21 September 2007 External T.I. 2007-0251651E5 - Excluded 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.

Principal Issues: Whether the interest in a partnership that carries on an active business in Canada would be considered to be excluded property.

Position: Yes.

Reasons: Definition of excluded property.

2007-025165
XXXXXXXXXX D. Zhang
(613) 957-2104
September 21, 2007

Dear XXXXXXXXXX:

Re: Excluded Property Involving Partnership Interest

We are writing in response to your electronic message of September 10, 2007, in which you described the following situation:

1. A Canadian resident individual owns 100% of a corporation ("FA") resident in the Netherlands;

2. FA has an interest in a partnership, all or substantially all of the property of which partnership is used or held principally for the purposes of gaining or producing income from an active business carried on in Canada; and

3. FA will immigrate to Canada, resulting in a deemed disposition of the partnership interest under paragraph 128.1(1)(b) of the Income Tax Act (the "Act").

You asked for our comments on whether the partnership interest would be considered to be excluded property under subsection 95(1) of the Act, and whether any capital gain resulting from the deemed disposition of the partnership interest would be disregarded in computing the foreign accrual property income ("FAPI") of FA.

Our Comments

The situation outlined in your letter appears to relate to a factual one. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advance income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advance Income Tax Ruling", dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the Internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments.

Pursuant to the definition of "excluded property" in subsection 95(1) of the Act, a partnership interest held by a foreign affiliate of a taxpayer will be considered to be excluded property, provided that all or substantially all of the property of the partnership is used or held by the partnership principally for the purpose of gaining or producing income from an active business. The definition does not stipulate that the active business must be carried on outside Canada. Further, a taxable capital gain realized by a foreign affiliate on the disposition of an excluded property would not, subject to certain exceptions that do not appear to be relevant to the situation described in your message, be included in a foreign affiliate's FAPI for a taxation year.

We trust that these comments are of assistance.

Yours truly,

Daryl Boychuk
Manager
International Section I
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch