word "principally" means more than 50%. Consequently, in the situation where the value of the immoveable property of a partnership that is located in a Contracting State is less than 50% of the value of the partnership then an interest in such partnership should not constitute an "immovable property" for purposes of subparagraph 4(b) of Article 13 of the Convention. As a result, any gain realized by a resident of the other Contracting State on a sale of such partnership interest would only be taxable in the Contracting State of which the taxpayer is a resident by virtue of paragraph 6 of Article 13 of the Convention.
We trust that our comments will be of assistance.
Our comments are provided in accordance with the practice outlined in paragraph 22 of IC 70-6R5.
Reorganizations and Resources Division
Income Tax Rulings Directorate
Policy and Planning Branch
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