2023-0965891E5 Section 115.2

Principal Issues: (i) Whether non-resident members of a limited partnership will be carrying on business in Canada by reason of a Canadian service provider making loans on behalf of the partnership. (ii) Where subsection 115.2(2) applies to the investment activities of the partnership, whether the non-resident partners may nevertheless be considered to be carrying on business in Canada for purposes of the Act either because of the Canadian service provider providing administrative services to the partnership that are outside of the scope of section 115.2 or because of GP, a corporation resident in Canada, performing administrative functions in Canada.

Position: (i) No. (ii) No.

Reasons: (i) Subsection 115.2(2) can apply in the context where the partnership invests in debt, generally acquired on original issue, provided all of the other requirements of subsection 115.2(2) are satisfied. If subsection 115.2(2) applies, the non-resident limited partners will not be considered to be carrying on business in Canada for purposes of subsections 115(1) and 150(1), Part XIV of the Act and section 805 of the Regulations as a result of those loan origination activities. (ii) Where non-resident partners are not otherwise considered to be carrying on business in Canada, they would not be considered to be carrying on business in Canada solely by reason of the Canadian service provider or GP performing administrative functions in Canada.

Author: Chan, Michael
Section: 115.2

XXXXXXXXXX                                                                   2023-096589
                                                                                           M. Chan

November 17, 2023

Dear XXXXXXXXXX,

Re: Application of subsection 115.2(2)

This is in reply to your letter in which you enquired about the application of subsection 115.2(2) of the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended, (the “Act”). More specifically, you asked us to confirm that in the hypothetical situation described below, the provision will apply to non-resident limited partners of a partnership whose activity is limited to the making of loans through the services of a Canadian service provider. If so, you asked as to confirm that the non-resident partners would not be considered to be carrying on business in Canada for purposes of subsections 115(1) and 150(1), Part XIV of the Act and section 805 of the Income Tax Regulations (the “Regulations”), provided they have no other connection to Canada.

Unless otherwise stated, every statutory reference herein is a reference to the relevant provision of the Act and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

Hypothetical Facts:

1. A taxable Canadian corporation (the “Manager”) carries on a business in Canada consisting of providing investment advisory and portfolio management services. The Manager is a “Canadian service provider” as defined in subsection 115.2(1).

2. A limited partnership (“Foreign LP”) is governed either by the laws of one of the provinces of Canada or by those of a foreign jurisdiction.

3. The general partner of Foreign LP is a taxable Canadian corporation that is an affiliate of the Manager (“GP”).

4. The limited partners of Foreign LP are all non-residents of Canada or partnerships that are not Canadian partnerships as defined in subsection 248(1).

5. Foreign LP’s activities described in its partnership agreement consist in the making of loans to borrowers that are resident in and outside Canada. These loans are a “qualified investment” as defined in subsection 115.2(1).

6. GP delegated all of its functions with respect to the investment activities of Foreign LP, including the making, monitoring, and disposing of loans on Foreign LP’s behalf, to the Manager pursuant to the terms of a management agreement. As a result, GP has no active role with respect to the income generating activities of Foreign LP and its activities are limited to administrative and clerical matters.

7. The requirements set out in paragraph 115.2(2)(c) are met. More specifically, none of the limited partners who subscribe for interests in Foreign LP are affiliated with any of GP, the Manager, or any person or partnership described in clause 115.2(2)(c)(ii)(A) or clause 115.2(2)(c)(ii)(B).

8. The limited partners’ only connection to Canada is their investment in Foreign LP.

The determination of whether a non-resident is “carrying on business in Canada” is a question of fact and is generally based on factors established by the Courts. An extended meaning of “carrying on business in Canada” is provided in section 253, which may deem a non-resident person to carry on business in Canada in the year in respect of certain activities described in the provision.

This request for a technical interpretation is limited to subsection 115.2(2) and we are not asked to comment on whether the limited partners of Foreign LP would, in the absence of subsection 115.2(2), be considered to be carrying on business in Canada by reason of investing in Foreign LP.

Our Comments:

Written confirmation of the tax implications inherent in particular transactions is given by this Directorate only where the transactions are proposed and are the subject matter of a request for an advance income tax ruling submitted in the manner set out in Information Circular 70-6R12. Nonetheless, we have provided general comments below, which we hope will be of assistance to you.

In general terms, subsection 115.2(2) provides that, for purposes of subsections 115(1) and 150(1), Part XIV and section 805 of the Regulations, a non-resident person is not considered to be carrying on business in Canada at any particular time solely because of the provision to the person, or to a partnership of which the person is a member, at the particular time of “designated investment services” by a Canadian service provider. Determination of whether all the services provided by the Manager to Foreign LP would be “designated investment services” as defined in subsection 115.2(1) can only be done in the context of an income tax ruling process.

The making of loans by the Manager on behalf of Foreign LP would generally qualify as “designated investment services” as defined in subsection 115.2(1). The definition “qualified investment” in subsection 115.2(1) includes “indebtedness,” and there is no indication that an acquisition, holding and disposition of a debt acquired on original issue through the services of a Canadian service provider are meant to be excluded from the application of subsection 115.2(2).

In addition, any ancillary services provided by the Manager in Canada that may fall outside the scope of “qualified investment services” in subsection 115.2(1), but that are administrative in nature and not an income generating activity would generally not be determinative on their own of the location where the business of Foreign LP is carried on. Therefore, where a non-resident limited partner is not considered to be carrying on business in Canada, by reason of the application of subsection 115.2(2) or otherwise, the non-resident limited partner will not be considered to be carrying on a business in Canada solely by reason of the Manager performing administrative functions in Canada.

Finally, the fact that GP, a corporation resident in Canada, performs administrative functions in Canada would not generally, in and by itself, cause Foreign LP or its limited partners to be carrying on business in Canada for the purposes of the Act where, once subsection 115.2(2) has been applied to disregard the activities conducted on behalf of Foreign LP by the Manager, the remaining activities of Foreign LP would not amount to carrying on business in Canada for the purposes of the Act.

Consequently, based on the hypothetical facts described in the request, the non-resident limited partners who are not otherwise carrying on a business in Canada as a result of activities outside the context of their investment in Foreign LP would not, solely by reason of investing in Foreign LP, be considered to carry on a business in Canada for purposes of subsections 115(1) and 150(1), Part XIV, and section 805 of the Regulations.

We trust that these comments will be of assistance.

Yours truly,

Ina Eroff
Acting Section Manager
for Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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