2014-0546581E5 Partnership interest excluded property

Principal Issues: Whether a partnership would be considered to be a foreign affiliate of a taxpayer for the purposes of the definition "excluded property" in subsection 95(1), in a particular fact pattern?

Position: No.

Reasons: Paragraph (e) of the definition “excluded property” does not deem a person that is not a foreign affiliate of a taxpayer to hold shares of the deemed non-resident corporation.

Author: Grégoire, Sylvain
Section: 95(1) “excluded property”, “foreign affiliate”

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                                                                                                                                                        2014-054658
                                                                                                                                                        Sylvain Grégoire

January 15, 2015

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Subject: Partnership Interest Excluded Property Determination

We are writing in response to your e-mail dated September 16, 2014 in which you requested our interpretation of the definition "excluded property" in subsection 95(1) of the Income Tax Act (Canada), R.S.C. 1985, c.1 (the "Act") with respect to the hypothetical scenario presented below.

Unless otherwise stated, all references to a statute are references to the provisions of the Act, as amended to the date hereof and every reference herein to a Part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provisions of the Act.

Assumptions

1.    Mr. A holds all of the shares of two corporations resident in Canada (“Canco 1” and “Canco 2”).
2.    Mr. B holds all of the shares of two other corporations resident in Canada ( “Canco 3” and “Canco 4”).
3.    Canco 2 and Canco 3 each holds 50% of the shares of a foreign company (“Forco”).
4.    Forco holds an interest in a partnership formed under foreign law (“LP”). The fair market value (“FMV”) of its interest in LP is equal to 10% of the FMV of all of the partnership interests in LP.
5.    Canco 1 and Canco 4 each holds a direct interest in LP. The FMV of each of their interests in LP is equal to 5% of the FMV of all of the partnership interests in LP.
6.    The remaining partners of LP are non-resident persons who are not related to Mr. A, Mr. B, or any of the Canadian-resident corporations mentioned above.      
7.    Mr. A and Mr. B are not related persons. 
8.    All of LP’s assets are used by it principally for the purpose of producing income from an active business carried on by it.

Question

You have asked us whether LP would be considered to be a foreign affiliate of Canco 3 for the purposes of the definition "excluded property" in subsection 95(1), such that any capital gain realized on a disposition by Forco of its interest in LP could be excluded from Forco’s “foreign accrual property income”.

Our Comments

This technical interpretation provides general comments about the provisions of the Act and related legislation (where referenced).  It does not confirm the income tax treatment of a particular situation involving a specific taxpayer but is intended to assist you in making that determination.  The income tax treatment of particular transactions proposed by a specific taxpayer will only be confirmed by this Directorate in the context of an advance income tax ruling request submitted in the manner set out in Information Circular IC70-6R6, Advance Income Tax Rulings and Technical Interpretations. 

Forco is a foreign affiliate of Canco 3 and a partner of LP. Accordingly, by virtue of paragraphs (d) and (e) of the definition "excluded property" in subsection 95(1), LP is deemed to be a non-resident corporation having 100 shares of capital stock of which Forco owns 10%, for the purposes of the definitions "foreign affiliate” and "direct equity percentage". Consequently, the equity percentage of Canco 3 in LP is 5 % thereby satisfying the requirement in paragraph (a) of the definition "foreign affiliate" in subsection 95(1).

However, we are of the view that the requirement in paragraph (b) of the definition “foreign affiliate” is not met in this scenario because Canco 4’s 5% interest in LP is not to be taken into account – Forco is the only partner of LP that is deemed to hold shares of LP for the purposes of the definition “excluded property”. Consequently, LP would not be considered to be a “foreign affiliate” of Canco 3 and Forco’s interest in LP would not qualify as “excluded property” in this particular fact pattern.     

We trust that these comments will be of assistance, and thank you for your enquiry.

Dave Beaulne, CPA, CA
Manager
International & Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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