18 June 2014 External T.I. 2011-0417491E5 - Non-resident's partnership interest

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 non-resident partner can be considered to have disposed of taxable Canadian property when a gain is triggered under paragraph 40(3.1)(a) on a partnership interest that is taxable Canadian property.

Position: No.

Reasons: Paragraph 40(3.1)(b) of the Act only applies for the purposes of section 110.6.

XXXXXXXXXX
2011-041749

June 18, 2014

Dear XXXXXXXXXX:

Re: Non-Resident's Deemed Gain on Partnership Interest

This is in response to your technical interpretation request pertaining to the operation of subsection 2(3) and clause 150(1)(a)(i)(D) of the Income Tax Act (the "Act") in the context of the following hypothetical scenario.

1) NRco is a non-resident corporation.
2) NRco is a limited partner of a partnership ("P").
3) NRco's interest in P is "taxable Canadian property" as defined in subsection 248(1) of the Act.
4) NRco is deemed by paragraph 40(3.1)(a) of the Act to have a gain (the "Deemed Gain") in respect of its interest in P.

You request our view whether in the above circumstances NRco would be considered to have disposed of a taxable Canadian property for the purposes of paragraph 2(3)(c) and clause 150(1)(a)(i)(D) of the Act.

Our Comments

This technical interpretation provides general comments about the provisions of the Income Tax Act (the "Act") and related legislation (where referenced). It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination. The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC 70-6R5, Advance Income Tax Rulings.

In the above hypothetical scenario, paragraph 40(3.1)(b) deems NRco to have disposed of the interest in P only for the purpose of section 110.6 of the Act. It is our view that NRCo would not be considered to have disposed of its interest in P for any other purpose including for the purpose of paragraph 2(3)(c) or clause 150(1)(a)(i)(D) of the Act. Accordingly, if the provisions of 2(3) do not apply for any other reason for the relevant taxation year, NRco would not be taxable in Canada on the Deemed Gain. However, NRco would be considered to have a taxable capital gain for the purposes of clause 150(1)(a)(i)(C) of the Act and would therefore be required to file an income tax return in Canada. In this respect, NRco would not have had an "excluded disposition", within the meaning of subsection 150(5) of the Act, of its interest in P because it did not dispose of its interest in P.

It is our view that non-taxation of the Deemed Gain in the above circumstances is contrary to policy and we have therefore brought the issue to the attention of the Department of Finance. Should it be determined that NRco carried out an "avoidance transaction" within the meaning of that term in subsection 245(3) of the Act, the Canada Revenue Agency would seek to apply the provisions of the General Anti-Avoidance Rule to tax the Deemed Gain.

We trust that this is the information you require.

Yours truly,

Olli Laurikainen CPA, CA
International Section II
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch