18 June 1996 External T.I. 9523595 - EXCLUDED PROPERTY STATUS - PARTNERSHIP STRUCTURES

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

Principal Issues:

Excluded property status involving partnership structures.

Position:

Depending on equity percentages for paragraphs (a) and (b) of definition of foreign affiliate in subsection 95(1), a non-resident corporation in which shares are held by a partnership could qualify as a foreign affiliate for purposes of excluded property rules.

Reasons:

Law, intent.

						952359
XXXXXXXXXX                                  Jane Stalker

Attention: XXXXXXXXXX

June 18, 1996

Dear Sirs:

Re: Excluded Property Status Involving Partnership Structures

We are writing in response to your letter dated September 6, 1995 in respect of the definition of "excluded property" as defined in subsection 95(1) of the Income Tax Act (Canada) (the "Act"), in two hypothetical situations.

Example A

1.A Canadian-incorporated and resident company (Canco) owns 100% of a foreign holding company (Forhold).

2.Forhold has a 90% interest in a partnership (P1).

3.P1's only assets are 25% of the share capital of a foreign operating company (Forco) and a 90% interest in a second partnership (P2). Forco and P2 both carry on active business operations exclusively outside Canada, and all or substantially all of the property of Forco and of P2 are used or held principally for the purposes of gaining or producing income from their active businesses.

We assume that the fair market value of Forhold's interest in P1 is also 90% of the fair market value of all interests in P1.

In our view any capital gain realized by Forhold on a disposition of its 90% interest in P1 would be excluded from its foreign accrual property income ("FAPI") because the interest in P1 would be considered "excluded property" as defined in subsection 95(1) of the Act. Furthermore, any capital gain realized by P1 on a disposition of its 25% interest in Forco or its 90% interest in P2 would be excluded from the FAPI of Forhold, since its interests in Forco and P2 would also be "excluded property".

As noted at the Round Table session of the 1992 Tax Executive Institute Conference, the definition of excluded property was amended to enable a non-resident corporation in which shares of the capital stock are held by a partnership to qualify as a foreign affiliate of a taxpayer for purposes of the excluded property rules. The Department commented as follows:

This position is consistent with the definition of "excluded property" in paragraph 95(1)(a.1) in that it was considered necessary to enact, for purposes of paragraphs 95(1)(d) and 95(4)(a) as they apply to paragraph 95(1)(a.1), the deeming provisions in subparagraphs 95(1)(a.1)(iv) and (v) in order that where a foreign affiliate had an interest in a partnership and the shares of the capital stock of a corporation in which all or substantially all the assets were used in an active business were partnership property such shares could be considered excluded property.

Example B

1.A Canadian-incorporated and resident company (Canco 1) owns 100% and 65 % of two other Canadian-incorporated and resident companies (Canco 2 and Canco 3 respectively).

2.Canco 2 owns 100% of a foreign holding company (Forhold 2), and Canco 3 owns 100% of a separate foreign holding company (Forhold 3).

3.Forhold 2 has an interest of 10% in a partnership (P1), and Canco 3 and Forhold 3 have interests of 65% and 25% respectively in P1.

4.P1's only assets are 25% of the share capital of a foreign operating company (Forco) and a 90% interest in a second partnership (P2).

5.Forco and P2 carry on active business operations exclusively outside Canada, and all or substantially all of the property of Forco and of P2 are used or held principally for the purpose of gaining or producing income form their active businesses.

We assume that the fair market value of Forhold 2's 10% interest in P1 is also 10% of the fair market value of all interests in P1, and that the fair market of P1's 90% interest in P2 is also 90% of the fair market value of all interests in P2.

For the purpose of the excluded property rules P1 and P2 would be considered non-resident corporations. For the same purpose, in interpreting the definition of foreign affiliate in subsection 95(1) of the Act, Canco 2 has an equity percentage of 2.5% in Forco and 9% in P2 for the purpose of paragraph (a) of that definition, and Canco 2 has an equity percentage of 0% in Forco and 0% in P2 for the purpose of paragraph (b) of that definition. However, P1 which is related to Canco 2 has an equity percentage of 25% in Forco and 90% in P2 for the purpose of paragraph (b) of the definition of foreign affiliate. Therefore, for the purpose of the excluded property definition, Forco and P2 are foreign affiliates of Canco. Accordingly, any capital gain realized by P1 on a disposition of its 25% interest in Forco or its 90% interest in P2 would be excluded from the FAPI of Forhold 2, since its interests in Forco and P2 would be excluded property pursuant to that definition in subsection 95(1) of the Act.

The above comments represent our general views with respect to the subject matter of your letter. These comments do not constitute an advance income tax ruling and therefore, as described in paragraph 21 of Information Circular 70-6R2, are not binding on the Department.

Yours truly,

for Director
Reorganizations and International Division
Income Tax Rulings and Interpretations Directorate