Subsection 197(1) - Definitions
Non-Portfolio Earnings
Administrative Policy
10 January 2011 External T.I. 2010-0377081E5 - Meaning of non-portfolio earnings
Where a SIFT holds all the shares of a foreign affiliate, and the SIFT's only transactions with the foreign affiliate are loans to the foreign affiliate, and the foreign affiliate has no business in Canada, the foreign affiliate's interest payments to the SIFT are unlikely to be considered non-portfolio earnings under s. 197(1). (In the fact scenario provided, the SIFT held the foreign affiliate's shares indirectly.)
SIFT Partnership
Administrative Policy
2024 Ruling 2023-0997921R3 - Code 3 - XXXXXXXXXX SIFT Ruling Request
A REIT (i.e., a listed unit trust qualifying as a REIT for ITA purposes) indirectly purchased a property from a Canadian-resident tax-exempt corporation on the basis that such vendor would effectively take back a convertible preferred share for part of the purchase price. This was accomplished by an affiliate of the vendor, which was also a tax-exempt resident corporation (the “Vendor Affiliate”), subscribing for preferred units of a newly formed subsidiary limited partnership (“New LP” – the property purchaser), which was held directly and indirectly by the REIT.
The preferred units bore a fixed per-unit distribution entitlement on their face amount and were exchangeable, based on a largely fixed exchange ratio, at the option of the Vendor Affiliate into REIT units. At the closing time, the FMV of the REIT units, into which the preferred units were exchangeable, was substantially lower than the face amount of the preferred units. Furthermore, the purpose of the preferred units’ exchange rights is stated to be “not to create an instrument that replicates the return on or value of a … REIT Unit.”
CRA ruled that the holding of the preferred units by the Vendor Affiliate would not cause New LP to be a SIFT partnership. This ruling turned on the proposition that the preferred units did not represent “investments” in a publicly-traded entity, i.e., the REIT. The s. 122.1 “investment” definition relevantly refers to “a right that may reasonably be considered to replicate a return on, or the value of, a security of the trust.” The CRA summary simply states that this was not the case “because there is no replication.”
There was no blandishment that New LP was an “excluded subsidiary entity,” which would have depended on satisfying the more onerous test that the preferred units were not “property, the value of which is determined, all or in part, by reference to a security that is listed or traded on a stock exchange.”
| Locations of other summaries | Wordcount | |
|---|---|---|
| Tax Topics - Income Tax Act - Section 122.1 - Subsection 122.1(1) - Investment - Paragraph (a) - Subparagraph (a)ii) | exchangeable preferred units of sub LP of REIT did not replicate return on REIT units | 728 |
| Tax Topics - Income Tax Act - Section 104 - Subsection 104(7.1) | same proportionate taxable income allocation on sub LP exchangeable units avoided circumvention of s. 104(7.1) | 121 |
Subsection 197(2) - Tax on partnership income
Articles
Colin Campbell, "Libility for the Tax on SIFT Partnerships: A Rejoinder", 2011 Canadian Tax Journal, Vol 59, p. 709
Suggests that the phrase "liable to" can create a liability to tax; and that, in any event, the creation of liability to tax, viewed as merely an inchoate obligation to pay tax, then is crystallized through the assessment process. Context and purpose point to the same conclusion.
Brian Bloom, Brandon Wiener, "Has Parliament Failed To Charge the 'Tax on SIFT Partnerships?", 2011 Canadian Tax Journal, Vol 59, p. 1
The "liable to" wording of s. 197(2) fails to create an immediate obligation to pay the SIFT tax because it does not specify that such tax is to be paid, so that the tax lacks a charging section.