CRA comments on the eligibility of a foreign partnership interest as excluded property

Paras. (d) and (e) of the excluded property definition deem the units of a foreign partnership held by a foreign affiliate of a Canadian taxpayer to be foreign shares for purposes of determining whether the partnership is a deemed foreign affiliate of the taxpayer under the excluded property definition.  However, CRA does not consider that this permits one to conclude that such partnership interest is excluded property, even where the partnership is engaged exclusively in an active business, if the equity percentage of the Canadian taxpayer in the partnerships (viewed as a deemed foreign corporation) is under 10% (say, 5%) and a further 5% interest in the partnership is held directly by a related Canadian corporation.  The reason is that the paras. (d) and (e) deeming rule only applies to partnership interests held by a foreign affiliate rather than by a (related) Canadian person – so that the partnership interest does not qualify as shares of a foreign affiliate (because the required 10% threshold under the foreign affiliate definition has not been achieved).  This, in turn, means that the partnership interest cannot qualify as excluded property notwithstanding the active business.

The factually unusual and narrow character of this point may imply that the paras. (d) and (e) deeming rule works quite well in circumstances where an active foreign partnership is held largely within a wholly-owned group.  For instance, there was no quibbling that paras. (d) and (e) do not explicitly go on to deem the active business assets of the partnership to be active business assets of the fictional non-resident corporation, so this would appear not be a sticking point.

Neal Armstrong.  Summary of 15 January 2015 T.I. 2014-0546581E5 under s. 95(1) – excluded property.