Canada: CRA expresses views on 97(2) planning

International Tax Review is part of Legal Benchmarking Limited, 1-2 Paris Garden, London, SE1 8ND

Copyright © Legal Benchmarking Limited and its affiliated companies 2026

Accessibility | Terms of Use | Privacy Policy | Modern Slavery Statement

Canada: CRA expresses views on 97(2) planning

diep.jpg

maccarthy.jpg

Nancy Diep


Corinne MacCarthy

At the annual Canadian Tax Foundation conference on December 2 2014, the Canada Revenue Agency (CRA) was asked whether it would apply the general anti-avoidance rule (GAAR) to the application of a tax-deferred transfer of assets to a partnership under subsection 97(2) of the Income Tax Act (ITA) where taxpayers initially formed a partnership with only Canadian resident partners in order to meet the requirements under the rule but, shortly after the transfer, admitted non-resident partners. Subsection 97(2) is an elective provision and generally requires that the transferor immediately after the transfer be a member of the partnership and that the partnership be a Canadian partnership, which is defined as a partnership all of whose members are resident in Canada. This is a point-in-time test so the subsequent admission of non-resident partners technically should not impact the application of the rule.

The CRA provided an example where Corp A (a Canadian resident) forms a partnership with its wholly-owned Canadian subsidiary. Corp A transfers, under subsection 97(2), property to the partnership with a cost of $100,000, fair market value of $100,000 and an undepreciated capital cost balance of $50,000 in exchange for 50,000 partnership units worth $50,000 and a $50,000 promissory note. The next day, a non-resident contributes $50,000 for 50,000 partnership units, which cash is used by the partnership to repay the promissory note. The non-resident has a 49.95% interest in the partnership while Corp A's interest is diluted to 50.04%.

The CRA indicated that it would seek to apply the GAAR to this type of arrangement. According to the CRA, the application of the GAAR in the circumstances is based not only on the policy behind subsection 97(2) but also subsection 100(1) and certain related anti-avoidance provisions in subsections 100(1.4) and (1.5). These rules generally prevent taxpayers from directly or indirectly selling partnership interests to non-residents in order to convert what would otherwise be income into a capital gain and avoid future taxation in Canada altogether where the interest is not taxable Canadian property to the non-resident.

If Corp A had disposed of a portion of its partnership interest directly to the non-resident, subsection 100(1) would have applied, resulting in a fully taxable gain. In terms of the anti-avoidance provisions, although there has been a dilution of Corp A's interest in the partnership, the fair market value of Corp A's interest itself has not been diluted so the arrangement would not have been caught by subsections 100 (1.4) and (1.5).

Given the particular circumstances of the example considered, it is not clear how broadly CRA would take this approach where a non-resident has become a partner after property has been contributed to the partnership under section 97(2). Furthermore, the role of subsection 100(1) in the context of subsection 97(2) for the purposes of any GAAR determination requires a careful review of the relevant facts of any particular transaction(s), as how transaction(s) come about and why they take place necessarily affect conclusions about how the GAAR may apply, even to a transaction that appears structurally similar to that considered by the CRA.

Nancy Diep (nancy.diep@blakes.com) and Corinne MacCarthy (corinne.mccarthy@blakes.com), Calgary

Blake, Cassels & Graydon

Tel: +1 403 260 9779 and +1 403 260 9758

Website: www.blakes.com

more across site & shared bottom lb ros

More from across our site

While the IBS incorporates taxable events previously covered by state and municipal taxes, its governance and operational logic represent a significant departure from the legacy model
The new office on the fourth floor of 4 More London will span 14,230 square feet, with the potential to expand to the first and second floors
MNEs now face a shift from modelling to execution as the side‑by‑side deal forces tax teams to upgrade systems, harmonise data, and prevent costly pillar two mismatches
As recent surveys suggest a disconnect between AI adoption and employee engagement, the big four risk digging themselves into a strategic hole
Almost three-quarters of surveyed tax professionals are concerned about inaccurate AI outputs; in other news, Dentons hired a partner from CMS to lead its Belgian tax team
Long-running, high-value and complex enquiries are a significant reason for HM Revenue and Customs’s increased TP yield, experts suggest
Landmark legal updates in India have led companies to prioritise specialised tax advisers over accountants, ITR has found
Brazil’s shift to a nationwide consumption tax is more than conceptual; it fundamentally transforms municipal revenue, enforcement, and administrative disputes
While some advisers praised the ruling’s definition of a ‘voucher’ for VAT purposes, a UK partner said the case left unanswered questions
While pillar two has been enacted on paper in Brazil, companies are encountering a range of practical compliance issues, ITR has heard
Gift this article