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: For the purposes of applying paragraph 95(2)(a) in determining whether a taxable Canadian corporation that is a member of a partnership has FAPI, does paragraph 95(2)(y) apply to prevent the partnership from having a qualifying interest in a foreign affiliate the shares of which are owned through the partnership?
Reasons: Interpretation of the Act.
July 12, 2013
Re: Foreign affiliate held through a partnership - paragraphs 95(2)(m) & 95(2)(y)
This is further to a letter from XXXXXXXXXX dated July 26, 2011, requesting our comments regarding the application of paragraphs 95(2)(m) and (y) of the Income Tax Act in a situation where a foreign affiliate is held through a partnership. All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended.
In the situation you described, a taxable Canadian corporation ("Canco") has a 51% interest in a partnership ("Partnership") through which are held all of the shares of a non-resident corporation ("Forco1"), which in turn owns all of the shares of another non-resident corporation ("Forco2"). Both of Forco1 and Forco2 are resident in the same country. In this context, Forco1 makes an interest bearing loan to Forco2.
For the purpose of determining whether Canco has "foreign accrual property income" within the meaning assigned by the definition of this expression in subsection 95(1) ("FAPI"), you submitted that Partnership is deemed to be a separate person resident in Canada that owns all of the Forco1 shares pursuant to subsection 96(1). Hence, provided that each of Forco1 and Forco2 is a "foreign affiliate" of Partnership within the meaning assigned by the definition of this expression in subsection 95(1) ("Foreign affiliate"), in respect of which Partnership has a "qualifying interest" within the meaning of paragraph 95(2)(m) ("Qualifying interest"), the interest income earned by Forco1 on the loan would be recharacterized as income from an active business pursuant to clause 95(2)(a)(ii)(B).
For the purposes of applying paragraph 95(2)(a) in determining whether Canco has FAPI, does paragraph 95(2)(y) apply to prevent Partnership from having a Qualifying interest in Forco1 and Forco2?
Written confirmations of the tax implications inherent in particular transactions are provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling submitted in the manner set out in Information Circular 70-6R5, dated May 17, 2002. Where a particular transaction has already been completed, a review of the relevant facts and circumstances surrounding the situation would be required. Such review would normally be conducted by the applicable Tax Services Office during the course of an income tax audit which, if undertaken, would be carried out after the particular taxpayer has prepared and filed its income tax return for the year. However, we are prepared to provide the following general comments that may be of assistance. Since these comments are general comments, they may not apply to your particular fact situation.
In determining the amount of FAPI to be included in Canco's income in the situation described above, the amount of FAPI has to be determined at the partnership level through the application of subsection 96(1). In this context, Partnership would have a Qualifying interest in respect of Forco1 provided that, at the relevant time, Forco1 qualifies as a Foreign affiliate of Partnership and that, for the purposes of paragraph 95(2)(m), Partnership owns shares of Forco1, the ownership of which met the conditions set out in subparagraphs 95(2)(m)(i) and (ii).
Also, the look-through rule of subparagraph 95(2)(m)(iii) would apply to the shares of Forco2 owned by Forco1. Consequently, Partnership would have a Qualifying interest in respect of Forco2 provided that, at the relevant time, Forco2 qualifies as a Foreign affiliate of Partnership and that, for the purposes of paragraph 95(2)(m), Partnership is deemed to own shares of Forco2, the ownership of which met the conditions set out in subparagraphs 95(2)(m)(i) and (ii).
This would be the case notwithstanding the deeming rule of paragraph 95(2)(y) that, in this context, would deem each member of Partnership to own the Forco1's shares based on their proportionate interest in the partnership for the purposes of determining whether a non-resident corporation is, at any time, a Foreign affiliate of a member of the partnership in respect of which it has a Qualifying interest.
We trust the above comments will be of assistance.
Guy Goulet CPA, CA, M.Fisc.
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Canada Revenue Agency
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