Regulation 5908

Subsection 5908(4)

Administrative Policy

21 February 2013 External T.I. 2012-0435881E5 - Wind-up and Reg. 5908

wind-up of Cdn sub holding other interest in holding partnership for FA treated as a transfer of FA shares from sub to parent

Parent, and its immediate wholly-owned subsidiary (Subsidiary), have 1% and 99% respective partnership interests in Partnership, which owns all 100 of the common shares of a foreign corporation ("FA"). Upon the winding-up of Subsidiary under s. 88(1), Partnership ceases to exist.

As the winding-up of Subsidiary will result in the deemed ownership of shares of FA decreasing from 99 to nil under draft s. 5908(1), this will cause draft s. 5908(2)(a) to deem Subsidiary to have disposed of the 99 common shares of FA previously deemed to be owned by it. Moreover, since after the wind-up, Parent owns those 99 common shares as a consequence of the transaction or event that gave rise to the disposition by Subsidiary, s. 5908(4) will deem Subsidiary to have disposed of the 99 common shares to Parent, so that s. 5905(5) will apply.

Subsection 5908(8)

Subsection 5908(9)


Michael Colborne, Michael McLaren, "Section 93 Elections — Proposed Amendments", Canadian Tax Journal, Vol. 58, 2010, p.357.

Preserves surplus adjustments for multi-tier partnerships (p. 378).

[P]roposed regulation 5908 ensures that a corporate partner of a partnership holding foreign affiliate shares is required to adjust the surplus balances of a foreign affiliate in which the partnership holds an interest in the same manner as every other Canadian-resident corporate shareholder pursuant to proposed regulations 5902(1)(b),5905(1), and 5905(5). Proposed regulation 5908(9) preserves this result through multiple tiers of partnerships by deeming a member of a partnership (the first partnership) that is a member of another partnership (the second partnership) to, itself, be a member of the second partnership for the purposes of proposed regulation 5908.

Subsection 5908(10)

Administrative Policy

27 March 2018 Internal T.I. 2015-0592551I7 - Excluded property status of partnership interest

partnership interests no longer were excluded property on dissolution given prior disposition of s. 95(2)(a)(ii) loans/potential qualification of partnership interest under para. (c) ignored

An Iceland “Sameignarfelag” (viewed by CRA as a partnership), which had been serving as a Finco to foreign affiliates in a Canadian multinational group, was wound up into its non-resident partners (NR1 and NR2, wholly-owned by Canco2). The interaffiliate loans had been giving rise to active business income to NR1 and NR2 under s. 95(2)(a)(ii)(B) and, thus, were excluded property. Even if the time of disposition by NR1 and NR2 of their partnership interests on the partnership wind-up were viewed as the time of the final partnership distribution rather than the subsequent time of formal dissolution of the partnership, by that time the partnership had disposed of its loans, so that the partnership interests at that time no longer qualified as excluded property.

Since the partnership interests were not excluded property at the time of their disposition on the winding-up, their ACB was to be computed in Canadian dollars under Reg. 5908(10), i.e., essentially it became irrelevant that for most of its life, the Icelandic partnership held excluded property for which the calculating currency of its partners was to be used. This, in turn, meant that NR1 and NR2 realized a capital loss for FAPI purposes on the partnership wind-up. In this regard, and after noting that amounts relevant to determining NR1’s exempt earnings would have been computed in relating to the loans in NR1’s calculating currency rather than Canadian dollars, CRA stated:

[A]djustments to ACB that may be the result of amounts that arose at a time while the property was excluded property will still need to be computed in Canadian currency, and if denominated in another currency, converted to Canadian currency at the relevant spot rate for the day the amount arose.

Locations of other summaries Wordcount
Tax Topics - Income Tax Act - Section 95 - Subsection 95(1) - Excluded Property partnership interests no longer were excluded property on dissolution given prior disposition of s. 95(2)(a)(ii) loans 551
Tax Topics - Income Tax Regulations - Regulation 5903 - Subsection 5903(5) - Paragraph 5903(5)(b) foreign affiliate parent cannot carry back FAPLs generated by wound-up foreign affiliate 389
Tax Topics - Income Tax Act - Section 96 Icelandic Sameignarfelag was partnership 198
Tax Topics - Income Tax Act - Section 95 - Subsection 95(2) - Paragraph 95(2)(f.14) once partnership interests were no longer excluded property, the components of their ACB calculation was to be translated at the rates when those components first arose 254
Tax Topics - Income Tax Act - Section 98 - Subsection 98(2) partnership interest disposition occurred no sooner than final distribution date 79


Marc Ton-That, Melanie Huynh, "Inconsistent Treatment of Partnerships in the Foreign Affiliate Rules,", 2009 Conference Report (Toronto: Canadian Tax Foundation, 2010), 24:1-61.

No application to lower-tier LP interests (pp. 24:16-17)

Regulation 5907(12) applies only to determine the ACB in a partnership interest held by a foreign affiliate. When a foreign affiliate owns an interest in a partnership that has an interest in a second partnership, the ACB in the second partnership to the first-tier partnership is presumably determined by using the rules in the Act.

Double taxation due to no adjustment for stub income (p. 24:18)

Suppose that FA 1 and FA 2 dispose of their interests in P to an unrelated person at a gain before the end of a calendar year, and P has income for the period up to the disposition time. Pursuant to the partnership agreement, a portion of the stub period income is allocated to FA 1 and FA 2 and thus included in their earnings. Under regulation 5907(12)(a)(i), there is no increase in FA 1's and FA 2's ACB in their respective interests in P, because FA 1 and FA 2 do not yet have a completed taxation year. The result is a double counting of the income amount, because the capital gain to FA 1 and FA 2 is higher than it would otherwise be had the ACB been properly adjusted. If the interests in P qualify as excluded property at the time of disposition, the phantom capital gain gives rise to exempt surplus (50 percent of the gain) and taxable surplus (the other 50 percent of the gain) in FA 1 and FA 2. When the interests in P are not excluded property, one-half of the phantom gain also gives rise to FAPI.

If P generates a loss instead of income from its active business, FA 1's and FA 2's share of the loss will reduce the ACB in their respective interests in P; thus, the incidence of double counting is avoided. The ACB adjustment is made under regulation 5907(12)(b)(i), which, unlike regulation 5907(12)(a)(i), does not require FA 1 and FA 2 to have a completed taxation year at the time of the ACB computation.

The same concerns also arise if the partnership is liquidated or dissolved into FA 1 and FA 2.