Principal Issues: Whether a foreign affiliate partner in a partnership is allocated its share of the capital gain of the partnership.
Position: Yes
Reasons: Context, scheme, and object of the provisions in question.
XXXXXXXXXX 2008-030285
March 10, 2011
Dear XXXXXXXXXX
Re: Capital Gains, FA's and Partnerships
This is in response to your e-mail message regarding the above-noted subject.
You have described the following hypothetical fact scenario.
1) Canco is a corporation resident in Canada.
2) Canco owns all of the shares of two foreign affiliates ("FA1" and "FA2").
3) FA1 and FA2 each hold a 50% interest in a partnership ("P").
4) P has disposed of a capital property and realized a capital gain.
You request our view whether in the context of the above scenario, the exempt portion of the capital gain is included in the "exempt earnings" as defined in subsection 5907(1) of the Income Tax Regulations (the "Regulations"), of FA1 and FA2. The concern arises because in the context of the above scenario it is not clear that any of the provisions of subsection 96(1) of the Act operate to determine and allocate to FA1 and FA2 its respective share of the capital gain realized by P (i.e. which includes the exempt portion thereof). The latter amount is relevant to and required in the computation of the "exempt earnings" of FA1 and FA2.
Our Comments
While subsection 96(1) of the Act is silent with respect to each partner's share of the capital gain realized by P, each of FA1 and FA2 will be considered to have been allocated a share of the capital gain of P in proportion to its respective interest in P. Each of FA1 and FA2 will include its respective share of the capital gain in the computation of its "exempt earnings" in accordance with the pre-amble of paragraph (a) of the definition of that term in subsection 5907(1) of the Regulations.
Our view as set out above generally extends to other provisions of the Regulations and the Act that apply in the context of taxpayers that have interests in foreign affiliates.
We trust the above is the information you require.
Yours truly,
Olli Laurikainen C.A.
Manager
International Section II
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch