7 February 1991 Income Tax Severed Letter - Canada-Germany Income Tax Agreement - Interest in Partnership

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.

Dear Sirs:

Re: Articles 13(4) and (5) of the Canada-Germany Income Tax Agreement (1981) (the “Treaty”)

This is in reply to your letter dated March 31, 1989. We apologize for the delay in responding to you, which delay arose because we considered it necessary to undertake consultations with the Department of Finance in connection with this matter.

You have submitted for our consideration the following hypothetical situation:

Hypothetical Situation:

• • Limited Partnership A (“Partnership”) is a Limited Partnership which carries on the business (in Canada) of mining, processing and sales of the processed product.
• • Partnership is owned as to 60% by a German resident individual, Mr. M; and 40% by a Canadian corporation, Co. X.
• • Mr. M. dies during the year.

Partnership's Balance Sheet in summary form contains the following assets and liabilities at the time of Mr. M's death.

Interest in mineral claims and related development costs - $10 Million

Mineral processing buildings, machinery and equipment (situated on leased land) - 25 Million

Total $35 Million

Long term debt $20 Million

Partners equity 15 Million

Total $ 35 Million

• • The fair market value (“FMV”) of the recorded assets is equivalent to their book values.
• • The FMV of the entire partnership is $20 million ($5.0 million attributable to goodwill).
• • The adjusted cost base of Mr. X's partnership interest at the time of his death is $3.0 million.

In respect of your inquiries, we can advise as follows:

• 1. The term “rental property” as used in the phrase “property (other than rental property) in which the business of the company, partnership, trust or estate was carried on” in paragraph 4 of Article 13 of the Treaty refers to property in respect of which the company, partnership, trust or estate in question (the “Subject Entity”) is a lessor and not to mineral processing buildings, machinery and equipment leased to and occupied by the Subject Entity and used by the Subject Entity in its business of mining, processing and sales of the processed mineral products.
• 2. Mines and mineral reserves and processing plants (including buildings and affixed machinery and equipment and the land under and/or adjacent thereto and necessary for their use) used by a Subject Entity in its business of mining, processing and sales of the processed mineral products will constitute “property in which the business of the Subject Entity was carried on” within the meaning of paragraph 4 of Article 13 of the Treaty.
• 3. The term “principally” as used in paragraph 4 of Article 13 of the Treaty means “in excess of 50%”.
• 4. The determination of from what the value of an interest in a partnership is principally derived is essentially a question of fact that can only be made after considering all of the relevant facts including the manner in which the assets of the partnership are financed and obligations pertaining to the assets of the partnership.