Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Principal Issues: Whether an individual, a partner in a foreign partnership who became a Canadian resident during a year, is required to report a capital gain for Canadian income tax purposes that was realized by the partnership while the individual was a non-resident of Canada
Reasons: Capital gain is included in the partner’s income under subsection 96(1) and reported under section 114.
Author: Ho, Judy
Section: 96(1), 96(8), 114
January 17, 2017
Mr. Roger Clarke HEADQUARTERS
Programs Officer Income Tax Rulings
750 Heron Road, 7th Floor Directorate
Ottawa, ON K1V 2E4 Judy Ho
Capital gain of a partnership
We are writing in response to your question whether an individual taxpayer who is a member in a foreign partnership and who immigrated to Canada during a taxation year is required to report a capital gain realized by the partnership prior to the taxpayer becoming a resident of Canada.
Unless otherwise stated, all references are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.) (the “Act”), as amended.
The facts, as we understand them, are as follows:
- An individual (“Taxpayer”) became a resident of Canada at some time in 2015.
- Prior to becoming a resident of Canada, the Taxpayer was a partner in a U.S. partnership (“Partnership”). The Partnership is considered to be a partnership for the purposes of the Act. The Taxpayer continued to hold the interest in the Partnership through the rest of 2015.
- The Partnership did not carry on business in Canada at any relevant time. The Partnership has a December 31 fiscal period end.
- The Taxpayer received a K1-Form 1065 (a form that is filed with the US Internal Revenue Service by partnerships) for the Partnership’s 2015 fiscal period in respect of the Taxpayer’s interest in the Partnership, with an amount of capital gain reported on the form.
- This capital gain arose from a disposition by the Partnership of a real property situated in the U.S. The disposition occurred while the Taxpayer was a resident of the U.S., not a resident of Canada. The distribution of the funds from the disposition occurred while the Taxpayer was a resident of Canada.
You have asked us whether the capital gain realized by the Partnership should be reported by the Taxpayer for Canadian income tax purposes for the Taxpayer’s 2015 taxation year since the gain was accrued and realized while the Taxpayer was a non-resident of Canada.
As stated in the facts, the Taxpayer was a non-resident of Canada throughout part of 2015 (prior to the immigration to Canada) and a resident of Canada throughout the remaining part of 2015 (after the immigration). As a result, the taxable income of the Taxpayer for 2015 would be determined pursuant to section 114. For the period in which the Taxpayer was a non-resident of Canada, the taxable income would only include income earned in Canada, as described in subsection 115(1). For the period in which the Taxpayer was a resident of Canada, income from all sources (i.e. world-wide income) would be included in the income of the Taxpayer.
Where a taxpayer is a member of a partnership, subsection 96(1) applies in determining the amount to be included in the taxpayer’s income. The partnership is treated as if it were a separate person resident in Canada and its taxation year is considered to be its fiscal period. The partner’s income is computed as if each partnership activity were carried on by the partnership as a separate person and a computation were made of the amount of each taxable capital gain of the partnership from the disposition of property for each taxation year of the partnership. As a result, the computation and allocation of the partnership’s income (including capital gains) to the members is made at the end of the partnership’s fiscal period.
In the situation described above, the capital gain was realized by the Partnership sometime in 2015 and allocated to the Taxpayer at the end of 2015 when the Taxpayer was a resident in Canada. Therefore, pursuant to section 114, the income of the Partnership, including the capital gain realized by the Partnership, must be reported by the Taxpayer on the Taxpayer’s 2015 Canadian income tax return. However, the amount of the gain reported by the Taxpayer on the tax return may differ from the amount stated on K1-Form 1065 since the amount of the capital gain (as well as any other partnership income) has to be computed in accordance with the Act.
Subsection 96(8) would not apply in the situation described to carve out the capital gain realized by the Partnership prior to the Taxpayer becoming a resident in Canada. Subject to certain conditions, subsection 96(8) applies where at a particular time, a person who is a member of a partnership becomes resident in Canada, and prevents the recognition for Canadian income tax purposes of losses realized by the partnership in respect of the disposition of a property prior to that particular time. However, while addressing the importation of losses into Canada, subsection 96(8) does not prevent the recognition of gains in Canada.
Lastly, as a result of the immigration to Canada, the Taxpayer would be deemed to have disposed and reacquired the interest in the Partnership under paragraphs 128.1(1)(b) and (c). However, such deemed disposition and reacquisition of the interest in the Partnership would not impact the gain that has to be reported by the Taxpayer in respect of the disposition of the property by the Partnership.
We trust our comments will be of assistance.
For Division Director
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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