2016-0632881E5 Regulation 808

Principal Issues: Whether a non-resident corporate partner can look through an upper-tier partnership to pick up properties owned by a lower-tier partnership, of which the first partnership is a member, when calculating its allowance in respect of investment in property in Canada.

Position: Yes.

Reasons: Having given consideration to the purpose of the Branch Tax and noting that a non-resident corporation that is a member of a top-tier partnership would be subject to Branch Tax in respect of its share of taxable income earned through a lower-tier partnership, it is reasonable to consider that the corporation will also be considered to be a member of a lower-tier partnership for the purpose of subsection 808(4) of the Regulations.

Author: Graham, Kanwal
Section: 219(1)(j); Regulation 808

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                                                                                                                          Kanwal Graham
September 22, 2017

Dear XXXXXXXXXX:

Re: Branch Tax in a multi-tiered partnership structure

This is in reply to your letter of February 17, 2016 in which you asked whether a non-resident corporate partner can “look through” a multi-tiered partnership structure for the purpose of calculating its allowance for the year in respect of its investment in property in Canada (“Allowance”) as provided for in paragraph 219(1)(j) of the Income Tax Act (the “Act”).

In your letter, you presented a scenario whereby a non-resident corporation owns an interest in Partnership A, which in turn owns an interest in Partnership B. All parties have a calendar year-end. Partnership B carries on business in Canada through a permanent establishment. Partnership A’s sole activity is holding its interest in Partnership B. Noting that the non-resident corporate partner would be subject to tax under Part XIV of the Act (“Branch Tax”) in respect of its share of taxable income earned through Partnership B, you asked whether it could look through Partnership A to take into consideration Partnership B’s properties when calculating its Allowance as provided for in paragraph 219(1)(j) of the Act and prescribed by section 808 of the Income Tax Regulations (the “Regulations”).

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 IC70-6R7, Advance Income Tax Rulings and Technical Interpretations.

Our Comments

The Department of Finance Explanatory Notes to subsection 219(1) of the Act describe the purpose of the Branch Tax as follows:

“A non-resident corporation may carry on business in Canada either through a subsidiary corporation or by operating a branch here. Dividends paid by a subsidiary to its non-resident parent company are subject to non-resident withholding tax under Part XIII of the Act, as modified by any applicable tax treaty. In the case of a branch, Part XIV imposes what is intended to be a generally comparable tax: in broad terms, any after-tax Canadian earnings that are not reinvested in the corporation’s Canadian business are subject to the branch tax.”

Where a non-resident corporation was carrying on business in Canada at the end of the year, the corporation may deduct, in computing its Branch Tax, an amount not exceeding the amount prescribed to be its Allowance. Where the corporation is a member of a partnership, subsection 808(4) of the Regulations is relevant to the computation of its Allowance. Essentially, in computing its Allowance, the corporate partner includes, pursuant to paragraph 808(4)(a) of the Regulations, its own qualified investment in property in Canada held outside the partnership and, pursuant to paragraph 808(4)(b) of the Regulations, its share of the partnership’s qualified investment in property in Canada.

Having given consideration to the purpose of the Branch Tax and noting that a non-resident corporation that is a member of a top-tier partnership would be subject to Branch Tax in respect of its share of taxable income earned through a lower-tier partnership, in our view, it is reasonable to consider that the corporation will also be considered to be a member of a lower-tier partnership for the purpose of subsection 808(4) of the Regulations. As such, in computing its Allowance, a corporate partner would include its share of the qualified investment in property in Canada owned by a lower-tier partnership of which it is considered to be a member.

In the scenario you presented, the non-resident corporate partner may, when calculating its Allowance as provided for in paragraph 219(1)(j) of the Act and as prescribed by section 808 of the Regulations, “look through” Partnership A to take into consideration Partnership B’s properties. Accordingly, the non-resident corporate partner would have two amounts included in the computation of its share of the partnerships’ qualified investment in property in Canada pursuant to paragraph 808(4)(b) of the Regulations: an amount for its proportionate share of Partnership A’s qualified investment in property in Canada; and an amount for its proportionate share of Partnership B’s qualified investment in property in Canada.

We trust these comments are of assistance.

Yours truly,

Lori Michele Carruthers, CPA, CA
Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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