10 November 1994 External T.I. 9415985 - 219(1)(k) BE USED WHERE SHRES AR TO BE OWNED U.S.PART.

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.

Principales Questions:

est-ce que 212(1)k) peut etre utiliser lorsque les actions sont détenues par une société en noms collectif américaine

Position Adoptée:

non

Raisons POUR POSITION ADOPTÉE:

libellé de 2112(1)k)

5-941598
XXXXXXXXXX Carole Pronovost
(613) 957-8953

Attention: XXXXXXXXXX

November 10, 1994

Dear Sirs:

Re: Application of paragraph 219(1)(k) of the Income Tax Act (the "Act") to a hypothetical situation

This is in reply to your letter dated June 15, 1994 wherein you requested our view on the application of paragraph 219(1)(k) of the Act to a hypothetical situation. You summarized the hypothetical situation as follows:

Hypothetical situation submitted

Substantially all of a partnership's business is carried on in the U.S.; however, it also carries on business in Canada through a branch. The U.S. partnership has two partners: one, a U.S. corporation ("Usco"), has a 98% interest in the partnership and the other, a U.S. individual, owns the remaining 2%. The partnership transfers all branch assets to a corporation resident in Canada ("Canco") which is a taxable canadian corporation, as defined in subsection 89(1) of the Act, and files an election under subsection 85(1) to ensure that no gain is triggered on this transfer. Then, the partnership will be the sole shareholder of Canco. The corporate partner will, in filing its return for the year of transfer, be required to include the prior year's investment allowance in the branch tax base by virtue of paragraph 219(1)(b) of the Act and would not be allowed a deduction under paragraph 219(1)(h) since, as a result of the transfer to Canco, the U.S. corporation would not be carrying on business in Canada at the end of the year.

Questions

1-Can paragraph 219(1)(k) be used to defer the secondary level tax where the shares are to be owned by a U.S. partnership.

2-Would our views differ if the partnership agreement were amended such that the corporate partner were entitled to all future dividends and proceeds from disposing of the shares of Canco.

Our comments

In our view, in order for a corporation to qualify for a deduction pursuant of 219(1)(k) of the Act, the corporation must dispose of the qualified property to a Canadian corporation that is, immediately after the disposition, a subsidiary wholly-owned corporation as defined in subsection 248(1) of the Act, i.e. a corporation all the issued share capital of which (except directors' qualifying shares) must be owned by the corporation to which it is subsidiary. Consequently, it is our view that a paragraph 219(1)(k) deduction is not available where the shares of the Canadian corporation are owned by a U.S. partnership. This view would not differ if the partnership agreement were amended to stipulate that the corporate partner were entitled to all future dividends and proceeds from disposing of the shares of Canco.

We regret that our answer could not be more favourable.

Yours truly,

for Director
Reorganization and Foreign Division
Rulings Directorate
Policy and Legislation Branch