2018-0787561I7 Partnership and the Meaning of "Related"

Principal Issues: Whether two corporations would be related pursuant to section 251 if the interest in one of the corporations is held through a partnership.

Position: Yes.

Reasons: See below.

Author: Ng, Tania
Section: 251

                                                                                                                                                                  April 3, 2019

HEADQUARTERS                                                                                                                                    HEADQUARTERS
General Operations Unit                                                                                                                           Income Tax Rulings
General Operations and Border Issues Directorate                                                                                  Directorate
Excise and GST/HST Rulings Directorate                                                                                                 Tania Ng
Attention: Corinne Campbell-Rosser                                                                                                         (519) 200-8908

                                                                                                                                                                   2018-078756

Meaning of Related – Partnerships

We are writing in reply to your email query dated November 26, 2018, wherein you requested our views on the interpretation of the definition of “related persons” in subsection 251(2) of the Income Tax Act (Canada) (the “Act”) in the context of partnerships.

You have asked whether a particular corporation (“Parentco”) and another corporation (“Subco2”) would be related pursuant to subsection 251(2) if Subco2 was wholly-owned by a partnership (“Partnership”) the only members of which consist of Parentco and its wholly-owned subsidiary (“Subco1”). The percentage of ownership of Partnership by Parentco and Subco1 could vary and the partnership could either be a general or a limited partnership.

2018-0787561I7 diagram.pdf

The question is being asked in the context of a provision found in the GST/HST legislation which allows a corporation to claim input tax credits for certain expenses relating to shares/indebtedness of related corporations. Whether corporations are “related” for the purposes of this provision depends on whether they would be related pursuant to subsections 251(2)-(6) of the Act. With respect to the scenario described above, Parentco wishes to be able to claim input tax credits for expenses relating to Subco2 as Subco2 is not registered for GST/HST purposes. In order for Parentco to claim these input tax credits, Parentco must be related to Subco2 pursuant to section 251 of the Act.

OUR POSITION

In the scenario described above, it is our view that Parentco is related to Subco2 pursuant to section 251 of the Act.

ANALYSIS AND DISCUSSION

Subsection 251(2) – Definition of “Related Persons”

The definition of “related persons” is found in subsection 251(2). Paragraph 251(2)(a) deems individuals to be related to each other if they are connected by blood relationship, marriage or common-law partnership or adoption. Paragraph 251(2)(b) deems a corporation to be related to a “person” if the person (i) controls the corporation, (ii) is a member of a related group that controls the corporation or (iii) is a person related to a person described in subparagraph (i) or (ii). Paragraph 251(2)(c) deems two corporations to be related to each other if (i) they are controlled by the same person or group of persons, (ii) if each corporation is controlled by one person and the person who controls one of the corporations is related to the person who controls the other corporation, (iii) if one of the corporations is controlled by one person and the person is related to any member of a related group that controls the other corporation, (iv) if one of the corporations is controlled by one person and that person is related to each member of an unrelated group that controls the other corporation, (v) if any member of a related group that controls one of the corporations is related to each member of an unrelated group that controls the other corporation, or (vi) if each member of an unrelated group that controls one of the
corporations is related to at least one member of an unrelated group that controls the other corporation.

This definition of “related persons” is clearly not designed with partnerships in mind. The absence of special rules for partnership in the “related person” definition can be contrasted to the specific partnership rules that can be found in the definition of “affiliated persons” in subsection 251.1(1).

CRA’s View on Partnerships and the Definition of “Related Persons”

The CRA’s longstanding position with respect to partnerships and the definition of “related persons” in subsection 251(2) can be found in the response to Question 28 of the 1990 CTF Revenue Canada Roundtable wherein we stated:

Although subsection 251(2) does not include the word “partnerships” in the definition of “related persons” it is the Department’s practice, relying on the provisions subsection 96(1), to consider a partnership to be a person when the computation of income at the partnership level under Division B of Part I is involved. Thus for example, a partnership that controls a corporation could be related to the corporation by virtue of paragraph 251(2)(b) where such relationship is relevant to the computation of the partnership’s income. In the cases where a partnership is not viewed as a person, the references to the word “person” in subsection 251(2) would be read as references to the partners of the partnership. [Emphasis Added]

Accordingly, it is our view that the Partnership is not a person for the purposes of determining whether Parentco and Subco2 are “related” for the purposes of the Act since this issue is not relevant for the purposes of computing the income of the Partnership. (footnote 1)

Application to the Facts

In the scenario described above, Parentco controls Subco1 as Subco1 is a wholly-owned subsidiary. Parentco and Subco1 are the only partners of the Partnership, and as such, regardless of whether the Partnership is a general partnership or a limited partnership, and regardless of the actual percentage of ownership in Partnership of both Parentco and Subco1, Parentco controls Partnership. Since Partnership owns all the shares of Subco2, in our view, Parentco and Subco2 would be considered as being “related persons” under paragraph 251(2)(b)(i). (footnote 2)

Generally speaking, because the “related person” rules are not designed with partnerships in mind, it is difficult to make broad statements with respect to the effect a partnership has on the “related person” analysis in any given scenario. In a situation where a partnership is comprised of different members, particularly where the partners do not solely comprise of a corporation and its wholly-owned subsidiary, the partnership agreement governing that particular partnership should be taken into account in determining who controls a corporation when a partnership owns shares in a corporation. The partnership agreement and the equity interest of the members must be examined to determine which member(s) of the partnership can exercise voting rights in respect of the shares of the corporation. In the case of a limited partnership, it is our understanding that it is usually the general partner that can exercise these rights. (footnote 3)

We trust the comments we have provided are helpful.

Yours sincerely,

Michael Cooke, CPA, CA
Manager
Corporate Reorganizations Section II
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

FOOTNOTES

Note to reader: Because of our system requirements, the footnotes contained in the original document are shown below instead:

1 See also CRA document 2013-0484031E5 and 2003-0038003 for a discussion of how to treat partnerships in the context of determining whether an acquisition of control was acquired.
2 A reference to “control” in subsection 251(2) includes indirect control – see paragraph 17 of IT-64R4.
3 See CRA document 2013-0484031E5 and Folio S1-F5-C1: Related persons and dealing at arm’s length (paragraph 1.43).

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