Non-resident investment funds have historically expressed concern that the Canada Revenue Agency (the "CRA") may assert that they are carrying on business in Canada for the purposes of the Income Tax Act (Canada) (the "Tax Act"), and, consequently, are subject to Canadian income tax, by virtue of having retained Canadian service providers. This concern has been particularly acute in cases where the non-resident fund has engaged a Canadian service provider to provide certain investment-related services, such as investment advisory or portfolio management assistance.

In response to these concerns, and to allow Canadian investment service providers to more effectively compete on the international stage, the Canadian government enacted section 115.2 of the Tax Act (the "Safe Harbour Provisions"), effective for taxation years ending after 1998. The Safe Harbour Provisions were expressed to be clarifying provisions and were aimed at providing legislative assurance to qualifying non-resident investment entities that they will not be found to be carrying on business in Canada for certain purposes of the Tax Act solely because they engage a Canadian service provider to provide designated investment services.

On October 31, 2011, the Department of Finance (Canada) released legislative proposals (the "Legislative Proposals") to strengthen and clarify the scope of the Safe Harbour Provisions, particularly as they relate to non-resident investment funds that are constituted as partnerships (including limited partnerships).

the legislative proposals

Over the last several years, the Department of Finance has periodically issued "comfort letters" to taxpayers and their advisors acknowledging certain gaps or anomalies in the Safe Harbour Provisions that were inconsistent with the perceived legislative intent of Parliament. In these letters, the Department of Finance agreed to recommend to the Minister of Finance that he bring amending proposals before Parliament to correct the perceived shortcomings of the Safe Harbour Provisions.

The Legislative Proposals generally codify the recommendations originally articulated in certain of the past "comfort letters". Several of the proposed amendments are of an administrative nature, such as extending the application of the Safe Harbour Provisions to provisions of the Tax Act and the corresponding Income Tax Regulations (Canada) that otherwise require non-residents carrying on business in Canada to file tax returns and partnership information returns, as applicable. Another amendment being advanced in the Legislative Proposals will provide greater certainty as to whether certain partnership interests that were disposed of prior to March 5, 2010 should be characterized as "taxable Canadian property" under the Tax Act in light of the Safe Harbour Provisions.

The Legislative Proposals also address substantive concerns about the scope of the protections available under the Safe Harbour Provisions to members of a non-resident partnership that engages the assistance of Canadian service providers to perform certain designated investment services. If enacted, the Legislative Proposals will modify the extent to which Canadian service providers and their affiliates may directly or indirectly invest in non-resident partnerships that intend to rely on the Safe Harbour Provisions.


Non-resident investment funds that have been relying on "comfort letters" previously issued by the Department of Finance may be heartened to know that the Department of Finance appears to be acting upon its previous written commitments. However, non-resident investment funds and their Canadian service providers should also review their organizational structures and operational protocols to ensure that they comply with the Legislative Proposals. Non-resident partnerships and their members, in particular, should consider whether the relieving amendments contained in the Legislative Proposals may allow the partnership to engage in certain advantageous restructurings or, alternatively, whether members of such partnerships should make certain elections contemplated in the Legislative Proposals to ensure that the existing terms of section 115.2 of the Tax Act apply in certain respects to the period ending on October 31, 2011. Finally, the Department of Finance is accepting comments on the Legislative Proposals up to November 30, 2011. Interested parties should assess whether they consider the Legislative Proposals to provide adequate protection for the matters referenced in previous "comfort letters" issued by the Department of Finance.