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Proposals to Impact Sale of Partnership Interest to Non-Residents and Tax Exempt Entities - by Liz Murphy  

Canadian Tax Adviser

 

August 21, 2012

 

Liz Murphy
GTA, Mergers and Acquisitions

 

The Department of Finance has released draft legislation regarding its 2012 federal budget proposal to apply section 100 to a recalculation of a taxpayer's gain to the sale of a partnership interest to a non-resident person, or to an indirect transfer of a partnership interest to a non-resident person or a tax-exempt entity. The draft legislation, released on August 14, 2012, expands subsection 100 to include a series test and refines the gain calculation to include depreciable property held indirectly by the partnership through one or more other partnerships.

Background
Currently, section 100 of the Act provides that a taxpayer's gain on the disposition of a partnership interest may be recalculated where there is a sale of a partnership interest to a an entity exempt from tax under section 149 of the Act (e.g., a pension fund, certain Crown corporations). The gain is recalculated such that the portion of the gain related to income assets held by a partnership (i.e., assets other than capital assets that are not depreciable assets) are fully taxable rather than taxed at the 50% capital gains inclusion rate.

 

Proposed legislation expands application
New subsection 100(1.1) expands the application of section 100 to include:

 

  • A disposition to a non-resident person (including a non-resident trust)
  • Look-through rules to include a partnership interest acquired by another partnership or trust resident in Canada (other than a mutual fund trust) that is held by tax-exempt entities or non-residents, although a 10% de minimus exception (subsection 100(1.2)) would prevent the application of the look-through rules in certain circumstances.

 

Once enacted, subsections 100(1.1) and (1.2) will come into force on August 14, 2012, with transitional relief available for certain transactions completed before 2012 pursuant to an arm's-length agreement entered into before August 14, 2012.

 

Relieving provision
The draft legislation introduces subsection 100(1.3), which states that a disposition of a partnership interest to a non-resident person is not subject to proposed subsection 100(1) if the following conditions are met:

 

  • The partnership is carrying on a business through one or more permanent establishments in Canada immediately before and immediately after the disposition
  • The total fair market value of the partnership's property used in that business carried on in Canada is equal to at least 90% of the total fair market value of all the property of the partnership.

 

Once enacted, this subsection would come into force on March 29, 2012.

 

Anti-avoidance rules
Proposed new anti-avoidance provisions in subsections 100(1.4) and (1.5) would apply where partnership interests are created or changed in a way that is economically equivalent to a direct disposition of a partnership interest without a disposition of an interest actually having been made (i.e., a dilution of an interest). These new anti-avoidance rules would come into force on August 14, 2012, with transitional relief available for certain transactions completed before 2012 pursuant to an arm's-length agreement entered into before August 14, 2012.

 

For more information, contact your KPMG adviser.

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