28 November 2005 External T.I. 2004-0075721E5 - Two-tiered partnerships and section 216

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.

Principal Issues: 1. Can a non-resident make an election under subsection 216(1) of the Act to file a return under Part I of the Act in connection with the rental income earned by a partnership which is allocated to another partnership and subsequently to its non-resident member?

2. For the purpose of computing the income of a partnership from its interest in real property, will the issuance costs deductible under paragraph 20(1)(e) of the Act by the partnership reduce its net income otherwise computed if the only property of a partnership is an interest in a partnership whose only property is a real property?

Position: 1. A non-resident would be permitted to make an election under subsection 216(1) with respect to the rental income which is allocated to him/her through a two-tiered partnership in the present situation. This position applies whether the partnerships are general partnerships or limited partnerships.

2. The issuance costs deductible by the partnership under paragraph 20(1)(e) of the Act, if any, will reduce the share of the net income computed otherwise.

Reasons:

1. Position taken in document 9225705.

2. The interest in the real property is the only source of income of the partnerships.

XXXXXXXXXX Sylvie Labarre
2004-007572
November 28, 2005

Dear XXXXXXXXXX

Re: Section 216 of the Income Tax Act

We are writing in response to your letter of May 6, 2004 wherein you requested information concerning various income tax issues that arise from a hypothetical situation involving a two-tiered partnership structure and section 216 of the Income Tax Act (the "Act").

Hypothetical Situation

Partnership A is a limited partnership formed under the laws of a province of Canada. Partnership B is the only limited partner of Partnership A. Partnership B is a limited partnership formed under the laws of a foreign country.

Partnership B completed a public offering of its limited partnership units and incurred expenses described in subparagraph 20(1)(e)(i) of the Act. Non-resident individuals own all of the limited partnership units of Partnership B (the "Non-Residents"). The cash raised from the public offering, net of issuance costs, was used to acquire limited partnership units of Partnership A. Partnership B holds a 99.9% interest in Partnership A and Partnership B does not own any other property. The general partner of Partnership A is a corporation incorporated in Canada and it holds a 0.01% in Partnership A.

Partnership A used the proceeds received from Partnership B to acquire a rental building situated in Canada. Partnership A does not own any other property. Partnership A will earn net rental income from the building which will constitute income from property and not income from carrying on business in Canada.

Questions

1. Can a Non-Resident make an election under subsection 216(1) of the Act to file a return under Part I of the Act in connection with the rental income earned by Partnership A which is allocated to Partnership B and subsequently to the Non-Resident?

2. If so, is the Non-Resident's share of the net income in respect of the building net of issuance costs deductible by Partnership B under paragraph 20(1)(e) of the Act?

Our comments

Written confirmation of the tax implications inherent in real transactions is given by this Directorate only where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5. However, we are prepared to provide you with the following general comments.

In Technical Interpretation 9225705, our view was that a non-resident would be permitted to make an election under subsection 216(1) of the Act with respect to the rental income which is allocated to him/her through a two-tiered partnership in the particular situation described in the Technical Interpretation. In that situation, non-residents were members of a non-resident general partnership which was a member of a second partnership that owned rental property in Canada.

In our view, the position taken in Technical Interpretation 9225705 (that still represents our position) would also apply in a situation where the two partnerships are limited partnerships instead of general partnerships. Therefore, a non-resident member of Partnership B can make an election under subsection 216(1) of the Act to file a return under Part I of the Act in connection with the rental income earned by Partnership A which is allocated to Partnership B and subsequently to the non-resident member.

Where subsection 216(1) of the Act applies in such a situation, the non-resident person's only income for the purpose of the return filed under section 216 of the Act is the non-resident person's share of the income of a partnership of which the non-resident was a member from its interest in real property in Canada. As the interest in real property in Canada is the only source of income of Partnership A and of Partnership B, we agree with you that the issuance costs deductible by Partnership B under paragraph 20(1)(e) of the Act, if any, will reduce the share of the net income of Partnership A allocated to Partnership B and the result will represent the income of Partnership B from its interest in real property in Canada.

We trust the above has been of some assistance and we regret the delay in responding.

Yours truly,

Alain Godin, Manager
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch