Section 218.3

Subsection 218.3(1)

Canadian Property Mutual Fund Investment

See Also

Resource Capital Fund IV LP v Commissioner of Taxation, [2018] FCA 41 (Federal Court of Australia), rev'd on various grounds [2019] FCAFC 51

shares of Australian mining company were primarily attributable to the processing rather than mining operations

Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal of shares of significant shareholdings in a TSX-listed Australian corporation (Talison Lithium) which, through a grandchild corporation, held mining leases in Australia and carried out an operation there of mining lithium ores and processing them. Although their (income account) gains were from selling the shares of Talison Lithium were not exempted under Art. 7 of the Australia-U.S. Convention because of the exclusion in Art. 13 (as expanded in Australian domestic legislation) for dispositions of (deemed) real property situated in Australia, their appeals of nonetheless were allowed on the basis that the shares of Talison Lithium were not taxable Australian real property because their value was attributable more to the “downstream” lithium processing operations than to the “upstream” mining operations.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 9 - Capital Gain vs. Profit - Shares private equity fund LP with 5-year holding objective realized share gain on income account 175
Tax Topics - Income Tax Act - Section 115 - Subsection 115(1) - Paragraph 115(1)(a) - Subparagraph 115(1)(a)(ii) gains of a NR PE fund from disposals of Australian share investments that were managed in part in Australia were derived from Australia 427
Tax Topics - Treaties - Income Tax Conventions - Article 3 each U.S.-resident partner of a Caymans PE LP carried on a U.S. “enterprise” 234
Tax Topics - Treaties - Income Tax Conventions - Article 13 exclusion in Art. 13 of Aust.-U.S. Treaty for real property dispositions extended to shares of Australian holding company holding mining leases through grandchild 420
Tax Topics - General Concepts - Stare Decisis lower court not bound by a point of law that was assumed rather than examined by a higher court 292
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) assessment of partnership was assessment of partners 89
Tax Topics - Treaties - Income Tax Conventions - Article 6 Art. 6 extends common law meaning of real property 198
Tax Topics - Income Tax Act - Section 248 - Subsection 248(1) - Taxable Canadian Property - Paragraph (d) shares of lithium mining and processing company were derived principally from the processing rather than mining operation and, thus, were not taxable Australian real property 514
Tax Topics - General Concepts - Fair Market Value - Other processing assets of mining company were more valuable than its mining assets 238

Subsection 218.3(3) - Use of losses


Under Part XIII.2, a non-resident person (or a partnership other than a Canadian partnership) is subject to withholding tax of 15% on the amount of any "assessable distribution" received by it from a "Canadian property mutual fund investment" (which, by definition, includes listed units of a mutual fund trust if more than 50% of the fair market value of the units is attributable to real property in Canada, Canadian resource property or timber resource properties). An "assessable distribution" includes a distribution on a Canadian property mutual fund investment that is not otherwise subject to tax under Part I or Part XIII.

Where the units of a mutual fund trust which derive more than 50% of their value from, for example, Canadian real property, the redemption proceeds for the units held by non-resident unitholders will generally be subject to Part XIII.2 withholding at a 15% rate, and the mutual fund trust is required to withhold and remit this tax by virtue of s. 218.3(2)(c). If any unitholder holds its units as taxable Canadian property, it would appear that the redemption proceeds paid to it would not be an assessable distribution, on the basis that such proceeds were included in computing the unitholder's gain (or loss) from taxable Canadian property and, therefore, were "subject to tax under Part I." However, it typically would be unlikely that the mutual fund trust would be in a position to determine conclusively whether units of a unitholder were taxable Canadian property – so that the mutual fund trust will proceed to withhold under Part XIII.2.

The amount of an assessable distribution received by a non-resident unitholder is treated (under ss. 218.3(2)(a) and (b))) as a capital gain of the non-resident from the disposition of a Canadian property mutual fund investment. The non-resident unitholder may (by filing a return) obtain a refund of the Part XIII.2 tax on the assessable distribution to the extent that the non-resident has realized capital losses in the year (or in specified circumstances, in other years) from the disposition of Canadian property mutual fund investments: s. 218.3(3).

On a literal reading of the Part XIII.2 tax provisions, the fact that mutual fund trust units are redeemed, rather than the unitholders receiving a distribution of the same amount on their units, would appear to have the effect of limiting their ability to recover the Part XIII.2 tax.

Example 3A

A non-resident unitholder whose unit has an adjusted cost base of $10 receives a return-of-capital distribution of $15.00, and then has its units redeemed for a nominal amount.

The $15.00 return-of-capital distribution does not reduce the adjusted cost base of its unit (s. 53(2)(h)(i.1)(B)(iii)), and is deemed not to give rise to a disposition of the unit (para. (h) of the definition of disposition in s. 248(1).) This distribution is an assessable distribution and, therefore, is subject to Part XIII.2 tax of 15%.

When the unit is redeemed for nominal proceeds of disposition, the unitholder realizes a capital loss of $10. If it files a return, it may offset this loss against $10 of the $15.00 gain deemed to be realized by the unitholder (under s. 218.3(2)(a)), with the result that the unitholder receives a refund of most of the Part XIII.2 tax.

Example 3B

A non-resident unitholder's unit (which has an adjusted cost base of $10) is redeemed for proceeds of disposition of $15.00. None of such proceeds are treated as a distribution of trust income, and the unit is no held as taxable Canadian property.

The $15.00 redemption proceeds are an assessable distribution and are subject to the 15% Part XIII.2 tax.

There is no explicit indication in Part XIII.2 or other provisions of the ITA that the amount of the assessable distribution is not also treated as proceeds of disposition of the unit. Accordingly, on a literal reading of the provisions of the Act, the unitholder is considered to dispose of its unit for proceeds of disposition of $15.00, with the result that it does not realize any capital loss that can be utilized to offset against the amount that was subject to Part XIII.2 tax.