31 January 1992 Income Tax Severed Letter 9131325 - Partnerships and the Canada-U.S. Income Tax Convention

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Subject: PARTNERSHIPS/TAX TREATIES (4093-U5-100-10) Section(s): ART 10, ART 13]

913132
J. Wilson
(613)957-2123

XXX

Attention: XXX

January 31, 1992

Dear Sirs:

Re: Canada-U.S. Income Tax Convention (1980) (the "Treaty") and Partnerships

This is in response to your letter dated November 6, 1991 wherein you requested the Department's interpretation of certain treaty provisions under a hypothetical set of facts. The facts you have presented are as follows:

• 1. A partnership consists of two U.S. resident corporations.
• 2. Each corporation has an equal interest in the partnership.
• 3. The partnership property includes the total share capital of a company resident in Canada.
• 4. The partnership has no permanent establishment in Canada.

You wish to know which withholding rate set out in paragraph 2 of Article X of the Treaty will apply to dividends paid by the Canadian company to the partnership and whether a gain on the sale of shares of the Canadian company would be exempted from taxation in Canada under Article XIII of the Treaty provided the gain is a gain described in paragraph 4 that Article.

It is our view that the dividends paid to the partnership by the Canadian corporation would be subject to Canadian withholding tax at the reduced rate of 15% set out in paragraph 2(b) of Article X of the Treaty. The U.S. resident corporations would not qualify for the reduced rate of 10% set out in paragraph 2(a) of Article X of the Treaty because under partnership law an individual partner does not have a fractional right in any particular partnership property which he alone could transfer or assign. In our view the concept of "partnership property" prevents a partner from treating shares of the Canadian company held by the partnership as its own. Accordingly, while the two U.S. corporations would collectively own all the shares of the Canadian corporation, it is our view that neither U.S. corporation could point to a specific percentage of the shares held by the partnership for the purposes of paragraph 2(a) of Article X of the Treaty. In addition, the partnership as a recipient of the dividends would not qualify for the reduced rate under paragraph 2(a) of Article X of the Treaty (ie. in the event the partnership was a "resident of a Contracting State") because neither it nor the partners collectively qualify as a "company" as required by that provision.

In our view any gain or loss from the disposition of the shares in the Canadian corporation by the partnership would be flowed through to the U.S. partners. Since the partners have collectively alienated the shares, each would be an "alienator" for the purposes of paragraph 4 of Article XIII of the Treaty. Accordingly, provided that the gain is a gain described in that paragraph, it would be taxable only in the United States.

We trust the above is the information you require.

Yours truly,

for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch