30 April 1994 Ministerial Letter 9408098 - Tax shelter foreign property 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.

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.

DRAFT

Ms Whelan or her staff should respond to the congratulations on her appointment and close the letter as she wishes. The following is the response to the tax issues raised by XXXXXXXXXX.

You have asked that I comment on the brochure included with your letter concerning an investment in a limited partnership that apparently constructs and operates condominiums in Florida. I have asked senior officials at Revenue Canada, Customs, Excise and Taxation to respond to your concerns. They have provided me with the following comments:

There are no special rules in the Income Tax Act (the "Act") that provide a direct incentive for investment in a partnership holding foreign property. The normal tax provisions for limited partnerships and for the calculation of partnership income apply. In order for a Canadian taxpayer to be entitled to any losses or deductions from an investment in a limited partnership unit, the partnership must be able to demonstrate that it carries on a business with a reasonable expectation of profit. Consequently, the partnership should be capable, over the years, of earning income that is taxable to the Canadian partners. An arrangement that merely provides free use of the property to the partners or operates with no possibility of generating profits would not qualify as a business regardless of whether the property is located in Canada or a foreign country. A partner, in such a partnership, would be prohibited from claiming losses for tax purposes.

The Act places a number of restrictions on the amount of losses limited partners can deduct. Many factors such as the amount of the investor's original investment, the partner's previous income or losses from the partnership, the amounts of any revenue guarantees and the amount of any non-arm's length loans, are taken into consideration. A new provision introduced in the February 22, 1994 Federal Budget will include a capital gain in a limited partner's income in most situations where a limited partner is allocated losses in excess of the partner's investment which would seem to be the case here.

If the partnership is in business and owns depreciable property such as a condominium, the capital cost allowance provisions provide an annual deduction that may be claimed against revenue. The Act also includes in income a recapture of any capital cost allowance claimed in previous years if the property is sold for an amount greater than its original cost reduced by the capital cost allowance claimed. If the property is sold for more than its original cost, as suggested in the brochure, it will be subject to capital gains as well as the recapture of any capital cost allowance claimed. All of these provisions apply to Canadian partners whether the partnership property is located in Canada or in a foreign country. Residents of Canada are taxable on their world income. Consequently, it is usually appropriate that the same rules for computing income and losses should apply to businesses carried on by Canadians in foreign countries.

The tax deductions, if any, which are available in a specific case will depend on the investor's personal tax situation and the manner in which the limited partnership operates. Consequently, most persons considering such an investment usually obtain independent tax advice on whether they would qualify for tax benefits such as those set out in the brochure.

Cal Brown
957-2131
April 30, 1994
940809