23 March 1999 External T.I. 9906245 - PARTNERSHIP, PART XI, FOREIGN PROPERTY

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.

Principal Issues: Can an interest in a limited partnership that invests in Canada be foreign property?

Position: Yes

Reasons: Unless prescribed otherwise, an interest in a trust or a partnership is foreign property for purposes of the Act.

XXXXXXXXXX 990624
M. P. Sarazin
March 23, 1999

Dear Sir:

Re: Foreign Property and Registered Retirement Income Funds (“RRIFs”)

This is in reply to your letter dated February 26, 1999, wherein you requested general information regarding the application of Part XI of the Income Tax Act (the “Act”) to your RRIF.

You have already addressed your queries to your local Tax Services Office, to the Department of Finance, to the Rulings Directorate of Revenue Canada (several phone calls XXXXXXXXXX/Sarazin) and to the Prime Minister’s Office. You are now requesting written responses to the following questions.

Question #1

What is the purpose of Part XI of the Act?

Comments

The original intent of this legislation was that a substantial part of the funds held in registered accounts should be invested in Canada because of the tax concessions provided to such accounts and for the prosperity and development of Canada. Part XI of the Act may subject certain trusts and corporations governed by deferred income plans to a special tax where more than 20% of the cost amount of their property consists of foreign property. We note that, for purposes of Part XI of the Act, certain investments are treated as foreign property even though the investments may not necessarily derive their value from investments outside of Canada.

Question #2

How could an interest in a trust or a partnership that holds only Canadian property be considered foreign property for purposes of Part XI of the Act?

Comments

As stated in our response to #1 above, the purpose of Part XI is to restrict the amount that trusts and corporations governed by deferred income plans invest in foreign properties. The expression “foreign property” is defined in subsection 206(1) of the Act.

Paragraph (i) of the definition of “foreign property” in subsection 206(1) of the Act states very clearly that foreign property includes, except as prescribed by regulation, any interest in, or right to acquire an interest in, a trust (other than a registered investment which is discussed in #4 below) or a partnership. We note that the definition does not require a look through to the underlying property held by the trust or partnership in making this determination. You will find that the Department has confirmed this interpretation of the provision in paragraph 5 of the enclosed Interpretation Bulletin IT-412R2 titled Foreign property of registered plans.

Part L of the Income Tax Regulations (the “Regulations”) prescribes the interests in certain trusts and partnerships that are exempted from being foreign property for purposes of Part XI of the Act.

Subsection 5000(1) of the Regulations exempts an interest in a mutual fund trust, a pooled fund trust, a trust that would be a mutual fund trust if Part XLVIII of the Regulations were read without reference to paragraph 4801(b) thereof, or a resource property trust from being foreign property if the trust has not acquired any foreign property after June 30, 1971 or at no time in the month did the cost amount to the trust of all of its foreign property exceed 20% of the cost amount to it of all property held by it.

Subsection 5000(1.1) of the Regulations prescribes an interest of a limited partner in a small business investment limited partnership (within the meaning assigned by subsection 5102(1) of the Regulations), an interest in a small business investment trust (within the meaning assigned by subsection 5103(1) of the Regulations) and an interest of a limited partner in a qualified limited partnership (within the meaning assigned by subsection 5000(7) of the Regulations) not to be foreign property for purposes of Part XI of the Act.

Subsection 5000(1.2) of the Regulations prescribes property of a beneficiary that is an interest under a master trust (within the meaning assigned by paragraph 149(1)(o.4) of the Act) not to be foreign property for purposes of Part XI of the Act where no other property of the beneficiary is foreign property at that time or the master trust does not own any foreign property at that time.

We also note that, in its News Release 99-009 dated January 28, 1999 (you state that you have a copy of the News Release), the Department of Finance proposes to exclude units in designated Canadian-based limited partnerships from treatment as foreign property. In order to qualify as a designated limited partnership after 1997, the partnership will have to satisfy the conditions described in the News Release. The determination of whether a specific partnership will satisfy the conditions is a question of fact. We note that there is no list of specific partnerships that will be exempted as a result of the proposed amendments.

Question #3

Are the expressions “partnership” and “limited partnership” defined in the Act? Is there a provision in the Act that links the two expressions?

Comments

The enclosed Interpretation Bulletin IT-90 titled What is a partnership? provides the Department’s general views on partnerships. You will note that paragraph 1 of IT-90 states that the Act does not define a “partnership” but outlines the tax consequences if one exists. You will also note that paragraph 2 of IT-90 refers the reader to the relevant provincial law in making the determination of whether an arrangement may constitute a partnership (this would include a limited partnership) for purposes of the Act. Consequently, the determination of whether a particular arrangement would constitute a partnership or limited partnership is a question of fact.

Question #4

Are the expressions “trust” and “registered investment” defined in the Act?

Comments

For the purposes of subdivision k of the Act dealing with trusts and their beneficiaries, the term “trust” is defined in subsection 108(1) of the Act to include an inter vivos trust and a testamentary trust. The determination of whether a trust exists is a question of fact and trust law. In order for a trust to exist there must be certainty of intention, certainty of subject matter (the trust property) and certainty of objects (the beneficiaries). The requirement that all three certainties be satisfied in order for a trust to exist was set out in Kingsdale Securities Co. v M.N.R., 74 DTC 6674 (F.C.A.).

A registered investment is defined in subsection 204.4(1) of the Act. It is defined to mean a trust or corporation that has applied in prescribed form as of a particular date in the year of application and has been accepted by the Minister as of that date as a registered investment for certain plans. In its application, the trust or corporation sets out the specific types of deferred income plans for which it wishes to be registered and it agrees to hold only investments that are qualified investments for the those particular types of deferred income plans. A registered investment is also subject to taxes under Part XI of the Act for any excess foreign property held by the trust or corporation.

Question #5

Is an interest in the limited partnership, XXXXXXXXXX, exempt from being considered foreign property for purposes of Part XI of the Act? How can you make this determination?

Comments

Again, the determination of whether a particular interest in a partnership is exempt from being considered foreign property is a question of fact. Unless proven otherwise, the presumption would be that an interest in a partnership is foreign property for purposes of the Act. We also do not have sufficient information on any limited partnership that you have described to determine whether or not it would be exempt under the proposed amendments described in #2 above. In order to determine whether the interest in the partnership is prescribed to be exempt under any of the provisions described in our response to #2 above, you would have to approach officials representing the partnership.

Question #6

Why is it possible that the Part XI tax may be significantly greater than the income earned in respect of the foreign property?

Comments

The Part XI tax is generally computed by taking 1% times the amount that the cost amount of the foreign property exceeds 20% of the cost amount of all of the property held by the plan at the end of each month. The tax does not refer or relate to the income earned on the foreign property. As stated earlier, the purpose of the penalty tax is to ensure that trusts and corporations governed by deferred income plans restrict their investments in foreign property, within the meaning assigned by subsection 206(1) of the Act. The trust or corporation governed by the deferred income plan may choose to retain the foreign property and pay the Part XI penalty taxes because of the potential return it may earn on the foreign property.

We trust that the above comments will be of assistance to you.

Yours truly,

Paul Lynch
for Director
Financial Industries Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
(613) 957-8979

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