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:
1. Would a non-resident limited partner of a partnership which is carrying on business in Canada through a Canadian permanent establishment be considered to be carrying on business in Canada through a Canadian permanent establishment?
2. Would that non-resident limited partner be taxable in Canada (other than under Part XIII of the Act) in respect of their share of partnership income allocated to them?
3. (a) Would certain distribution fees and redemption fees paid to the partnership be subject to Part XIII tax?
(b) If Part XIII tax does so apply, would paragraph 212(13.1)(b) apply with respect to the entire amount of such payments, or only to the proportion of the payments allocable to the non-resident partner(s)?
Position:
(Note: Responses may be modified by the application of the terms of any relevant reciprocal tax agreement or convention that Canada has with another country.)
1. Yes. 2. Yes. 3. (a) To the extent the fees can reasonably be attributed to a business carried on by the partnership in Canada, those fees would be subject to tax under Part I, not Part XIII.
(b) If Part XIII did apply, the withholding applies to the full amount of the payment even though some of the partners are residents of Canada.
Reasons:
1. Consistent with decisions in Gordon Grocott v. Her Majesty The Queen (96 DTC 1025) and No. 630 v. Minister of National Revenue (59 DTC 300). Also consistent with comments at page 8:16 of the 1989 report of the Corporate Management Tax Conference.
2. Presuming the non-resident limited partner is considered to be carrying on business through a permanent establishment in Canada, generally speaking, Regulation 805(1) would apply so there would be no Part XIII tax liability in respect of the non-resident's portion of the business income earned by the partnership. Subsection 2(3) and section 115 of the Act would apply to subject a person, who was not resident in Canada at any time in a taxation year, to Part I tax in that year on taxable income earned in Canada. Section 114 of the Act would be used to determine taxable income for non- resident partners that are individuals and were only resident in Canada for part of the year.
3. (a) Consistent with Regulation 805(1) and paragraph 8 of IT-81R.
(b) See paragraph 7 of IT-81R.
Attention: XXXXXXXXXX
Dear Sirs:
Re: Taxation of Non-Canadian Partnerships Operating in Canada Technical Opinion Request
This is in reply to your letter dated June 11, 1997, wherein reference is made to an advance income tax ruling, XXXXXXXXXX You are now requesting our opinion concerning issues which arise if a limited partner of XXXXXXXXXX were to become a non-resident of Canada.
As noted in Information Circular 70-6R3, we do not provide opinions with respect to proposed factual transactions other than in reply to an advance income tax ruling request. We would be pleased to consider your application for an advance ruling, should you decide to proceed in that manner. In the interim, we will offer the following general comments, which we hope will be of assistance to you. Due to the general nature of your queries and of this reply, we have not taken into account the effect of any reciprocal tax agreements or conventions that Canada may have with another country.
1. In a scenario where a limited partnership is carrying on business in Canada through a Canadian permanent establishment, it is our view that each of the partners, including any non- resident limited partners, would be considered to be carrying on that same business in Canada through a Canadian permanent establishment.
2. Where such a non-resident limited partner is carrying on business through a permanent establishment in Canada, subsection 805(1) of the Income Tax Regulations would apply with the result that there would be no Part XIII tax liability in respect of the non-resident's portion of the business income earned by the partnership. However, subsection 2(3) of the Income Tax Act would apply such that a person who was not resident in Canada at any time in a taxation year would be subject to tax in that year under Part I of the Act on taxable income earned in Canada. The taxable income would be determined under section 115 of the Act. In this regard reference is made to paragraph 8 of Interpretation Bulletin IT-81R, paragraphs 1 to 5 of IT-420R3 and paragraph 53(c) of Information Circular 77-16R4.
For non-resident partners that are individuals and were only resident in Canada for part of the year, section 114 of the Act is used to determine their taxable income.
3. We confirm your understanding that where a person resident in Canada pays an amount to a partnership that has ceased to be a Canadian partnership (within the meaning of that term in section 102 of the Act), paragraph 212(13.1)(b) of the Act deems the partnership, in respect of the payment, to be a non- resident person. Paragraphs 5 to 8 of Interpretation Bulletin IT-81R addresses this matter further. In particular please note
i) paragraph 7 of IT-81R states the Department's position that any applicable tax to be withheld under Part XIII applies to the full amount of the payment to the partnership even though some members of the partnership are residents of Canada. Canadian residents of the partnership may claim a tax credit for their portion of the Part XIII tax withheld, and
ii) paragraph 8 of IT-81R which refers to the application of Regulation 805(1) to amounts that would otherwise be subject to tax under Part XIII of the Act. Generally speaking, to the extent the payments received by the partnership can reasonably be attributed to a business carried on by the partnership in Canada, those payments would be subject to tax under Part I, not Part XIII of the Act.
In accordance with paragraph 22 of Information Circular 70-6R3, the above comments are only general expressions of opinion on the application of the Income Tax Act to hypothetical situations, and as such should not be construed as advance income tax rulings, nor are they binding on the Department.
Yours truly
Manager
Partnerships Section
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
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