6 November 2013 External T.I. 2013-0485691E5 - Connected Corporation and Part IV Tax

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: 1. Should the shares of a payer corporation held through a partnership be considered when determining whether or not the payer corporation is connected with the recipient corporation for the purposes of computing the Part IV tax liability of the recipient corporation? 2. Where the payer corporation is connected with the recipient corporation, should the taxable dividends received through the partnership be included in determining the Part IV tax liability?

Position: 1 - Yes. 2 - Yes.

Reasons: For the purposes of Part IV, subsection 186(6) provides a deeming rule such that each member of the partnership is deemed to have received its proportionate share of the taxable dividends received by the partnership, and further, each member is deemed to own a proportion of the shares owned by the partnership based on that member's share of all dividends received on such shares by the partnership.

XXXXXXXXXX
2013-048569
Jennifer Ouimet

November 6, 2013

Dear XXXXXXXXXX:

Subject: Connected Corporation and Part IV Tax

This is in response to your email of April 17, 2013, requesting our views regarding the application of the Part IV tax rules in a situation involving a limited partnership.

In your email, you provide a scenario where the recipient corporation owns 20% of the shares of a payer corporation and is thus connected with the payer corporation under paragraph 186(4)(b) of the Income Tax Act. In addition, the recipient corporation owns 12.5% of the total units of a limited partnership which owns 20% of the shares of the payer corporation. Specifically, you ask whether the taxable dividends received through the limited partnership are subject to Part IV tax.

Written confirmation of the tax consequences that apply to a particular fact situation is given by this Directorate only in the context of an advanced income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other Canada Revenue Agency (CRA) publications can be accessed on the CRA website at www.cra-arc.gc.ca. However, we are prepared to provide the following general comments, which may be of assistance.

Our Comments

In general, pursuant to paragraph 186(4)(a) of the Act, a payer corporation is connected with a recipient corporation at a particular time if the payer corporation is controlled (within the meaning provided under subsection 186(2) of the Act) by the recipient corporation. In addition, under paragraph 186(4)(b) of the Act, a payer corporation is connected with a recipient corporation if the recipient corporation owns at that time: (i) more than 10% of the issued share capital (having full voting rights under all circumstances) of the payer corporation, and (ii) shares of the capital stock of the payer corporation having a fair market value of more than 10% of the fair market value of all the issued shares of the capital stock of the payer corporation.

Subsection 186(6) of the Act contains deeming rules that are relevant where a recipient corporation is a member of a partnership. Paragraph 15 of Interpretation Bulletin IT-269R4, Part IV Tax on Taxable Dividends Received by a Private Corporation or a Subject Corporation, explains this deeming provision as follows:

"Where taxable dividends are received by a partnership, paragraph 186(6)(a) provides that, for the purpose of computing Part IV tax liability, each member of the partnership is deemed to have received its proportionate share of such dividends in the member's taxation year in which the fiscal period of the partnership ends. Paragraph 186(6)(b) provides that the member is considered to own a proportion of the shares owned by the partnership based on the member's share of all dividends received on such shares by the partnership in its fiscal period. This provision is relevant in determining whether a payer corporation is connected to a recipient corporation that is a member of a partnership."

Accordingly, in the situation you described, the taxable dividends received through the limited partnership should be included in determining the Part IV tax liability of the recipient corporation. In general, under paragraph 186(1)(b) of the Act, Part IV tax applies to any "assessable dividend", as defined in subsection 186(3) of the Act, received by a recipient corporation in the year from a connected payer corporation and is computed with reference to the payer corporation's dividend refund for its taxation year in which it paid the dividend.

We trust that these comments will be of assistance.

Yours truly,

Chrys Tzortzis, CPA, CA
For Director
Partnerships Section
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch