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.
July 14, 1994
Saskatoon District Office Rulings Directorate
G. Middleton
(613) 957-8953
Attention: Patrick Saint-Pierre
Appeals Section
940737
Non-Resident Partner's Share of Income and Losses From a Partnership
As discussed in our recent telephone conversation, we think it is best to refer the attached correspondence from XXXXXXXXXX to you since the questions raised involve actual files which you are presently dealing with.
As a result of our numerous telephone conversations with XXXXXXXXXX we would like to provide you with some of our comments in connection with the questions raised by XXXXXXXXXX.
Our understanding of the facts are:
-An individual was a limited partner in a limited partnership which owned a MURB property in Canada.
-The individual emigrated from Canada several years ago and became a non-resident of Canada.
-The limited partnership reported losses from the MURB property in most of the years in question and allocated a portion of the losses to the limited partner both before and after he became a non-resident of Canada.
-The partnership claimed CCA in each of the years which was included in the losses allocated to the partners.
-The MURB property may be disposed which may trigger recapture of capital cost allowance ("CCA").
The taxpayer asked the following questions:
1.Whether the partnership income from the MURB property could be income from property rather than income from a business.
2.Whether the non-resident partner's share of recapture of CCA, in respect of the period before and after his emigration, would be required to be included in his income under section 115.
3.Whether an election under section 216 of the Act could be filed by one partner.
With respect to the first question, it is a question of fact as to whether the partnership is carrying on business with respect to the MURB property or whether the partnership is merely earning income from property. Such a determination can only be made after all of the facts, agreements, arrangements, etc. have been obtained and reviewed.
Business Income of Partnership
If the partnership is determined to be carrying on business in Canada, the non-resident partner's share of the partnership losses may become non-capital losses, as determined under paragraph 111(8)(c) of the Act, if the share of partnership losses exceeds the non-resident's other sources of income under section 115 in a particular year. Any such non-capital losses may be carried forward to subsequent years to offset partnership income allocated to him (including recapture of CCA which is included in his income under subparagraph 115(1)(a)(ii) or (iii.2) of the Act), or to offset any other income which is included in his income under section 115.
On the presumption that the non-resident partner is considered to be carrying on business through a permanent establishment in Canada, there would be no Part XIII tax liability in respect of the rent paid to the partnership by virtue of section 805 of the Income Tax Regulations.
With respect to the second question above, the entire amount of a non-resident's share of recapture of CCA allocated to him by the partnership would be required to be included in income under section 115 of the Act.
Property Income of the Partnership
On the other hand, if it is determined that the partnership is earning property income from the MURB property rather than business income, the tenants in the MURB would be required to withhold Part XIII tax at rate of 25% on the gross rental payments made to the partnership from the point of time when the partnership ceases to be a Canadian partnership (e.g. once a partner becomes a non-resident of Canada) in accordance with paragraph 212(13.1)(b) of the Act.
With respect to the third question above, an election under section 216 of the Act can be made by only one partner to reduce or eliminate the partner's portion of the Part XIII tax liability. If the non-resident partner, in the circumstances described above, makes an election under section 216 to pay tax under Part I instead of under Part XIII on the property income (property losses) of the partnership allocated to him in a year as if that was his only income for the year, the Part XIII tax liability may be reduced for that year. It should be noted that a non-resident's share of such a partnership loss on a section 216 election is not a non-capital loss and it cannot be applied against any other source of income under Part I or Part XIII in the current year or any other year.
With respect to the second question above, if the partnership disposes of the MURB property in a subsequent year and allocates income to a non-resident partner which includes recapture of CCA, the non-resident partner may be required to file a separate return pursuant to subsection 216(5) of the Act to report all, or a portion of, his share of the partnership income (and recapture of CCA). Any portion of the recaptured CCA which is not included in the partner's income on the section 216(5) return would be required to be included in his income under subparagraph 115(1)(a)(iii.2) of the Act on a different Part I tax return. In general, the amount of recaptured CCA reported under this subparagraph would relate to the partner's share of the CCA claimed by the partnership in each year before the partner became a non-resident and in each year in which he did not make an election under subsection 216(1) of the Act.
If the partnership is determined to have property income, if the tenants have not withheld the required amount of Part XIII tax as described above and if the non-resident partner has not made a section 216 election (which may be the case), the entire amount of recapture allocated to the non-resident partner would be included in his income pursuant to subparagraph 115(1)(a)(iii.2) of the Act. You may want to discuss this result with the International Tax Programs Directorate to see if there is any administrative relief.
Should you require any further assistance in this matter, we would be pleased to provide it. We are also enclosing a copy of our response to XXXXXXXXXX dated July 14, 1994.
for Director
Reorganizations and Foreign Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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