In 2010-0385931I7 (released last week), the Rulings Directorate of the Canada Revenue Agency (Rulings) was asked to consider a case where a partnership of non-resident partners disposed of 25% of the common shares of a Canadian public company (Canco) that owned real estate in Canada. The gain realized by the partnership was not exempt under any applicable tax treaty. The question for Rulings was whether the gain realized by the partnership was taxable in Canada to the non-resident partners. The answer was no: the gain was not taxable. The reasoning of Rulings was as follows.

  • A non-resident “person” is only subject to tax under s. 2(3)(c) if the “person” disposes of taxable Canadian property (TCP).
  • The “person” in the case considered was each partner and not the partnership. Importantly, the rule in s. 96, which treats a partnership as a person for limited purposes, does not apply for purposes of s. 2(3)(c).
  • Under the common law, a member of a partnership does not own any particular property of the partnership in specie.
  • As a result, it could not be said that any particular non-resident partner “owned” 25% or more of shares of Canco for purposes of paragraph (e) of the definition of TCP in s. 248(1). Accordingly, none of the partners disposed of TCP. (A similar principle could well apply for paragraph (d) of the definition of TCP).

Similar reasoning applied for purposes of the reporting and withholding requirements under s. 116. As none of the non-resident partners disposed of TCP, s. 116 did not apply. Rulings noted that these results are likely unintended, and has informed the Department of Finance accordingly. Rulings further said the general anti-avoidance rule (s. 245) would be considered in any case where a partnership has been interposed to avoid what would otherwise be a taxable gain on TCP in Canada.