18 June 2014 External T.I. 2011-0421481E5 - 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 a non-resident can be considered to have disposed of taxable Canadian property when it is deemed to have a gain under the provisions of paragraph 40(3.1)(a) of the Act.

Position: No.

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

XXXXXXXXXX
2011-042148

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 116(6.1) of the Income Tax Act (the "Act") in the context of the following hypothetical scenario.

1. NRco is a non-resident corporation resident in Germany.
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.
5. The Deemed Gain is exempt from tax in Canada under paragraph 6 of Article 13 of the Canada-Germany Tax Agreement. As a result NRco's interest in P is "treaty-protected property" as defined in subsection 248(1) of the Act.

You request our view whether in the above circumstances NRco would be considered to have disposed of a taxable Canadian property to another person for the purposes of subsection 116(6.1) of the Act such that the property would qualify as "treaty-exempt property" of NRco for the purposes of subsection 116(6) 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. In our view the interest in P is not considered to have been disposed of for any other purpose including subsections 116(6.1) and 116(3) of the Act. It is noteworthy that NRco is also not considered to have disposed of its interest in P for the purpose of paragraph 2(3)(c) of the Act. Accordingly, if the provisions of 2(3) do not apply for any other reason in respect of the relevant taxation year, NRco would not be taxable in Canada on the Deemed Gain even if it had not been treaty-protected property. 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 could not have had an "excluded disposition" as defined in subsection 150(5) of the Act, because it did not dispose of the interest in P.

It is our view that the non-application of subsection 2(3) and section 116 in the context of a Deemed Gain realized by a non-resident taxpayer is contrary to policy and we have therefore brought the issue to the attention of the Department of Finance. Should it be determined that a taxpayer has carried out an "avoidance transaction" within the meaning of that term in subsection 245(3) of the Act, to avoid taxation of a Deemed Gain that would otherwise be taxable in Canada, the Canada Revenue Agency would seek to apply the provisions of the General Anti-Avoidance Rule to tax such 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