Taxable Canadian Property

See Also

Commissioner of Taxation v. Resource Capital Fund III LP, [2014] FCAFC 37 (Fed. Ct. of Austr.)

mining information not to be valued separately at reproduction cost

The appellant ("RCF") was a non-Australian partnership which was assessed on the basis that its gain from the sale of a "member ship interest" in an Australian company ("SBM") with two underground gold mines in Western Australia was from "taxable Australian real property". The SBM membership interest qualified as TARP "if the sum of the market value of [SBM]'s assets that [were] taxable Australian real property exceed[ed] the sum of the market values of its assets that [were] not taxable Australian real property." The primary judge below had found that the SBM membership interests were not TARP, in part, on the basis that the mining information of SBM (a non-TARP asset) had a substantial value in light of the substantial exploration cost that would be required to reproduce this information, as well as the substantial present value of the mining production that would be foregone during the three to five year exploration and evaluation process and that the valuation of the mining rights (a TARP asset) should be discounted by the same factors.

In rejecting this approach on appeal, the Court stated that the market values of the various assets should be made:

on the hypothesis of a simultaneous sale to the one purchaser with the capacity to use those assets in combination in a gold mining operation as their highest and best use. …[A]ll the experts…agreed that in the case of a simultaneous sale to the one purchaser, the hypothetical purchaser could expect to acquire the mining information and plant and equipment for less than their re-creation costs with little or no delay.

Accordingly, it appeared that the Commissioner was successful, although the parties could make submissions on the final calculations.

Locations of other summaries Wordcount
Tax Topics - General Concepts - Fair Market Value - Other mining information not to be valued separately at reproduction cost 286
Tax Topics - Treaties - Income Tax Conventions - Article 13 mining information not to be valued separately at reproduction cost 286
Tax Topics - Treaties - Income Tax Conventions - Article 4 reverse hybrid partnership 415

Lipson v. The Queen, 2012 DTC 1064 [at 2796], 2012 TCC 20

The taxpayers received a number of capital distributions from the liquidator of their mother's "succession" (a Quebec estate), but only filed a notice under s. 116(3) respecting the final distribution. The Minister assessed penalties against the taxpayers on the basis that the taxpayer was deemed under para. (d) of the definition in s. 248(1) of disposition to have disposed of taxable Canadian property (an interest in a trust) without filing the required notices under s. 116(3) respecting the previous distributions.

Jorré J. allowed the taxpayer's appeal. As Quebec succession is not a trust, the distributions did not represent dispositions of interests in a trust. Although s. 104(1) provided that a reference to "trust" or "estate" included an executor or a liquidator of a succession, this merely facilitated a drafting technique to permit the word "trust" or "estate" to refer both to a trust or estate, and the persons charged with responsibility for carrying out the obligations of the trust or estate, as the case may be - and did not have the effect of deeming a Quebec succession to be a trust.

Administrative Policy

1 May 1990 Memorandum AC70442

"With respect to the application of the provisions of section 116 of the Act to the disposition of partnership property, (i) the assumptions in subsection 96(1) of the Act are not applicable, (ii) on the disposition of partnership property, each member of the partnership is considered to have disposed of his share of that property, and (iii) each non-resident partner is a non-resident person referred to in section 116 ... . The Department also considers that section 116 applies to a non-resident partner who disposes of his partnership interest which is taxable Canadian property by virtue of subparagraph 115(1)(b)(v) to the partnership in return for certain partnership property. Each remaining partner is considered to be the person referred in subsection 116(1)(a)."

84 C.R. - Q.36

S.116 has no application to dispositions of Canadian real estate that constitutes inventory to the non-resident investor.

Articles

Edward A. Heakes, "Another Wave of Foreign Affiliate Proposals", International Tax Planning, Volume XVIII, No. 4, 2013, p. 1275

De minimis partnership interests are included in test (p. 1276

[I]f a taxpayer holds 5% of the shares of a listed company and is a partner in a partnership that holds 20% of such shares, the 25% test would be met.

Under the current draft, the size of the taxpayer's interest in the partnership is not taken into account in determining whether the listed shares are taxable Canadian property and this has the potential to create various anomalous results….

Steve Suarez, Maire-Eve Gosselin, "Canada's Section 116 System for Nonresident Vendors of Taxable Canadian Property", Tax Notes International,9 April 2012, p. 175

Includes discussion of change in CRA policy (net to gross asset value) re determination of whether shares derive their value primarily from real estate.

Michael N. Kandev, Fred Purkey, "Practical Troubles With the Disposition of Canadian-Situs Property by Nonresidents of Canada", Practitioner's Corner, Tax Notes International, 12 September 2011, p. 807.

David W. Ross, "Non-Resident Unitholders - Impact on Status", Resource Sector Taxation, 2004, p. 76: Discussion whether net profit interests are interests in respect of real property.

Paragraph (b)

Administrative Policy

19 June 2015 STEP Roundtable, Q. 10

look-back rule applied to cash distribution out of trust which was funded by estate with real estate proceeds

A testator dies leaving an estate comprised mostly of real property situated in Canada (a principal residence). Upon completion of the estate administration, a ½ share of the residue (now all cash) is paid (as required under the will) to a resident trust (the "Son's Trust") for the benefit of the testator's non-resident son. One year later, the trustee of the Son's Trust makes a capital distribution to the son. Would son's interest in Son's Trust be taxable Canadian property, so that s. 116 would apply to that distribution to him?

CRA indicated that the most likely situation is that the transfer of cash from the estate to Son's Trust would satisfy para. (f) of the definition of "disposition" in s. 248(1) (no change in beneficial ownership), so that s. 248(25.1) would deem Son's Trust to be a continuation of the estate. On this basis, and in light of the 60-month look-back rule in para. (b) of the definition of tcp, Son's interest in Son's Trust would be considered to be derived directly or indirectly from Canadian real property, so that the cash distribution by Son's Trust would be considered to have been made on taxable Canadian property.

Alternatively, if the transfer of Son's share of the estate cash to Son's Trust did not meet all the conditions of para. (f), s. 248(25.1) would not apply. However, Son's interest in Son's Trust (being an indirect interest in the estate) would be taxable Canadian property here as well, so that again, as the distribution occurs within 60 months, it would be a distribution on taxable Canadian property.

27 June 2013 External T.I. 2012-0459481E5 - Taxation of a Non-Resident

gold coins

In response to a query as to whether precious metal coins stored in Canada on behalf of a non-resident individual would be taxable Canadian property, CRA stated that the question as to whether the non-resident was carrying on business in Canada was one of fact on which it could not comment, and further indicated that if he were carrying on business in Canada, there was a potential exemption under Art. VII of the Canada-U.S. Convention.

7 July 2011 External T.I. 2011-0403271E5 - Non-resident's taxable income in Canada

gold bullion generally excluded

Gold bullion situated in Canada owned by a non-resident is not taxable Canadian property provided that it is not part of the inventory of a business carried on in Canada.

92 C.M.TC - Q.6

internationl ship

It is essentially a question of fact whether a ship used in international shipping constitutes taxable Canadian property.

Paragraph (d)

See Also

Resource Capital Fund IV LP v Commissioner of Taxation, [2018] FCA 41 (Federal Court of Australia)

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

Two Caymans investment LPs (“RCF IV” and RCF V”) whose limited partners were mostly U.S. residents, realized gains from the disposal 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. Pagone J found that the U.S.-resident partners’ share of the partnership gains from selling the shares of Talison Lithium were not exempt under Art. 7 of the Australia-U.S. Convention because of the exclusion in Art. 13 for dispositions of (deemed) real property situated in Australia, given s. 3A(1) of the International Tax Agreements Act 1953 (Cth), which extended the application of the Art. 13 exclusion to dispositions of shares of companies “the value of whose assets is wholly or principally attributable, whether directly, or indirectly through one or more interposed companies or other entities, to … real property or interests”. Thus, the Art. 13 exclusion applied to the “disposal of real property indirectly by the partners of RCV IV and RCF V by their disposal of shares” (para. 85). Given that Art. 13 and s. 3A(1) did not themselves impose tax, the question more precisely was whether “whether the tax effected by Division 855 of the 1997 Act [respecting taxable Australian real property assets, or “TARP”] is upon the value of assets which was principally or wholly attributable to such real property or interests (para. 87).

In this regard, Pagone J found (at paras. 101, 103)

The ordinary meaning of mining is the “action, process or industry of extracting ores” and that activity was complete upon the recovery of the ore from the earth in the absence of an extended meaning… . It follows that on this basis of assessment of the RCF IV and RCF V partners there is to be excluded from the taxable value of the capital gain, the value attributable to the general purpose leases, the miscellaneous licence and the plants used in the processing operations rather than in the mining. …

Whether the interests of the applicants in Talison Lithium also passed the principal asset test, for the purposes of s 855-25(1)(b), requires consideration of whether 50% or more of the market value of the assets of Talison Lithium were attributable to Australian real property.

Pagone J found that, subject to a further hearing as to the form of the order that he should issue, the taxpayer’s appeal was to be allowed and remitted for reconsideration by the Commissioner based on his acceptance of the valuation approach of the taxpayer’s valuation expert, under which the valuation of the assets and operations involved the mining of the ore body (“the upstream operations”) was lower than that for the subsequent operations after extraction and severance of the ore from the ground (“the downstream operations”), with the value of the ore extracted from the ground not being part of the taxable Australian real property and being valued for the above purposes immediately after that resource had been extracted and severed from the ground.

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 167
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 411
Tax Topics - Treaties - Income Tax Conventions - Article 3 each U.S.-resident partner of a Caymans PE LP carried on a U.S. “enterprise” 222
Tax Topics 386
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
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 272
Tax Topics - Income Tax Act - Section 152 - Subsection 152(1) assessment of partnership was assessment of partners 83
Tax Topics - Treaties - Income Tax Conventions - Article 6 Art. 6 extends common law meaning of real property 180
Tax Topics - Income Tax Act - Section 218.3 - Subsection 218.3(1) - Canadian Property Mutual Fund Investment shares of Australian mining company were primarily attributable to the processing rather than mining operations 140
Tax Topics - General Concepts - Fair Market Value - Other processing assets of mining company were more valuable than its mining assets 234

Administrative Policy

22 September 2017 External T.I. 2016-0668041E5 - TCP and Article 13(5) of Canada-UK Treaty

proportionate value approach to determining whether shares of a foreign holding company are derived more than 50% from Canadian immovable property for Treaty purposes

A Netherlands company (“BVCo”) wholly-owns:

  • All the shares, with a fair market value (“FMV”) of $1M, of a Canadian subsidiary (“TCPCo”), having Canadian real property (in which its business is not carried on) with an FMV $2M and liabilities $1 M; and
  • All the shares, with an FMV of $0.5M, of an Australian subsidiary (“AusCo”) having Australian real property with an FMV $10M and liabilities of $9.5M.

Are the BVCo shares taxable Canadian property ("TCP")? CRA responded:

[T]he gross asset value method should be applied first at the TCPCo and AusCo level. The percentage of relevant Canadian property for TCPCo is 100% (equal to $2 M / $2 M x 100). … [T]he percentage of relevant Canadian property for AusCo is 0% (equal to $0 / $10 M x 100).

Next, the gross asset value method should be applied at BVCo’s level making use of the proportionate value approach. The proportionate value approach as described in 2015-0624511I7 can be summarized as follows:

  • the percentage of relevant Canadian property of a particular subsidiary entity should be multiplied by the FMV of the shares of that entity; and
  • the product resulting from above is the prorated FMV of the shares of the particular subsidiary entity which represents the FMV of a relevant Canadian property asset indirectly held by the parent. …

[T]his would result in BVCo having a percentage of relevant Canadian property of 67% = $1 M / $1.5 M.

Since more than 50% of the FMV of BVCo’s shares is derived from real or immovable property situated in Canada, the shares of BVCo are TCP … .

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 13 proportionate value approach to determining whether shares of a foreign holding company are derived more than 50% from Canadian immovable property for Treaty purposes 287

1 May 2017 Internal T.I. 2015-0624511I7 - 248(1)(e)(ii) of the definition of TCP

upstream and downstream loans within a wholly-owned corporate group generally are to be treated differently/gross asset and proportionate value approach used

A non-resident trust (the “Trust”) took the position that its shares of various private non-resident corporations (“NRCos”) were not taxable Canadian property (“TCP”), so that it was deemed under s. 94(3)(c) to have acquired its NRCo shares at a cost equal to their fair market value (“FMV”). The only assets of the NRCos, other than any intercompany receivables, were shares in private operating corporations resident in Canada (“Opcos”). The Opcos held timber resource properties, Canadian real property, other properties not listed in the definition of TCP and, in some cases, shares of lower tier Opcos.

After referencing its established position that the gross asset (rather than net asset) value method should be used to determine whether more than 50% of the FMV of the share of a corporation was derived directly or indirectly from relevant Canadian properties (“RCP”), such as real property situated in Canada and that “the proportionate value approach should be used to determine the proportion of the FMVs of the shares of the Opcos that derived from RCP for the purpose of applying the gross asset value method to the shares of the NRCos in order to determine whether more than 50% of the FMV of the share of an NRCo was derived directly or indirectly from one, or any combination of, RCP,” the Rulings Directorate stated:

[A]ny intercompany receivable balance pertaining to a loan made downstream is not…a distinct asset of the particular parent corporation but, rather, its value increases the relevant FMV of its asset that is shares of a particular wholly-owned subsidiary. …

[I]ncluding the value of an intercompany receivable balance pertaining to a loan made upstream as a distinct asset when determining the FMV of the wholly-owned lending subsidiary’s assets would result in the double counting… because when carrying out the gross asset value test for the parent corporation the value of the related intercompany payable balance is…ignored while the funds the parent received from the upstream loan would be included as a distinct asset of the parent… . Therefore…when applying the proportionate value method to a particular subsidiary corporation, the value of an intercompany receivable balance pertaining to a loan made upstream is not…a distinct asset of the particular subsidiary corporation but, rather, its value decreases the relevant FMV of the shares of the particular wholly-owned subsidiary.

…To the extent a loan made to a sister corporation is similar in nature to a loan made downstream (e.g., the loan is part of a back-to-back loan because the funds are on-loaned by the sister corporation to a subsidiary of the particular lending corporation), the intercompany receivable balance pertaining to the loan made to the sister corporation is not.. a distinct asset of the particular lending corporation but, rather, its value increases the relevant FMV of its asset that is shares of its subsidiary.

Whereas, if a loan made to a sister corporation is not similar in nature to a loan made downstream and the shares of the particular lending corporation would not be TCP had it not made the loan (e.g., if it had kept its internally generated excess funds in a bank account), generally, the value of the intercompany receivable balance should be included as a distinct asset when determining the FMV of the particular lending corporation’s assets.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 94 - Subsection 94(3) - Paaragraph 94(3)(c) methodology for determining whether shares of NR corps indirectly holding some Cdn real property and resource properties through Opcos with interco loans were taxable Cdn property 309

1 March 2017 External T.I. 2016-0658431E5 - Article XIII of Canada-U.S. Convention

derived principally test done on look-through basis

The question of whether a share or trust interest derives its value from Canadian real property for purposes of the Canada-U.S. Treaty is a point-in-time test so that the sale of such share or interest immediately after the sale of the Canadian real property for cash will be exempt, even though under the 60-month look-back rule, the share or interest may be taxable Canadian property. CRA also stated that in both the Treaty and TCP context,

the phrase “derived principally from real property”… allows one to look through a particular property (which is, for example, a share of a corporation or an interest in a trust) to the real property situated in Canada and held, directly or indirectly, by such corporation or trust

without indicating any exception for where intermediate interests are held as debt.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 13 test of a real property security under the Canada-U.S. Treaty is a point-in-time test 254

6 December 2016 External T.I. 2014-0542551E5 - Taxable Canadian Property

the derivation of estate property from Cdn real property of the deceased does not cause the interests in the estate to be taxable Cdn property

A Canadian resident individual (the “Taxpayer”) sold a principal residence and invested the proceeds in shares of publicly traded corporations of which the Taxpayer and all non arm’s -length persons owned less than 25% of the shares of any class. Following the Taxpayer’s death, the executor makes a capital distribution to one of the beneficiaries who is a non-resident of Canada in satisfaction of the beneficiary’s capital interest. The distribution results in such non-resident beneficiary being considered to have disposed of all or a portion of the beneficiary’s capital interest in the Estate. In finding that this did not entail a disposition of taxable Canadian property, CRA stated:

Even though the investments in the Estate were originally acquired by the Taxpayer using proceeds from the sale of real property, the phrase “the value is derived from” for the purposes of the definition of TCP only allows one to look at the underlying assets of the Estate at any time during the 60-month period that ends at the particular time.

However, since the Estate itself did not hold real property (either directly or indirectly, subject to the carve-out) at any time during the 60 months preceding the disposition of the interest in the Estate, such 60-month look-back period in the definition of TCP would not extend beyond the creation of the Estate… .

2012 IFA Roundtable, Q.5 [preliminary -final above]

proportionate consolidation

In determining whether the shares of of a Canadian corporation (Canco 1) are taxable Canadian property, CRA will apply a proportionate value approach to any subsidiary (Canco 2) of Canco 1 whose shares are themselves taxable Canadian property, so that if Canco 2 has a NAV of $401 resulting from holding Canadian real property with a value of $1,000, mortgage debt of $999 and cash of $400, Canco 1 will be considered to hold Canadian real estate with a value of ($1,000/$1,400)*$401, or $286, for the purposes of determining whether the shares of a Canco 1 derive more than 50% of their fair market value from Canadian real estate, resource or timber properties. CRA is considering whether intercompany debt should be disregarded for purposes of applying this proportionate value approach. Investments in subsidiary partnerships will be handled the same way.

2013 Ruling 2012-0444431R3 - Taxable Canadian Property

foreign partnership holding debt in addition to equity of foreign holdco

A partnership (Foreign Partnership), whose non-resident members (Investors) are resident in Foreign Countries 1 through 5, uses a portion of its cash from unit and loan subscriptions to subscribe for equity of a Newco resident in Foreign Country 6 (Foreign Parent), and applies the balance of its subscription cash to subscribe for a mixture of profit-participating loans and non-interest-bearing loans of Foreign Parent (the Foreign Parent Loans). Foreign Parent, in turn, uses such cash proceeds to subscribe for shares of another Newco (Foreign Subsidiary), also resident in Foreign Country 6 and to subscribe for interest-bearing loans of Foreign Subsidiary (the Foreign Subsidiary Loans). Foreign Subsidiary, in turn, uses such cash proceeds to acquire partnership interests in a partnership (Canadian Partnership) holding Canadian real property.

Ruling that each Investor's interest in the Foreign Partnership will be taxable Canadian property.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 13 NR partnership holding real property interests through debt 259

13 September 2012 CICA Compliance Roundtable, 2012-0453021C6 - Taxable Canadian Property

mortgages not tcp

Respecting a question as to whether shares of an unlisted corporation would be taxable Canadian property if during the preceding 60 months "most of the value of the corporation's shares was derived directly from assets consisting of non-defaulted arm's length mortgages secured by real property situated in Canada," CRA stated:

...CRA is of the view that the fact that at some time during the 60-month period that ended at the determination time, most of the value of the shares of a corporation that is not listed on a designated stock exchange was derived directly from assets consisting of non-defaulted arm's length mortgages secured by real property situated in Canada, would not result in a share of that corporation being TCP. However, if the rights of a particular mortgagee were different from those described in subsection 248(4) of the Act, we would need to examine all of the facts and circumstances relating to that particular mortgage before taking a final position....

17 May 2012 IFA Conference Roundtable, 2012-0444091C6 - Definition of taxable Canadian property

proportionate consolidation/debt look-through

In determining (when a non-resident disposes of shares of Parent) what portion of the shares of the Subsidiary of Parent represent real or immovable property of Parent, CRA will apply to the fair market of the shares of Subsidiary the proportion which the real or immovable property of Subsidiary represents of its total gross assets – and the same approach is applied respecting a subsidiary partnership. There is an exception where shares of Subsidiary were not themselves taxable Canadian property.

Indebtedness between a Parent and a wholly-owned Subsidiary has no impact on the determination of whether the value of the shares of the Parent was derived directly or indirectly from real or immovable property situated in Canada. If the shares of the Parent would be TCP had the Parent capitalized its wholly-owned Subsidiary with only equity, then such shares will be considered TCP if the Parent capitalizes the Subsidiary in part with equity and in part with debt.

28 November 2011 CTF Roundtable, 2011-0425901C6 - Does share derive value principally from real prop

proportionate consolidation

In response to a question as to how the 50%-derived-from-real-property test should be applied where the non-resident disposes of shares of Parent which holds Subsidiary, CRA stated:

a determination will need to be made of the proportion of the total gross assets of the Subsidiary that comprises of real or immovable property situated in Canada (and certain other property....). Under the current wording of the "taxable Canadian property" definition, an amount equal to that same proportion of the FMV of the shares of the Subsidiary will be considered real or immovable property situated in Canada of the Parent in the determination of whether the shares of the Parent derive their value principally from real or immovable property situated in Canada.

CRA then sumarized the 27 August 2010 amendment that would prevent an indirect "look through" approach where shares of Subsidiary were not themselves taxable Canadian property.

Locations of other summaries Wordcount
Tax Topics - Treaties - Income Tax Conventions - Article 13 debt allocation under derivation test 129

Articles

John Tobin, "Infrastructure and P3 Projects", 2017 Conference Report (Canadian Tax Foundation), 10:1-31

TCP status on loans to P3 Projecto LP potentially avoided if partners of non-resident collective investment vehicle partnership lend directly to Projectco rather than through the CIV LP (p. 10:17)

In a CIV structure, it is typical for the non-Canadian partnership to hold both debt and equity of Projectco, meaning that there are two distinct property interests held by the non-Canadian partnership. The loan to Projectco is clearly not TCP on its own. Thus, if the loan exceeds 50 percent of the non-Canadian partnership’s assets, arguably the partnership does not derive its value substantially from the ownership of shares of Projectco because it derives its value from the debt. However, the CRA recently indicated that the intercompany indebtedness should be ignored and the partnership property may be TCP. [fn 47: … 2015-062451117 … [and] 2012-0444091C6] The result may be different if a partnership’s partners made loans to Projectco directly (or through a parallel structure) rather than through the non-Canadian partnership being tested.

Jared A. Mackey, "Canada Revenue Agency Views on Taxable Canadian Property Determinations Involving Subsidiaries", Tax Topics (Wolters Kluwer), No. 2315, July 21, 2016 p. 1

Proportionate value approach to determining what portion of equity is Canadian real/resource property (“CRP”) (p. 2)

If a subsidiary's shares are themselves TCP, the CRA has indicated [in 2011-0425901C6] that it will apply a "proportionate value" or "look-through" approach when determining the TCP [taxable Canadian property] status of the parent's equity. Under this approach, it is first necessary to determine the proportion of the subsidiary's total gross assets that constitute CRP. Second, an amount equal to that same proportion multiplied by the fair market value of the shares of the subsidiary held by the parent will be considered CRP for the parent….

Thus, if 60% of the subsidiary's gross assets constitute CRP, 60% of the value of the subsidiary's shares will be considered to be derived from CRP for the parent.

Broad meaning of “dervived” (p. 2)

The look-through approach adopted by the CRA is supported by a number of cases that have interpreted the word "derived" to be a "term of wide import". [fn 6: Westar Mining…92 DTC 6358 (FCA) at para. 24.] The courts have interpreted the term broadly to require looking through to an amount's origin or source, even though there may be intervening channels from such origin or source to the final destination. [fn 7: Kemp…3 DTC 1078 (Ex Ct) at paras 12-14; Cilhooy… [1945] CTC 203 (Ex Ct) at paras 22-23; … Hollinger[1963] S.C.R. 131.] The courts have equated the term "derived" with the phrase "arising from or accruing," which also imports the common idea of origin or source. [fn 9:…Kirk, [1900] AC 588 (PC) at 592; …Hollinger[1963] S.C.R. 131 at para 12; and Garcia2007 TCC 548…at paras 28-37.]…

Look-through subsidiary partnership (p. 3)

…CRA stated that it would apply the same look-through approach to investments in partnerships for purposes of determining whether a parent's equity constitutes TCP. [fn 9: …2012-0444091C6…]

Example of look-through approach (p. 3)

[A] parent owns shares of a subsidiary valued at $40 and holds $50 of cash. The subsidiary, in turn, owns CRP of $200, a related mortgage debt of $200, and cash of $40. …

$200/$240 of the subsidiary's gross assets constitute CRP, such that 83% and 17% of the fair market value of the subsidiary's shares would be considered CRP and non-CRP, respectively, for the parent. As a result, the parent's gross assets would consist of 37% CRP and 63% non-CRP. [fn 11: Equal to (17% × $40 (value of subsidiary shares) + $40 (parent cash)) / $90 (total parent assets.]

CRA’s approach re intercompany debt (pp.4-5)

[A]ccording to the CRA [at the 2012 IFA Conference], intercompany debt is to be completely ignored as an asset for the parent and as a liability for the subsidiary…. [In 2012-0444431R3] CRA ignored the intercompany debts in determining whether the equity interest constituted TCP. … CRA’s approach…ignores the intercompany debt as an asset for the parent and as a liability for the subsidiary, but continues to recognize it in the calculation of the fair market value of the subsidiary’s equity… . [This] approach may…produce cases where an equity/debt capital structure of a subsidiary would result in the parent’s equity constituting TCP, where a 100% equity structure would otherwise not, and vice versa.

Applying CRA’s approach to manipulate consequences (p. 5)

To illustrate the shortcoming of the CRA’s approach to intercompany debt relative to a look-through approach, consider a 100% equity structure where a parent's only assets are shares of a subsidiary with fair market value of $100 and cash of $50, while the subsidiary's only asset is CRP of $100. In these circumstances, the parent's equity would 'constitute TCP since the full value of the subsidiary's equity ($100) would be considered derived from CRP, which is greater than 50% of the parent's total gross assets (i.e., $100/$ 150). If the parent had instead financed the subsidiary with $40 of equity and $60 debt, and the intercompany debt were ignored as directed by the CRA, the parent's equity would not constitute TCP. In these circumstances, only $40 of the parent's equity in respect of the subsidiary shares would be considered to be derived from CRP, which is less than 50% of the parent's gross assets ($40 / ($40 + $50)). Under a look-through approach to the intercompany debt, the parent's equity would constitute TCP since $40 of the parent's equity and $60 of the parent's debt would be considered derived from CRP, greater than 50% of the total gross assets.

The opposite result can occur if the subsidiary holds substantial non-CRP.

Words and Phrases
derived

Timothy Hughes, Matias Milet, Marc Richardson-Arnould, "Private Equity Funds – Selected Canadian Tax Issues", Tax Management International Journal, 2016, p.84

Goodwill fluctuations relative to real estate may potentially taint private equity investments (p. 86)

Private equity funds currently invest predominantly in Canadian bio-tech, clean-tech, and high-tech companies, the shares of which are unlikely to constitute TCP. However, the value of a company's technology or goodwill may fluctuate, and if the company is operating a plant or has acquired office space, the relative value of such assets may at some point during the prior 60 months cause its shares to be TCP. Accordingly, there is a risk that a non-Canadian private equity fund (or, where the fund is structured as a partnership, its members) [fn 1: Currently, such a fund may file one notification on behalf of all non-Canadian partners on the condition that sufficient information about each individual partner is provided. However, the fund will not be able to file a single tax return on behalf of all of the, partners….] may be subject to the foregoing regime with respect to the disposition of shares of a portfolio company….

Sheryl Troup, "Purchasing Private Corporation Shares: Hazards if the Vendor is Non-Resident", Canadian Tax Focus, Volume 3, No. 4, November 2013, p. 5.

Gross v. net asset method (p.5)

At a CRA and Revenue Québec round table published in the Canadian Tax Foundation's 2011 Conference Report, the CRA stated that the gross asset value method should be used in respect of all property dispositions (both for tax treaty purposes and for the purposes of the definition of "taxable Canadian property" in the Act) for all dispositions after 2012. Thus, the determination of whether a share of a company derives its value principally from real or immovable property situated in Canada should be made by reference to the value of the properties of the company without taking into account its debts or other liabilities.

Example (p. 5)

For a highly leveraged company, the answer to the question whether the shares are TCP can differ significantly if a valuation method other than the gross asset value method is used. Assume, for example, that a company has land with an FMV of $500,000, other assets of $10 million, and liabilities of $9.8 million. If the gross asset value method is used, the land constitutes 5 percent of the total value of the shares. If a net asset value method is used, the land value exceeds 50 percent of the FMV of the shares, and the shares are TCP.

Paragraph (e)

Administrative Policy

19 March 2013 Internal T.I. 2010-0385931I7 - Taxable Canadian property and Partnerships

TCP rules not applying to foreign partners of partnership

A partnership is disposing of its 25% shareholding of a listed public corporation ("Pubco"). Those shares derived more than 50% of their fair market value from Canadian real property and are not treaty-protected property for any of the partners, all of whom are non-resident and deal with each other at arm's length.

In finding that the non-resident partners are not taxable on the disposition under s. 2(3)(c) and that "section 116 has no application," CRA stated:

…subsection 96(1) does not apply for the purposes of paragraph 2(3)(c). Thus, for the purpose of determining whether the non-resident partner is taxable under subsection 2(3)…the partners of the partnership are considered to have disposed of their respective interest in the property of the partnership and paragraph 96(1)(c) does not apply….In other words, the "non-resident person" referred to in subsection 2(3) is the non-resident partner and not the partnership.

…although the partnership realizes a gain from the disposition of a TCP and a portion of the gain is allocated to the non-resident partner and included in computing his taxable income earned in Canada under paragraph 115(1)(a) and paragraph 115(1)(b), the shares are not TCP for the purposes of paragraph 2(3)(c), in respect of each non-resident partner….[U]nder common law... it may not be said that the non-resident partner owned a specific percentage of the underlying property of the partnership. Therefore, ... none of the non-resident partners is taxable in Canada on their portion of the gain realized by the partnership on the disposition of the shares of Pubco.

We believe this result to be unintended and have advised officials at the Department of Finance.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 116 - Subsection 116(1) partnership look-through 266
Tax Topics - Income Tax Act - Section 96 - Subsection 96(1) - Paragraph 96(1)(f) partnership TCP gain but not TCP status attributed to partners 84

29 November 2011 November CTF Roundtable, 2011-0425931C6 - 2011 CTF - Question 20

CRA confirmed that:

when determining whether a share listed on a designated stock exchange is TCP at "any particular time" during a 60 month period both of the tests at subparagraphs (e)(i) and (ii) of the definition must be satisfied at the same time.

Articles

Jack Bernstein, Francesco Gucciardo, "TCP Proposal Overshoots Objective?", Canadian Tax Highlights, Vol. 21, No. 8, p. 4

The authors provided the following example showing that a small direct holding of shares of a Canco could become taxable Canadian property under the draft amendments by virtue of the non-resident investor also having small investments in investment or trading limited partnerships:

Assume that Mr. X, a non-resident, owns 2 percent of the shares of a Canadian public company (Canco). At all relevant times, Canco's assets consist primarily of Canadian real property or Canadian resource property: this holding satisfies the subparagraph (e)(ii) condition in the TCP definition that at the relevant time more than 50 percent of Canco's asset value is attributable to property with the required Canadian nexus. Mr. X has small investments in several funds, each of which has thousands of other investors; Mr. X holds a 0.025 percent interest in each of the two funds that are structured as partnerships (fund 1 and fund 2). Mr. X is at arm's length with each of those two funds and with every other fund investor; fund 1 and fund 2 are not related. In aggregate, fund 1 and fund 2 own 23 percent of Canco shares, which make up 1 percent of each of their portfolios.

Mr. X. sells his 2 percent shareholding in Cando. Are those shares TCP?....

Under the amended 25 percent ownership test, the direct ownership of the 2 percent is unchanged, but it is augmented by all Canco shares that are owned by or that belonged to partnerships in which Mr. X, or any person not at arm's length with him, holds a membership interest (either directly or indirectly through one or more partnerships). Fund 1 and fund 2 are partnerships in which Mr. X holds a membership interest. Because fund 1 and fund 2 own in the aggregate 23 percent of Canco's shares, all of those shares are attributed to Mr. X under the proposed definition to determine whether the Canco shares that he owns directly are TCP. On the facts of this example, the shares held directly and sold by Mr. X are TCP because at least 25 percent of the issued Canco shares of any class are owned by or belong to any combination of the persons described.

Paragraph (f)

Administrative Policy

7 March 2016 External T.I. 2015-0608211E5 - Assignment of right to purchase

assigning right to purchase Canadian real estate is disposing of tcp

Would an assignment to a trust by a non-resident person of a right to purchase a Canadian apartment unit be considered a disposition of taxable Canadian property? CRA responded:

According to Black's Law Dictionary 9th Ed, “option” includes the right to buy an asset at a fixed price within a specified time. Based on this definition, the right to purchase an apartment should be considered an option for purposes of the Act.

…“[A]ssignment” is a form of “transfer”, and therefore, provided all other conditions of the definition are met, the assignment of the right to purchase the apartment to a trust would be considered a disposition.

Words and Phrases
option transfer

18 December 2002 External T.I. 2002-015179 -

In light of the repeal of s. 115(3), a taxpayer who owns directly 20% of the shares of a listed corporation and has an option to acquire an additional 5% of those shares will not be considered to hold taxable Canadian property. However, where the taxpayer or persons with whom the taxpayer does not deal at arm's length owns 25% or more of any class of the shares of a corporation, both the shares and any options to acquire additional shares will be taxable Canadian property.

91 C.R. - Q.49

RC treats options to acquire property as described in s. 115(1)(b)(iv) held by non-resident persons, or persons with whom they did not deal at arm's length, as having been exercised for purposes of evaluating the 25% ownership test.

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