2020-0862451C6 2020 CTF - Q4 - Sale of TCP by a partnership

Principal Issues: Whether a purchaser who purchases TCP from a partnership may be liable under subsections 116(5) or (5.3) of the Act in respect of the portion of the consideration paid to the partnership that, after reasonable inquiry, the purchaser believes is attributable to direct or indirect partners (through one or more other partnerships) of the partnership that are resident in Canada?

Position: No.

Reasons: For the purpose of computing the purchaser’s liability, it is our view that the “cost to the purchaser of the property” or the “amount payable” by the purchaser for the property acquired from a non-resident person in paragraph 116(5)(c) or subparagraph 116(5.3)(a)(i) of the Act respectively excludes the portion of the consideration paid by the purchaser to a partnership that is reasonably attributable to the interest held by Canadian resident partners in the property through the partnership or through the partnership and other tiered partnerships.

Author: Eroff, Ina
Section: 116

2020 CTF Annual Conference
CRA Roundtable

Question 4: Sale of Taxable Canadian Property by a Partnership

Where “taxable Canadian property” (“TCP”) is sold by a partnership, the Canada Revenue Agency (“CRA”) has consistently administered the provisions of section 116 of the Income Tax Act (Canada) (the “Act”) on the basis that it is the partners of the partnership which have disposed of the property.  However we understand that it is the CRA’s policy to accept one notification of disposition filed pursuant to subsection 116(1) of the Act on behalf of all partners. See 2009-0317371I7 and 2012-0444081C6.  Consistent with this position, we understand that if the CRA issues a section 116 certificate to the partnership pursuant to subsection 116(2) of the Act, the certificate limit referred to in subsection 116(2) of the Act will not reflect the estimated proceeds of disposition of the TCP that are attributable to Canadian resident partners (because Canadian resident vendors are not subject to section 116 compliance requirements).  A similar comment applies to a certificate issued pursuant to subsection 116(5.2) of the Act.

Would the CRA confirm that a purchaser who purchases TCP or property described in subsection 116(5.2) of the Act from a partnership has no liability under subsections 116(5) or (5.3) of the Act in respect of the portion of the consideration paid to the partnership that, after reasonable inquiry, the purchaser believes is attributable to direct or indirect (through one or more other partnerships) partners of the partnership that are resident in Canada?

CRA Response

Subsection 116(5) of the Act may impose a liability on a purchaser who has acquired certain TCP from a non-resident person. Subsection 116(5.3) of the Act may impose a liability on a purchaser who has acquired from a non-resident person certain property described in subsection 116(5.2) of the Act (including certain property that may not otherwise be TCP for purposes of section 116 of the Act).  The amount of the purchaser’s liability under subsection 116(5) of the Act is computed by reference to the amount by which the cost to the purchaser of the acquired property exceeds the certificate limit set under subsection 116(2) of the Act (if any).  The amount of the purchaser’s liability under subsection 116(5.3) of the Act is the excess of the amount payable for the property over the amount fixed in the certificate under subsection 116(5.2) of the Act.

It is our view that the term "non-resident person" in section 116 of the Act refers to each partner individually, because subsection 96(1) of the Act does not deem a partnership to be a separate person for purposes of the withholding requirements in section 116 of the Act.  For the purposes of (inter alia) paragraph 2(3)(c) and section 116 of the Act, each partner of the partnership is considered to have disposed of their respective interest in the property of the partnership for proceeds of disposition equal to the portion of the consideration that is proportionate to the partner’s interest in the property.

For the purpose of computing a purchaser’s liability, it is our view that the “cost to the purchaser of the property” or the “amount payable” by the purchaser for the property acquired from a non-resident person in paragraph 116(5)(c) or subparagraph 116(5.3)(a)(i) of the Act, respectively, excludes the portion of the consideration paid by the purchaser to a partnership that is reasonably attributable to the interest held by Canadian resident partners in the property through the partnership or through the partnership and other tiered partnerships.

John Meek/Ina Eroff
2020-086245
October 27, 2020

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