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Canada: Canada clarifies tax treatment to non-resident partners on disposition of property held by a partnership



Bill Maclagan

Soraya Jamal

Non-residents are generally subject to Canadian tax on gains realised on dispositions of "taxable Canadian property" (TCP) unless treaty relief is available. Historically, TCP has included shares of a public corporation, shares of a mutual fund corporation and units of a mutual fund trust held by a non-resident where at any time during the 60-month period immediately preceding a disposition of any such property, two tests are satisfied: (i) the non-resident holder, persons with whom the non-resident holder did not deal at arm's-length, or the non-resident holder together with all such persons, owned 25% or more of the issued shares of any class or series of shares of the capital stock of the corporation or issued units of the trust, as the case may be; and (ii) more than 50% of the fair market value of the particular share or unit was derived directly or indirectly from one or any combination of real or immovable property situated in Canada, Canadian resource properties, timber resource properties, and options in respect of, or interests in, or for civil law rights in, any such properties (whether or not such property exists).

In the context of a partnership that has non-resident partners, the Canada Revenue Agency (CRA) confirmed earlier this year that the TCP determination of property held by a partnership should be made at the partner level and not the partnership level. This was inconsistent with previous positions and the CRA stated that it believed that this result was unintended. On July 12 2013, the Canadian government released proposed amendments to the Income Tax Act to reverse this position, such that the TCP determination must occur at the partnership level. As a result of this proposed amendment, if a partnership disposes of property that would not be considered TCP if the non-resident partner owned the property directly, that partner's portion of the gain realised on the disposition may nonetheless be subject to Canadian tax if the property constitutes TCP to the partnership. This mismatch of property characterisation will occur where the partnership meets the 25% ownership test described above, but a non-resident partner would not.

A partnership with non-resident partners should be alert to the impact of the proposed legislative amendments and should take the necessary measures to avoid inadvertently triggering a Canadian tax liability for its non-resident partners.

Bill Maclagan ( and Soraya Jamal (

Blake, Cassels & Graydon

Tel: +1 604 631 3300


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