19 March 2013 Internal T.I. 2010-0385931I7 - Taxable Canadian property and Partnerships

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: Is the determination of whether a property is "taxable Canadian property" ("TCP") within the meaning of paragraph (e) of subsection 248(1) made at the partners' or the partnership level?

Position: For purposes of paragraph 2(3)(c), paragraph (e) of the definition of TCP in subsection 248(1) of the Act should be read by reference to the partners.

Reasons: While subsection 96(1) applies for the purpose of computing the partners' taxable income earned in Canada for purposes of subparagraph 115(1), it does not apply for the purposes of paragraph 2(3)(c) or section 116.

March 19, 2013

Claudio DiRienzo Angelina Argento
Policy and Technical Advisor International Section II
Medium Business Audit Division Income Tax Rulings
Directorate

2010-038593

Paragraph (e) of the definition of "taxable Canadian property" ("TCP") in subsection 248(1) of the Income Tax Act (the "Act")

This is in reply to your email of November 4, 2010, in which you asked for our views as to whether, for the purpose of applying sections 115 and 116 of the Act, the definition of TCP in subsection 248(1) of the Act, in the context of a partnership with non-resident partners, should be made at the partnership level or at the level of the non-resident partners.

All references to sections, subsections, paragraphs, and subparagraphs in this memo are references to the Act.

Facts

In particular, you received an inquiry from a taxpayer in respect of the following facts:

• A partnership owns 25% of the shares of a corporation which is listed on a designated stock exchange ("Pubco");
• Pubco only has one class of shares;
• The partnership has non-resident partners all of whom deal with each other and the partnership, at arm's length;
• None of the partners of the partnership own any shares of Pubco directly;
• The partnership is disposing of all of its shares in Pubco;
• At some time during the 60 month period that ends at the time of the disposition, more than 50% of the fair market value of the shares of Pubco is derived directly or indirectly from real property situated in Canada; and
• The shares of Pubco are not treaty-protected property (footnote 1) in reference to any of the partners.

You note that if the determination is made at the partnership level, then the shares of Pubco would constitute TCP within the meaning of paragraph (e) of the definition of that term in subsection 248(1). However, if we must look through the partnership to the non-resident partners, you note that the shares of Pubco would not constitute TCP, as none of the non-resident partners owns, either alone or together with persons with whom he does not deal at non-arm's length, 25% of the shares of Pubco.

Our Comments

Interaction of subsection 96(1) and section 115

Subsection 2(3) defines the circumstances in which a non-resident person is taxable under Part I on the non-resident person's taxable income earned in Canada. Paragraph 2(3)(c) refers to a non-resident person who has disposed of TCP at any time in the year or a previous year. A non-resident person's taxable income earned in Canada for the year is determined in accordance with section 115. Subparagraph 115(1)(a)(iii) generally requires non-residents (including non-resident partners) to include taxable capital gains from dispositions of TCP (other than treaty-protected properties) in computing "taxable income earned in Canada".

Paragraph (e) of the definition of TCP in subsection 248(1) describes the conditions under which the shares of a public company would be considered TCP:

"a share of the capital stock of a corporation that is listed on a designated stock exchange...…, if, at any particular time during the 60-month period that ends at that time,

(i) 25% or more of the issued shares of any class of the capital stock of the corporation, or 25% or more of the issued units of the trust, as the case may be, were owned by or belonged to one or any combination of

(A) the taxpayer, and
(B) persons with whom the taxpayer did not deal at arm's length, and

(ii) more than 50% of the fair market value of the share or unit, as the case may be, was derived directly or indirectly from one or any combination of properties described under subparagraphs (d)(i) to (iv)."

Where a taxpayer is a non-resident member of a partnership, the taxpayer's taxable income earned in Canada for a taxation year derived through the partnership shall be computed as if the partnership were a separate person resident in Canada (footnote 2) and each partnership activity (including the ownership of property) were carried on by the partnership as a separate person, and a computation were made of the amount of each taxable capital gain of the partnership from the disposition of property (footnote 3) .

In the above example, in respect of the fictional person referred to in paragraph 96(1)(a), the shares constitute TCP under paragraph (e) of the definition of that term in subsection 248(1). Therefore, each partner's share of the gain would be included in that partner's taxable income earned in Canada under subparagraph 115(1)(a)(iii) and paragraph 115(1)(b).

However, subsection 96(1) does not apply for the purposes of paragraph 2(3)(c). Thus, for the purpose of determining whether the non-resident partner is taxable under subsection 2(3) of the Act, the partners of the partnership are considered to have disposed of their respective interest in the property of the partnership and paragraph 96(1)(c) does not apply (footnote 4) . In other words, the "non-resident person" referred to in subsection 2(3) is the non-resident partner and not the partnership. Thus, for the purpose determining whether the non-resident partner is taxable under subsection 2(3), the test in paragraph 2(3)(c) is applied at the partner level.

Therefore, in your case, although the partnership realizes a gain from the disposition of a TCP and a portion of the gain is allocated to the non-resident partner and included in computing his taxable income earned in Canada under paragraph 115(1)(a) and paragraph 115(1)(b), the shares are not TCP for the purposes of paragraph 2(3)(c), in respect of each non-resident partner. In particular, the non-resident partner did not dispose of any TCP as neither he nor he together with persons with whom he did not deal at arm's length, owned 25% or more of shares described in paragraph (e) of the definition of TCP in subsection 248(1). This is because under common law a member of a partnership may not own any property of the partnership in species but only jointly with the other partners of the partnership. Hence, it may not be said that the non-resident partner owned a specific percentage of the underlying property of the partnership. Therefore, unless any partner otherwise meets the conditions described in subsection 2(3), none of the non-resident partners is taxable in Canada on their portion of the gain realized by the partnership on the disposition of the shares of Pubco.

We believe this result to be unintended and have advised officials at the Department of Finance.

We note however that a non-resident partner may be taxable in Canada on his share of the gain of the partnership from the disposition of the Pubco shares, if any of paragraphs 2(3)(a) to (c) apply to the non-resident partner at any time in the year or a previous year for another reason. For example, if a non-resident partner was employed in Canada in a previous year, pursuant to paragraph 2(3)(a), he would be taxable in Canada on his taxable income earned in Canada, including his share of the gain of the partnership from the disposition of the Pubco shares, in the later year.

It is to be noted that the CRA will consider the application of the GAAR if it can be established that the partnership was interposed between the partners and the shares of Pubco to avoid the Canadian taxation of a subsequent gain realized on the disposition of the shares of Pubco.

Interaction of subsection 96(1) and section 116

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. In our view, the term "non-resident person" in section 116 of the Act means each partner individually (footnote 5) . Therefore, only a disposition of partnership assets that are TCP to the non-resident partners requires compliance with the section 116 certificate procedures by each of the non-resident partners. In other words, each non-resident partner is required to notify the CRA of his/her disposition of TCP (i.e. partnership assets that are TCP to that non-resident partner). In this regard, it is current CRA policy (footnote 6) to accept one notification of disposition filed on behalf of all non-resident partners on the condition that sufficient information about each individual partner is provided. Therefore, along with the one notice, the CRA requires a complete listing of the non-resident partners who are disposing of the property, including their Canadian and foreign addresses, tax identification numbers, percentage of ownership, and their respective portion of the payments or security. A partnership cannot file one income tax return on behalf of all the partners because the legislation does not provide for this filing method. Generally, each partner is required to file a tax return as each partner's final tax liability will be determined when the tax returns are filed and assessed.

In your case, for purposes of section 116, a non-resident partner has not disposed of any TCP, as none of the partners, nor he together with persons with whom he did not deal at arm's length, owned 25% or more of shares described in paragraph (e) of the definition of TCP in subsection 248(1). Therefore, in your case, there is no requirement for any non-resident partner to notify CRA for the purposes of the withholding requirements in section 116 of the Act (footnote 7) . In other words, since the shares of Pubco disposed of by the partnership do not constitute TCP to any of the partners, section 116 has no application to your case.

We trust these comments are of assistance.

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

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 As that term is defined in subsection 248(1).
2 Paragraph 96(1)(a).
3 Paragraph 96(1)(c).
4 XXXXXXXXXX
5 CRA Document No. 2009-0317371I7 dated July 16, 2009.
6 CRA Documents No. 2012-0444081C6 dated May 17, 2012 and 2011-0410491E5 dated October 4, 2011.
7 Note, however, that a partnership interest is taxable Canadian property if, within the last 60 months, more than 50 percent of the partnership's fair market value is derived from Canadian real property, Canadian resource property, or Canadian timber rights. Therefore, a disposition, other than on death, of a partnership interest that is taxable Canadian property requires compliance with the section 116 certificate procedures.