Purpose of s. 100(1.1)(d) (p.2)
…[P]aragraph 100(1.1)(d) does not include a trust merely because it has a non-resident beneficiary. While the Department of Finance Explanatory Notes do not explain the reason for this, one can only assume that it is because accrued income gains on the assets of a partnership cannot be avoided by a non-resident through the use of a trust due to Part XII.2 tax. [fn no 13: Blanchet J. "Transactions Involving Interests in Partnerships", draft paper presented to the Canadian Tax Foundation's 63rd Tax Conference, 2012, at footnote 16.]
Breadth of beneficiary concept/automatic tainting if 10% stacked interest (pp. 2-3)
While the addition of paragraph 100(1.1)(d) is meant to prevent vendors from disposing indirectly of their partnership interests to tax-exempt entities and therefore avoiding subsection 100(1), paragraph 100(1.1)(d) is drafted such that it will include any trust that has a tax-exempt entity as a beneficiary. For example, a family trust in which one of the discretionary beneficiaries is a charity would be included under paragraph 100(1.1)(d), even if the trustees have never allocated any income to that beneficiary and have no intention of allocating income to that beneficiary. As noted above with respect to paragraph 100(1.1)(c), in the case of stacked trusts it may not matter whether any tax-exempt person has an ultimate interest in one of the trusts for the trust to be included under paragraph 100(1.1)(d). If the purchaser is a trust with a partnership as a beneficiary, for example, and another trust holds 10% or more of the fair market value of all the interests in the beneficiary partnership, then the purchaser trust will be included under paragraph 100(1.1)(d) and subsection 100(1) will apply to the vending partner, regardless of whether the second trust has any tax-exempt beneficiaries.4
Reason for rule (p. 3)
Subsection 100(1.3) applies where the purchaser of the partnership interest is a non-resident and partnership property is used, both immediately before and after the acquisition of the partnership interest, in carrying on business in Canada through a permanent establishment and that property represents 90% or more of the fair market value of all the assets of the partnership. It appears that this exemption was included because under Article XIII of Canada's income tax treaties, non-residents are taxed in the same manner as Canadian residents on income earned from the disposition of such assets…
Direct acquisition limitation (p.3)
[T]he exception in subsection 100(1.3) is limited to direct acquisitions by non-residents. This means that if the purchaser is a partnership with a non-resident partner, this exception will not be available regardless of whether the asset conditions in paragraphs 100(1.3)(a) and (b) are met. The reason for this discrepancy is unknown; it would have been easy to expand the exception to "a person referred to in paragraph (1.1)(b) or subparagraph (1.1)(c)(ii)".
Email this Content