1 June 1992 Income Tax Severed Letter 9131695 - Non-resident owned investment corporations — partnership interests

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: NRO'S (PARTNERSHIP INTERESTS) (HAA 6666-1) SECTION: 133(8)(d)

913169
J. Wilson
(613)957-2123

June 1, 1992

Dear Sirs:

Re: Non-Resident Owned Investment Corporation ("NRO")

We are writing in reply to your letter of November 14, 1991 whereby you requested the Department's interpretation of paragraph 133(8)(d) of the Income Tax Act ("Act") under a hypothetical set of facts. The facts you have presented are as follows:

• 1. A non-resident of Canada owns all of the issued and outstanding shares of a corporation incorporated in Canada ("Canco").
• 2. Canco invests in a number of partnerships, all constituted under the laws of Canada, that own debt (ie. through either the acquisition thereof or the making of loans) and equity securities.
• 3. The nature of the partnerships' income will depend, in part, on whether the partnerships hold these securities on capital or income account. The partnerships will earn interest and dividends and, if the partnerships hold the securities on capital account, capital gains. If the partnerships hold the securities on income account, gains on disposition will be derived from the trading by the partnerships in such securities.
• 4. Where Canco has invested in a limited partnership, in order to retain its status as a limited partner, Canco could not, and would not be permitted to under the partnership agreements, take part in the control or management of the business of the partnerships or exercise any power in connection therewith, have any authority or power to act for the partnerships or hold itself out as having the power or authority to act for or bind the partnerships. Thus, with respect to its investments in such partnerships, the only activity of Canco would relate to the holding of its partnership interests.

Our Comments

In our opinion, Canco's share of the partnership's income that is attributable to interest (ie. whether through the acquisition of debt obligations or the making of loans) and dividend revenues would be considered income "derived from ..... interest or dividends" for the purpose of clause 133(8)(d)(ii)(C) of the Act. Canco's share of the partnership's taxable capital gains would be considered income "derived from.....the disposition of capital property" for the purpose of clause 133(8)(d)(ii)(E) of the Act. Canco's share of the partnership's business income that is attributable to income from the making of loans or from the trading or dealing in bonds, shares, debentures and other similar property would be considered income derived from such sources for the purpose of clauses 133(8)(d)(ii)(A) and (B) of the Act.

Interpretation Bulletin IT-400 gives the Department's position regarding the determination of "principal business" (ie. with respect to "principal-business corporations") where a taxpayer has invested in a partnership. Paragraph 12 thereof states that where a corporation is a member of a partnership, for purposes of determining the corporations principal business, the business operations carried on by the partnership are regarded as being carried on by the corporation directly, to the extent of the corporation's interest in the partnership.

The Department's position on this matter applies equally to limited partnerships. For example, while only a general partner transacts the business of the limited partnership, this appears no different, as regards the relationship between partners, than an active general partner transacting the partnership business on behalf of a dormant general partner. It is our understanding that in a limited partnership, the general partner is in fact the agent of the limited partners and hence, although a limited partner may not himself actively participate in the business of the partnership, he is necessarily carrying on the business through his general partner.

The question of when income from the sources described in subparagraph 133(8)(d)(iv), whether carried on directly or through a partnership, becomes a principal business is one of fact to be determined by an examination and comparison of all the facts (see Interpretation Bulletin IT-290 pertaining to the meaning of "principal business" for purposes of subparagraph 133(8)(d)(iv)). We, of course, have not been provided all the necessary facts to make such a determination. However, it is our view that an investment in a limited partnership that carries on the business of the making of loans or the trading or dealing in bonds, shares, debentures, mortgages, hypothecs, bills, notes or other similar property or any interest therein could potentially cause a corporation to lose its NRO status by virtue of subparagraph 133(8)(d)(iv).

We trust the forgoing is satisfactory.

Yours truly,

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