2013 Ruling 2012-0444431R3 - Taxable Canadian Property

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 investor's partnership interest in the foreign partnership will be taxable Canadian property

Position: Yes.

Reasons: The interest in the foreign partnership will derive, indirectly, all of its value from real property situated in Canada

XXXXXXXXXX
2012-044443

XXXXXXXXXX, 2013

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in response to your XXXXXXXXXX request, for an advance income tax ruling on behalf of the non-resident investors that will invest in a foreign partnership that will then invest, indirectly, in the above partnership.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions described in the documents submitted with your advance income tax ruling request do not form part of the facts and proposed transactions on which these rulings are based and any reference to these documents is provided solely for the convenience of the reader.

Definitions

In this letter, the following terms have the meaning specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supplement) as amended to the date of this advance income tax ruling;

(b) "Affiliate" has the meaning assigned by the Business Corporations Act (XXXXXXXXXX): XXXXXXXXXX;

(c) "Canadian General Partner" means XXXXXXXXXX;

(d) "Canadian Limited Partner" means XXXXXXXXXX;

(e) "Canadian Partnership" means XXXXXXXXXX;

(f) "capital property" has the meaning assigned by section 54 of the Act;

(g) "CRA" means the Canada Revenue Agency;

(h) "Foreign Country 1" means XXXXXXXXXX;

(i) "Foreign Country 2" means XXXXXXXXXX;

(j) "Foreign Country 3" means XXXXXXXXXX;

(k) "Foreign Country 4" means XXXXXXXXXX;

(l) "Foreign Country 5" means XXXXXXXXXX;

(m) "Foreign Country 6" means XXXXXXXXXX;

(n) "Foreign Country 7" means XXXXXXXXXX;

(o) "Foreign Exchange" means the XXXXXXXXXX;

(p) "Foreign Jurisdiction" means XXXXXXXXXX;

(q) "Foreign Parent" means a XXXXXXXXXX in Foreign Country 6;

(r) "Foreign Parent Loans" means the loans to be made by the Foreign Partnership to Foreign Parent;

(s) "Foreign Partnership" means the limited partnership that will be formed pursuant to the laws of the Foreign Jurisdiction;

(t) "Foreign Subsidiary" means a XXXXXXXXXX in Foreign Country 6;

(u) "Foreign Subsidiary Loans" means the loans to be made by the Foreign Partnership to Foreign Subsidiary;

(v) "Investor" means any non-resident individual, partnership, corporation, trust, unincorporated organization, pension fund, government, government agency or political subdivision of a government that will become a limited partner of the Foreign Partnership;

(w) "Legislation" means the XXXXXXXXXX Partnerships Act (XXXXXXXXXX);

(x) "Management Agreement" means the management agreement to be entered into between the Canadian Partnership and the Manager;

(y) "Manager" means XXXXXXXXXX;

(z) "non-resident" has the meaning assigned by subsection 248(1) of the Act;

(aa) "Parent" means XXXXXXXXXX;

(bb) "Partnership Agreement" means the limited partnership agreement to be entered into by the Canadian General Partner and the Canadian Limited Partner;

(cc) "person" has the meaning assigned by subsection 248(1) of the Act;

(dd) "Province A" means XXXXXXXXXX;

(ee) "Province B" means XXXXXXXXXX;

(ff) "Real Property" means, at any time, a direct or indirect interest in any of:

XXXXXXXXXX

(gg) "Subsidiary" means XXXXXXXXXX;

(hh) "taxable Canadian property ("TCP")" has the meaning assigned by subsection 248(1) of the Act;

(ii) "Treaty 1" means the XXXXXXXXXX;

(jj) "Treaty 2" means the XXXXXXXXXX;

(kk) "Treaty 3" means the XXXXXXXXXX;

(ll) "Treaty 4" means the XXXXXXXXXX;

(mm) "Treaty 5" means the XXXXXXXXXX; and

(nn) "treaty-protected property" has the meaning assigned by subsection 248(1) of the Act.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Facts

1. Parent is a non-resident public limited company whose shares are listed on the Foreign Exchange. Parent carries on business as a XXXXXXXXXX company.

2. Subsidiary is a company registered in Foreign Country 7 and is authorized to carry on business in, and is regulated by the XXXXXXXXXX of, Foreign Country 4. Subsidiary is a XXXXXXXXXX. All of the issued and outstanding shares of Subsidiary are owned by Parent.

3. The Canadian General Partner is a corporation duly constituted under the laws of Province A and is an Affiliate of Parent. The Canadian Limited Partner is an individual resident in Canada for purposes of the Act.

4. The Manager is a corporation duly constituted under the laws of Province B and is an Affiliate of Parent. The Manager currently manages a XXXXXXXXXX located in Canada.

5. To the best of your knowledge and that of the Canadian General Partner and the Canadian Limited Partner, none of the proposed transactions involved in this ruling letter:

(i) is in an earlier return of the Canadian General Partner or the Canadian Limited Partner or any person related to the Canadian General Partner or the Canadian Limited Partner,

(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Canadian General Partner or the Canadian Limited Partner or any person related to the Canadian General Partner or the Canadian Limited Partner,

(iii) is under objection by the Canadian General Partner or the Canadian Limited Partner or any person related to the Canadian General Partner or the Canadian Limited Partner,

(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or

(v) is the subject of any advance income tax ruling previously issued to the Canadian General Partner or the Canadian Limited Partner or any person related to the Canadian General Partner or the Canadian Limited Partner.

Proposed Transactions

6. The Canadian Partnership will be formed pursuant to the Legislation for the principal purpose of investing in Real Property in Canada. The Canadian General Partner and the Canadian Limited Partner will enter into the Partnership Agreement. The Partnership Agreement will include a provision appointing the Manager to be the operator and manager of the Canadian Partnership in accordance with the terms of the proposed Management Agreement. As the operator and manager of the Canadian Partnership, the Manager will receive management fees and performance fees for its services.

7. The following investment constraints will apply to the Manager: the fair market value of any single asset cannot exceed XXXXXXXXXX% of the fair market value of all of the assets of the Canadian Partnership; no more than XXXXXXXXXX% of the Canadian Partnership's XXXXXXXXXX income can be earned from a XXXXXXXXXX; no more than XXXXXXXXXX% of the assets of the Canadian Partnership can be invested in any single province; no more than XXXXXXXXXX% of the assets of the Canadian Partnership can be attributable to XXXXXXXXXX; no more than XXXXXXXXXX% of the assets of the Canadian Partnership can be attributable to XXXXXXXXXX; and no more than XXXXXXXXXX% of the assets of the Canadian Partnership can be attributable to XXXXXXXXXX.

8. The Foreign Partnership will be established pursuant to the laws of the Foreign Jurisdiction. Each Investor in the Foreign Partnership will be, and will have always been, non-resident. Each Investor will contribute cash to acquire their partnership interest in the Foreign Partnership. Each Investor will also provide non-interest bearing loans to the Foreign Partnership. Of the total amount contributed to the Foreign Partnership by an Investor, $XXXXXXXXXX will be contributed to acquire their partnership interest and the remainder will be contributed as non-interest bearing loans. Each Investor's liability for the liabilities of the Foreign Partnership will be limited to the amount of cash contributed to acquire their partnership interest and the amount of any non-interest bearing loans made to the Foreign Partnership by such Investor. Each Investor's interest in the Foreign Partnership will be capital property to the Investor.

9. The Foreign Partnership will form Foreign Parent pursuant to the laws of Foreign Country 6. The Foreign Partnership will use XXXXXXXXXX% of the cash it receives from each Investor to acquire all of the shares to be issued by Foreign Parent at the time of its incorporation. The Foreign Partnership will use XXXXXXXXXX% of the cash it receives from each Investor to make the Foreign Parent Loans to Foreign Parent. The Foreign Parent Loans will be a mixture of profit-participating loans and non-interest bearing loans.

10. Foreign Parent will form Foreign Subsidiary pursuant to the laws of Foreign Country 6. Foreign Parent will use all of the cash received from the Foreign Partnership to acquire all of the shares to be issued by Foreign Subsidiary at the time of its incorporation. The Foreign Partnership will use the remaining XXXXXXXXXX% of the cash it received from Investors to make the Foreign Subsidiary Loans to Foreign Subsidiary. The Foreign Subsidiary Loans will be interest bearing loans.

11. Foreign Subsidiary will use all of the cash that it received from Foreign Parent and the Foreign Partnership to acquire partnership interests in the Canadian Partnership.

12. The Canadian Partnership will use all of the cash it receives from Foreign Subsidiary to invest in a diversified portfolio of Real Property. Such Real Property will be TCP for purposes of the Act.

Purpose of the Proposed Transactions

13. The purpose of the proposed transactions is to provide a flexible and efficiently managed investment product for Investors looking to further diversify their investments by gaining access to Canadian XXXXXXXXXX.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. Each Investor's interest in the Foreign Partnership will be TCP.

B. Provided that:

(a) a particular Investor is a resident, within the meaning of Article XXXXXXXXXX of Treaty 1, of Foreign Country 1; and

(b) the only properties of the Foreign Partnership are the shares of Foreign Parent, the Foreign Parent Loans and the Foreign Subsidiary Loans;

the particular Investor's interest in the Foreign Partnership will be treaty-protected property.

C. Provided that:

(a) a particular Investor is a resident, within the meaning of Article XXXXXXXXXX of Treaty 2, of Foreign Country 2; and

(b) a particular Investor does not have a controlling interest, (a controlling interest being where the Investor and persons related to the Investor have an interest of 50% or more), in the Foreign Partnership;

the particular Investor's interest in the Foreign Partnership will be treaty-protected property.

D. Provided that a particular Investor is a resident, within the meaning of Article XXXXXXXXXX of Treaty 3, of Foreign Country 3, the particular Investor's interest in the Foreign Partnership will be a treaty-protected property.

E. Subject to paragraph XXXXXXXXXX of Article XXXXXXXXXX of Treaty 4 applying to a particular Investor that is a resident of Foreign Country 4, provided that:

(a) the Investor is a resident, within the meaning of Article XXXXXXXXXX of Treaty 4, of Foreign Country 4 immediately before such Investor disposes of an interest in the Foreign Partnership (the "Disposition Time"); and

(b) the Investor and any persons related to or connected with the Investor are entitled to an interest of less than 10% of the income and capital of the Foreign Partnership immediately before the Disposition Time;

the particular Investor's interest in the Foreign Partnership will be treaty-protected property at the Disposition Time.

F. Where a particular Investor is a resident, within the meaning of Article XXXXXXXXXX of Treaty 5, of Foreign Country 5, the particular Investor's interest in the Foreign Partnership will not be treaty-protected property.

These rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5, issued by the CRA on May 17, 2002 and are binding on the CRA provided that the first Investor acquires a partnership interest in the Foreign Partnership before XXXXXXXXXX.

Additional Comments

Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein. For greater certainty, nothing in this advance income tax ruling should be construed as implying that the CRA has agreed to or reviewed the determination of:

(a) the fair market value of any property described herein;

(b) whether an Investor is resident in a particular country;

(c) whether the result obtained by an Investor is not consistent with the scheme of Treaty 1, Treaty 2, Treaty 3 and/or Treaty 4 such that the proposed transactions would result in an abuse of a treaty to which subsection 245(2) of the Act would apply to re-determine the tax consequences to an Investor; or

(d) the mode of application of Article 13 of any convention, within the meaning of section 2 of the Income Tax Conventions Interpretation Act, not described in Rulings B through F.

The above-noted rulings are based on the Act and Treaty 1, Treaty 2, Treaty 3, Treaty 4 and Treaty 5 in their present form and do not take into account any proposed amendments to the Act or those treaties which, if enacted, could have an effect on the rulings provided herein.

Yours truly,

for Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch