The draft ETA s. 132(6) rule does not appear to be substantially undercut by the expansive PE definition

Draft s. 132(6) provides that, subject to s. 132(2), an investment limited partnership (ILP) is deemed to not be resident in Canada at any time if the total value of all interests in it held by non-resident members (other than prescribed members) is 95% or more of the total value of all interests in it. One of the targeted effects of this rule is to permit a general partner (whose Canadian residence otherwise would “taint” the ILP as a resident partnership), to charge general partner draws or fees to the ILP on a zero-rated basis if the membership of the ILP satisfies the 95% test.

The exclusion in s. 132(2) deems a non-resident person to be resident in Canada in respect of activities carried on by it through a permanent establishment in Canada.

On an expansive interpretation of the ETA definition of a permanent establishment, it could be considered that, in fact, there is no circumstance in which an ILP, which has a Canadian-resident general partner (with personnel or agents exercising its functions qua general partner using a Canadian office of the general partner), will be deemed by s. 132(6) to not be resident in Canada, given that essentially all the activities of the ILP will be considered to be carried on through its general partner and, thus, through the Canadian office of the general partner (viewed as a permanent establishment of the ILP).

However, it is understood that Finance considers that the intent was for the s. 132(2) exclusion to apply only where there is a commercial activity being carried on in Canada that could represent a permanent establishment of the investment limited partnership, for example, the holding of a piece of commercial real estate, and that s. 132(2) would not apply to the Canadian office of the general partner. As discussed in our Commentary, this view is consistent with a partnership being a separate person for GST/HST purposes.

A similar analysis suggests that the s. 132(2) exclusion does not undercut the exemption of a 95%-qualified partnership under draft s. 132(6) from the qualifying consideration rule in ETA s. 218.01.

Neal Armstrong. Commentary on ETA draft s. 132(6).