16 July 2009 Internal T.I. 2009-0317371I7 - T2062C Notice-TCP disposed of by Partn or LLC

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 a T2062C Notice should be filed in respect of a) the partnership or the partners; b) the LLC that is a partnership for U.S. tax purposes, or the members

Position: a) The partners; b) The LLC, if all of the members of the LLC are resident in the U.S. and entitled to benefits under the Canada-U.S. Tax Convention.

Reasons: a) The partnership is not deemed to be a separate person for purposes of section 116; b) The LLC is the "non-resident person" in section 116, but is not entitled to treaty benefits

July 16, 2009

T2062C Notice - TCP disposed of by Partnership or LLC

Dear Janet:

We are responding to your email of April 7, 2009 in which you ask for our views on the application of section 116 of the Income Tax Act (the "Act") in the following two hypothetical scenarios.

1st Scenario

Assume that a partnership is owned one-third each by a U.S. resident, a resident of a second country with which Canada has an income tax convention, and a resident of a third country with which Canada does not have an income tax convention. The U.S. resident is entitled to benefits under the Canada-U.S. Tax Convention (the "U.S. Convention") and the resident of the second country is entitled to benefits under Canada's treaty with the second country. The partnership does not check the box under U.S. tax rules to be taxed as a corporation.

Assume further that the partnership disposes of taxable Canadian property ("TCP"), as that term is defined in subsection 248(1) of the Act. The disposition triggers the purchaser's withholding requirements in section 116 of the Act. The gain is exempt under the U.S. Convention and the treaty with the second country. As part of its due diligence, the purchaser would like to provide notice to e Minister under paragraph 116(5)(a.1) and subsections 116(5.01) and 116(5.02) of the Act (Form T2062C).

You would like to know if the term "non-resident person" in section 116 of the Act means the partnership, or the partners.

OUR COMMENTS

In our view, the term "non-resident person" in section 116 of the Act means each partner individually. Subsection 96(1) of the Act applies for purposes of computing the partner's income, non-capital loss, net capital loss, restricted farm loss, farm loss or taxable income earned in Canada, as if the partnership were a separate person resident in Canada. However, subsection 96(1) does not deem the partnership to be a separate person for purposes of the withholding requirements in section 116 of the Act.

Consequently, the tests in subsection 116(5.01) of the Act must be applied to each partner. The property would be "treaty-protected property" (as that term is defined in subsection 248(1) of the Act) of the U.S. resident and the resident of the second country, but would not be treaty-protected property of the resident of the third country. The purchaser would complete one T2062C notice for each of the U.S. resident and the resident of the second country, indicating the portion of the purchase price that would be in proportion to the partner's share of the gain.

The purchaser could not provide a T2062C notice in respect of the resident of the third country. In this case, the purchaser must either withhold in accordance with subsection 116(5) of the Act, or be in receipt of a certificate from the Minister under subsection 116(4) of the Act.

2nd Scenario

Assume the same facts as Scenario 1, except that the TCP is owned by a limited liability company ("LLC"). The LLC is owned one-third each by a U.S. resident, a resident of another country with which Canada has an income tax convention, and a resident of a third country with which Canada does not have an income tax convention. Assume that the LLC is considered to be a corporation for purposes of the Act, but is treated as a partnership under U.S. tax rules and is not liable to tax in the U.S.

You would like to know if the term "non-resident person" in section 116 of the Act means the LLC, or the members of the LLC.

OUR COMMENTS

Because the LLC is considered to be a corporation for purposes of the Act, the term "non-resident person" in section 116 in this scenario would be read as a reference to the LLC. Consequently, the tests in subsection 116(5.01) of the Act must be applied to the LLC. Since the LLC is not liable to tax, it would not be resident in a treaty country, as required by paragraph 116(5.01)(a). Therefore, the purchaser could not provide a T2062C notice for the disposition of the TCP, and would have to withhold under subsection 116(5) of the Act, or be in receipt of a certificate from the Minister under subsection 116(4).

If the conditions in paragraph 6 of Article IV [Residence] of the U.S. Convention are met, the LLC will be entitled to the treaty benefits on a portion of the gain from the disposition of the TCP that would be attributed to the U.S. resident member. Regardless, for purposes of the withholding rules in section 116 of the Act, the non-resident person means the LLC. As noted in the Technical Explanation of the Fifth Protocol to the Canada-U.S. Tax Convention, Canada does not treat the LLC as though it did not exist, substituting the members for it in the role of the taxpayer under Canada's system.

However, where all of the members of the LLC are resident in the U.S. and entitled to benefits under the Canada-U.S. Tax Convention, we would not be opposed if you took the view, administratively, that the purchaser may file a T2062C Notice in respect of the LLC.

We trust that we have been of some assistance.

Yours truly,

Olli Laurikainen, Manager
For Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch