In some cases, a Canadian resource exploration company (Canco) may acquire and directly hold a resource property interest in the US (the Property Interest). At a certain point, however, it may become necessary for corporate and commercial law purposes to assign the Property Interest to an “entity” formed in the US. If the Property Interest has significantly appreciated in value since first acquired, and Canco does not have sufficient tax pools, significant taxable income could arise in Canada on such a transfer. In this circumstance, a potential solution to consider is the use of a limited partnership formed under the laws of a US state, as follows.
- Canco forms a new Canadian subsidiary (Cansub).
- Canco and Cansub form a limited partnership under the laws of the selected US state (USLP), with Canco as limited partner and Cansub as general partner.
- Canco transfers the Property Interest to US LP in consideration for additional limited partnership units of USLP.
- A joint tax election under s. 97(2) of the Income Tax Act (Canada) is timely filed with the Canada Revenue Agency (CRA).
The tax election under s. 97(2) should defer any income otherwise arising in Canco on the transfer of the Property Interest to USLP. Of course, US tax and related issues must also be considered and addressed.