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.
SUMMARY: Foreign affiliates - investment business—ITA-95—1997 Tax Executives Institute Conference - Question IX - Whether the activities of a foreign affiliate partner can influence the characterization of its income derived from a 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 Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
PRINCIPAL ISSUES: Whether the activities of a foreign affiliate partner can influence the characterization of its income derived from a partnership.
POSITION: The income of a partner from a partnership is characterized at the partnership level. The activities of partner or its purpose for making the investment in the partnership interest has no impact on this characterization.
REASONS: Paragraph 96(1)(a) provides that the income of partnership is to be computed as though the partnership were a separate person. Paragraph 96(1)(f) provides that it retains its character as such in the hand of partner. The partnership business is separate from that of the partners. DRAFT
1997 Tax Executives Institute Conference
Question IX
Foreign Affiliates - Investment Business and Limited Partnership
As part of its ordinary business activities, a foreign affiliate that is carrying on business (the “Banking Business”) as a regulated foreign bank, may acquire a limited partnership interest in a limited partnership which carries on a business the principal purpose of which is to earn income from property. Where such a limited partnership interest is held by a foreign affiliate in the course of an active business, would the income derived by the foreign affiliate from its limited partnership interest qualify as active business income.
Department's Position
This question turns on whether the business carried on by the partnership is a business that is separate from the Banking Business carried on directly by the affiliate. In our view, a business carried on by a partner through a partnership is always separate and distinct from any business that the partner may carry on directly.
In this case the business of the limited partnership satisfies the purpose test in the definition of “investment business” in subsection 95(1). Moreover, as the foreign affiliate has only a limited partnership interest in the partnership, the business of the partnership will not satisfy the condition for exclusion in paragraph (b) of the definition of “investment business” in subsection 95(1) regardless of the number of full-time employees employed in the active conduct of partnership business. Therefore the income derived by the foreign affiliate from the limited partnership will be income from an “investment business” to the foreign affiliate.
Prepared by Olli Laurikainen
November 21, 1997
File: 972976
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