Principal Issues: Whether the arm's length test of sub-paragraph 212(1)(b)(i) should be applied at the partners' or at the partnership's level considering paragraph 212(13.1)?
Position: Question of facts.
Reasons: Previous position and wording of the Act.
XXXXXXXXXX 2009-034003 Yannick Roulier July 21, 2010
Dear XXXXXXXXXX :
Re: Paragraph 212(1)(b) of the Income Tax Act
This is in reply to a letter of September 4, 2009, in which we are asked for our views as to whether the arm's length test of sub-paragraph 212(1)(b)(i) should be applied at the partner or at the partnership level considering paragraph 212(13.1)(b) of the Income tax Act ("Act"). All statutory references in this letter are references to the provisions of the Act, R.S.C. 1985 (5th supp.) c. 1, as amended.
Comments
For the purposes of Part XIII of the Act, other than section 216, paragraph 212(13.1)(b) provides that where a person resident in Canada pays or credits an amount to a partnership (other than a Canadian partnership within the meaning assigned by section 102), the partnership is deemed to be a non-resident person in respect of that payment.
The rule in paragraph 212(13.1)(b) deems a partnership to be a non resident person specifically in respect of the payment in order to subject the payer to obligations imposed under Part XIII. We are of the view that paragraph 212(13.1)(b) deems a partnership to be a person notably for the purposes of applying the arm's length test in subparagraph 212(1)(b)(i). Paragraph 251(1)(c) provides that it is a question of fact whether persons not related to each other are at a particular time dealing with each other at arm's length. However, paragraph 251(1)(a) also provides that related persons shall be deemed not to deal with each other at arm's length. Consequently, if it is necessary to determine whether a payer is dealing at arm's length with a partnership for the purposes of paragraph 212(1)(b) of the Act, it is relevant to know whether the payer is related to the partnership as a consequence of the deeming rule. For example, if the payer is a corporation and the corporation is controlled by the partnership that receives the payment, the entities would be deemed not to be dealing at arm's length pursuant to paragraph 251(2)(b) of the Act. This is because pursuant to subsection 251(2) of the Act, related persons include a corporation and a person who controls the corporation if it is controlled by one person.
In other respects, you submit that a look-through approach is appropriate in determining whether members of a partnership might get the benefit of Article XI of the Canada - United States Tax Convention ("Convention"). In the context of a partnership structure, we are of the view that the partners are the taxpayers who may invoke the benefits of this Article, subject, among other things, to the rules provided under Articles IV, XI and XXIX-A of the Convention. This statement does not affect the fact that a partnership might, where necessary, be considered to be a "person" pursuant to the definition of this term in Article III for the application of the Convention.
The above comments constitute technical interpretations. They are not income tax rulings and are not binding on the CRA.
We trust the above comments will be of some assistance.
Yours truly,
Alain Godin, Manager
for Director
International and trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch