26 November 1992 Income Tax Severed Letter 9235140 - Foreign Affiliates and Partnerships

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.

TAX EXECUTIVE INSTITUTE CONFERENCE

DECEMBER 1992

QUESTION 19

FOREIGN AFFILIATES AND PARTNERSHIPS

• At the 1988 Canadian Tax Foundation Round Table (question 11) the Department took the view that a foreign corporation that is held by a partnership would not qualify as a foreign affiliate of any corporate partner.
• In view of the approach adopted by the Department with regard to transfers from a partnership to the partners as a preliminary step to a butterfly transaction (see Ted Harris, "An Update of Revenue Canada's Approach to the Butterfly Reorganization", 1991 CR 14:1-15, at 14:10), is the Department prepared to change its opinion so as to consider each partner to be the owner of shares of the foreign affiliate for purposes of paragraph 95(1)(d).

DEPARTMENT'S POSITION

• In our view the issues discussed above are not the same. As was stated in our Round Table response, for the purposes of computing the income of the partners (including the application of the definition in paragraph 95(1)(d)), the partnership (not the partners) owns the shares of the foreign corporation. For these purposes the foreign corporation is a foreign affiliate of the partnership, not of the corporate partners.
• This position is consistent with the definition of "excluded property" in paragraph 95(1)(a.1) in that it was considered necessary to enact, for purposes of paragraphs 95(1)(d) and 95(4)(a) as they apply to paragraph 95(1)(a.1), the deeming provisions in subparagraphs 95(1)(a.1)(iv) and (v) in order that where a foreign affiliate had an interest in a partnership and the shares of the capital stock of a corporation in which all or substantially the assets were used in an active business were partnership property such shares could be considered excluded property.
• When determining whether property has become property of the particular corporation for purposes of paragraph 55(3)(b), the rules in subsection 96(1) are not relevant and the common law view of the partnership is appropriate for this purpose. In this regard the partner would be considered to have an undivided interest in the partnership property based on his proportionate interest in the partnership. The dissolution of the partnership with the partner receiving his undivided proportionate interest in all of the partnership property would therefore not result in an acquisition of property for purposes of paragraph 55(3)(b).

Prepared by: Tim Kuss
Date: November 26, 1992
Control #: 923514