14 September 1993 Income Tax Severed Letter 9313615 - Tax a Partner of a Foreign 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.

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.

                                           931361
XXXXXXXXXX                                 K. B. Harding
                                           (613) 957-2111

September 14, 1993

Dear Sirs:

Re: Canada-Egypt Income Tax Convention (the "Convention")

This is in reply to your letter which was faxed to Revenue Canada on May 10, 1993 wherein you requested our opinion concerning the taxability of income earned by a Canadian partner as a member of an Egyptian partnership which carries on business only in Egypt.

You indicated that paragraph 1 of Article 7 of the Convention provides that the profits of an Egyptian enterprise shall be taxable only in Egypt unless the enterprise carries on business in Canada through a permanent establishment situated therein.

You have been advised that since Canadian residents are taxed on their world income that you, XXXXXXXXXX carrying on an active business only in Egypt, will be taxable on your XXXXXXXXXX% share of the profits in the limited partnership. It is your view that paragraph 1 of Article 7 of the Convention will take precedence over the Income Tax Act and prevent Canada from taxing the income of a partnership in such a situation.

Paragraph 6.2 of the Income Tax Conventions Interpretation Act (the "ITCIA") was enacted to clarify that Canada maintains its right to tax the Canadian partners on their share of income of a partnership which may be considered a resident or enterprise of the other country under a tax convention or agreement. The ITCIA, a copy of which is attached, provides that:

          Notwithstanding the provisions of a convention
          between Canada and another state or the Act giving
          it the force of law in Canada, it is hereby
          declared that the law of Canada is that, for the
          purposes of the application of the convention and
          Income Tax Act to a person who is a resident of
          Canada, a partnership of which that person is a
          member is neither a resident nor an enterprise of
          that other state.

When paragraph 6.2 of the ITCIA was introduced in Parliament the Technical Notes, a copy of which is also attached, provides that:

The new section is consequential on the decision of the United Kingdom Court of Appeal in the case of the Queen v. Padmore. In that decision, it was held that a resident partner's share of the income of a partnership managed in another country may be considered to be the income of a resident of that other country for purposes of a tax treaty.

New section 6.2 is intended to preclude the application in Canada of the reasoning developed in the case. It clarifies that a partner's share of the income of the partnership is subject to the Income Tax Act regardless of whether the partnership may be considered to be a resident of another country under a tax treaty concluded by Canada.

We trust the above provides an adequate explanation of the reason why Canada continues to have the right to tax the income of a Canadian partner of an Egyptian enterprise which carries on business only in Egypt.

Yours truly,

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