6 April 1993 External T.I. 9301815 F - HA7988 Foreign Tax Credit - Member of Partnership

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.

XXXXXXXXXX 

Attention:  XXXXXXXXXX

Dear Sir:

RE:  Foreign Tax Credit-Member of Partnership

This is further to your letter January 15, 1993 concerning the following hypothetical situation.

A.      A Canadian partnership holds an interest in a U.S. partnership. The Canadian partnership holds 99.9% of the U.S. partnership and the U.S. partnership is its only significant asset.

B.      The U.S. partnership holds real estate, some of which would be rental, some of which would be resold at a profit.

C.      Under U.S. tax law, the U.S. partnership is taxed as a corporation.

D.      The U.S. partnership pays U.S. Corporate tax.

E.      The U.S. partnership then distributes the after-tax profits to its Canadian partners. The U.S. partnership withholds U.S. taxes on the distributions since they are considered to be dividends paid by a corporation for U.S. Income Tax purposes.

You raised the following two questions:

1)     Is the Canadian partnership entitled to allocate to its partners the U.S. income tax paid by the U.S. partnership so that the Canadian partners are entitled to a foreign tax credit on their Canadian Income Tax returns.

2)     Is the Canadian partnership entitled to allocate to its partners the U.S. withholding tax paid by the U.S. partnership on distributions to its Canadian partnership, so that the Canadian partners are entitled to a foreign tax credit on their Canadian Income Tax returns.

Our Comments:

With respect to your first question, a Canadian partner is required to include his proportionate share of the U.S. income in his income for the year. The business and non-business income taxes paid by the partnership are allocated on a pro rata basis to each of the partners for purposes of section 126 of the Act. Our position on this matter is outlined in Interpretation Bulletin 183.

The second question raises the matter of whether withholding taxes paid on the distribution of after-tax profits from a U.S. Partnership which is taxed as a corporation, to the Canadian partners is included in the definition of "business-income tax" or "non-business income tax" for the purposes of calculating the foreign tax credit. In this regard we draw your attention to paragraphs 6 - 21 of Interpretation Bulletin- 270R2.

In our opinion taxes withheld on the distribution of profits from such a U.S. partnership would qualify as "business income tax" pursuant to paragraph 126(7)(a) where the distribution of profits is considered to be "business income" as opposed to "income from property". Where the income is determined to be "income from property, withholding taxes on the distribution of profits would be considered as being "non-business income tax" pursuant to paragraph 126(7)(c). The question of whether profits from real estate constitutes business income or income from property is a question of fact. The department's view on the nature of income from rentals is set out in Interpretation Bulletin It-434R.

Yours truly,

for DirectorReorganizations and Foreign DivisionRulings DirectorateLegislative and Intergovernmental Affairs Branch