Canada: Guidance relating to Canadian tax treaties and foreign limited partners

International Tax Review is part of Legal Benchmarking Limited, 4 Bouverie Street, London, EC4Y 8AX

Copyright © Legal Benchmarking Limited and its affiliated companies 2025

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

Canada: Guidance relating to Canadian tax treaties and foreign limited partners

Canada Free Trade

Although not legally binding, the Canada Revenue Agency (CRA) recently answered three questions about the entitlement of UK minority limited partners (Partners), under the Canada-UK income tax convention (Treaty), to a reduction of the Canadian 25% withholding rate on certain dividend and interest payments.

gagnon.jpg
jones.jpg

Jean Marc Gagnon

Josh Jones

The context relates to a UK limited partnership (LP) that held all the shares of a Canadian corporation (Holdco) that in turn held all the shares of a Canadian operating corporation (Opco).

Subparagraph 10(2)(a) of the Treaty reduces the Canadian withholding tax rate on dividends paid by a Canadian corporation to a UK company if the recipient controlled directly or indirectly at least 10% of the voting power in the Canadian corporation. The CRA reiterated its position that it looks through a partnership to determine if its partners are entitled to treaty benefits in respect of the income of the partnership. The CRA stated that in this case, the LP's general partner controlled Holdco in such a way that the Partners would only be considered to indirectly control the voting power in Holdco if the partnership agreement specifically provided the Partners with the ability to vote on Holdco's shares.

The CRA also considered whether a Partner can own directly or indirectly shares of Holdco for purposes of subparagraph 10(3)(b) of the Treaty, which generally provides a withholding tax exemption on dividends paid to certain pensions or benefits organisations unless such an organisation owns directly or indirectly more than 10% of the capital or the voting power of the payor corporation. The CRA confirmed that each Partner would be considered to own indirectly Holdco shares (capital) in proportion to its partnership interests in LP. The CRA concluded that the words "directly or indirectly" in subparagraph (b) enabled it to attribute a particular percentage of LP's ownership of Holdco shares to each Partner, notwithstanding that under partnership law, partners are not generally considered to own partnership property.

The CRA was finally asked whether each Partner can be considered to be dealing at arm's length with Opco for purposes of subparagraph 11(3)(c) of the Treaty, which provides an exemption for interest paid to arm's length persons. Canadian law also provides an exemption from withholding tax for most interest paid to arm's length non-residents. For this purpose, a recipient partnership with at least one non-resident partner is deemed to be a non-resident person, and the CRA's view is presumably that for withholding purposes interest paid by Opco to LP is non-arm's length interest because LP controls Opco (through Holdco). However, as the CRA looks through a partnership to determine treaty benefits, the analysis under the Treaty is different.

The CRA confirmed that, unless the partnership agreement provides otherwise, the general partner is the sole partner controlling Holdco such that the general partner was not dealing at arm's length with Holdco or Opco. Accordingly, if each Partner dealt at arm's length with each other partner (including the general partner) and the partnership agreement did not remove control from the general partner, the CRA concluded that each Partner should be viewed as dealing at arm's length with Opco for the purposes of the Treaty. This position is in line with another administrative position of the CRA confirming that, if a partner has little or no say directing the partnership's operations, the partner is generally considered to be dealing at arm's length with the partnership. The CRA's position is also consistent with positions adopted by the CRA in situations involving partners and partnerships where a control position or exercise an influence over operations is key.

Several income tax conventions entered into by Canada include similar concepts as the Treaty, such that the recent CRA positions should have broader impact.

Jean Marc Gagnon (jean.gagnon@blakes.com) and Josh Jones (josh.jones@blakes.com)

Blake, Cassels & Graydon

Tel: +1 514 982 5025 and +1 416 863 4278

Website: www.blakes.com

more across site & shared bottom lb ros

More from across our site

Heads of tax need to push their teams forward as strategic business advisers to add value across the organisation, says Sandy Markwick
Scott Bessent reportedly felt undermined by Musk naming Gary Shapley as acting IRS commissioner; in other news, Baker Tilly will combine with a top 15 US firm
The promise of nine years’ tax certainty and a ‘rational and pragmatic’ government process makes APAs a no-brainer, Indian tax advisers tell ITR
Despite garnering significant revenues from multinationals, Italy’s digital services tax presents pressing double taxation issues, say Stefano Simontacchi and Francesco Saverio Scandone of BonelliErede
ITR’s research shows that in-house tax counsel in Asia also feel underserved by their advisers’ international networks
World Tax global head of research Jon Moore tells ITR how his team spots standout submissions, and gives early statistical insights into this year’s entries
Australia’s conservative opposition will repeal controversial tax agent reporting rules if elected in the country’s May general election
Shapley would be the fourth person to hold the job this year; in other news, UK tax advisory firm MHA raised fewer funds than expected from its London IPO
The US needs to be involved in pillar one for there to be more international acceptance of the project, Michael Masciangelo says
The UK regulator is investigating EY’s auditing of the national postal service as it relates to the high-profile Horizon scandal, which saw hundreds wrongfully convicted
Gift this article