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: Part I.3 implications to a corporation that is a member in a partnership that is in turn a member of a second tier partnership in circumstances where the corporation makes a loan to the second tier partnership and vice versa.
Position: General discussion of application of the current legislation and the draft legislation released on July 18, 2005.
Reasons: Legislation and draft legislation
XXXXXXXXXX 2005-013177
October 25, 2005
Dear XXXXXXXXXX:
Re: Part I.3 and Tiered Partnerships
This is in reply to your letter of May 17, 2005 concerning the application of the Part I.3 tax to tiered partnership structures.
The two hypothetical situations you have described each involves a taxable Canadian corporation, Parentco, which owns 100% of Subco which, in turn, owns 100% of Aco and Bco. Subco and Aco are partners of a limited partnership, Partnership I. Subco is a limited partner of Partnership I with a 99.99% interest and Aco is the general partner of Partnership I. The sole asset of Partnership I is a 99.99% limited partnership interest in Partnership II which carries on an active business in Canada. The general partner of Partnership II is Bco. The taxation year-end of all the corporations and the two partnerships is December 31. None of the corporations involved is a "financial institution" as defined in subsection 181(1) of Income Tax Act (the "Act").
In the first hypothetical situation, Subco made a loan of $100 to Partnership II in 2005 and Partnership II used the proceeds of this loan to acquire a non-depreciable property. Subco's balance sheet as at December 31, 2005 shows a loan receivable from Partnership II of $100. Partnership II's balance sheet as at December 31, 2005 shows a loan payable to Subco of $100.
In the second hypothetical situation, Partnership II made a loan of $100 to Subco in 2005. The loan is reflected as a loan payable on Subco's balance sheet and as a loan receivable on Partnership II's balance sheet at year-end.
With regard to the above situations, you are requesting our views on the Part I.3 tax implications of the loan of $100 to the lender and the borrower.
Written confirmation of the 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. Where the particular transactions are completed, the inquiry should be addressed to the relevant Tax Services Office. However, we are prepared to provide the following general comments which may be of assistance.
Where a corporation (other than a financial institution) is a member of a partnership at the end of its taxation year, paragraph 181.2(3)(g) of the Act currently requires the corporation to include in its capital its proportionate share of amounts (other than such amounts owing to any corporate partner) that would be determined under paragraph 181.2(3)(g) and paragraphs 181.2(3)(b) to (f) of the Act in respect of the partnership at the end of the partnership's last fiscal period ending at or before the corporation's taxation year (if the references in paragraphs (b) to (f) to "corporation" were read as references to "partnership"). We note that the draft legislation released on July 18, 2005 contains a proposed amendment to paragraph 181.2(3)(g) of the Act, applicable to taxation years beginning after December 20, 2002. In particular, under the proposed amendment, the amount to be included in the corporation's capital is its proportionate share of amounts (other than amounts owing to the member or to other corporations that are members of the partnership) that would, if paragraph 181.2(3)(g) and paragraphs 181.2(3)(b) to (d) and (f) of the Act applied to partnerships in the same way that they apply to corporations, be determined under those paragraphs in respect of the partnership at the end of its last fiscal period that ends at or before the end of the corporation's taxation year.
A corporation lending money to a partnership is entitled to claim an investment allowance under paragraph 181.2(4)(d.1) of the Act if the loan is made to a partnership all of the members of which, throughout the year, were other corporations (other than financial institutions) that were not exempt from tax under Part I.3 otherwise than because of paragraph 181.1(3)(d) of the Act.
Pursuant to paragraph 181.2(4)(e) of the Act, a corporate member of a partnership is entitled to claim an investment allowance in respect of the carrying value of its interest in a partnership. Subsection 181.2(5) of the Act provides that the carrying value of an interest of a corporation in a partnership will be deemed to be an amount equal to that proportion of the total of all amounts each of which is the carrying value of an asset of the partnership, subject to certain exceptions, described in any of paragraphs 181.2(4)(a) to (d) and (f) of the Act that the corporation's share of the partnership's income or loss for that period is of the partnership's income or loss for that period. The July 18, 2005 draft legislation proposes to amend subsection 181.2(5) of the Act so that for the purposes of subsections 181.2(4) and (5) of the Act, the carrying value of an interest of a corporation or of a partnership (the "member") in a particular partnership is deemed to be the member's specified proportion of the amount that would, if the particular partnership were a corporation, be the particular partnership's investment allowance.
First hypothetical situation
With regard to the first hypothetical situation, we confirm that Subco's loan of $100 to Partnership II is not included in Subco's capital under paragraph 181.2(3)(g) of the Act since Subco is a member of Partnership I and not of Partnership II. Paragraph 181.2(4)(b) of the Act will not apply to permit an investment allowance to Subco in respect of the loan under paragraph 181.2(4)(b) of the Act because the loan was not made to another corporation. An investment allowance is also not available under paragraph 181.2(4)(d.1) of the Act as not all of the members of the Partnership II are other corporations. While Subco has an interest in Partnership I, the carrying value of that interest under paragraph 181.2(4)(e) of the Act is nil by virtue of subsection 181.2(5) of the Act. The only asset of Partnership I is its interest in Partnership II but such interest is not included in Subco's investment allowance because there is no reference in subsection 181.2(5) of the Act to assets described in paragraph 181.2(4)(d.1) of the Act.
As for the application of the draft legislation, the proposed amendment to paragraph 181.2(3)(g) of the Act is intended to ensure that the proration of the amounts required under paragraph 181.2(3)(g) of the Act will carry through any number of tiered partnerships. Therefore, if Partnership II were a corporation, it would have a capital inclusion of $100 under paragraph 181.2(3)(c) of the Act. Given the particular facts of this situation, that capital inclusion should, consistent with the intent of the proposed amendment, carry through Partnership I to Subco for inclusion in Subco's capital. However, Subco will not be entitled to an investment allowance in respect of the loan. The proposed amendment to subsection 181.2(5) of the Act is not relevant to this situation since Partnership II has a loan payable which would not qualify for the investment allowance. In this regard, the comfort letter issued by the Department of Finance on May 25, 2004 indicated their intent to recommend further amendments to Part I.3 to effectively permit an investment allowance in respect of a loan or advance to a second or lower tiered partnership. We will be in a better position to determine the consequences when the draft legislation is released.
Second hypothetical situation
With regard to the second hypothetical situation, we confirm that paragraph 181.2(3)(c) of the Act would apply to include the loan payable of $100 in Subco's capital. We note that the nature of the lender, be it another corporation, natural person, trust or a partnership is not relevant for the purposes of this provision. As for the investment allowance, for the same reasons as those given in the first hypothetical situation, Subco's investment allowance is nil.
In applying the July 18, 2005 proposed amendments to the second hypothetical situation, it is our view that there would be a capital inclusion to Subco in respect of the loan payable of $100 but Subco would be entitled to an investment allowance of $100. If Partnership II were a corporation, it would be entitled to an investment allowance in respect of the loan receivable from Subco under paragraph 181.2(4)(b) of the Act. This investment allowance would, as a result of the proposed amendment to subsection 181.2(5) of the Act, carry through Partnership I to Subco.
Our comments are provided in accordance with the practice described in paragraph 22 of Information Circular 70-6R5 and are not binding on the Agency.
Yours truly,
F. Lee Workman
Manager
Charitable and Financial Institution Sectors
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
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