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Canadian taxpayers with an interest in a partnership that holds specified foreign property (as defined in subsection 233.3(1)) may face uncertainty when assessing their form T1135 (“Foreign Income Verification Statement”) filing obligations. Depending on the partnership’s structure, either (1) the taxpayer may be required to file form T1135 in respect of its partnership interest, or (2) the partnership may be required to file form T1135 in respect of its property.
Section 233.3 requires a specified Canadian entity whose total cost amount of specified foreign property exceeds $100,000 at any time in the year to file form T1135 by the entity’s filing-due date. A specified Canadian entity includes a taxpayer resident in Canada and a partnership if the income attributable to non-resident partners is less than 90 percent of the total income of the partnership. A specified foreign property includes an interest in a partnership that holds specified foreign property, but does not include a partnership that is a specified Canadian entity.
Assume that an individual resident in Canada owns a 5 percent interest with a cost amount exceeding $100,000 in a partnership that holds real estate rental property in the United States (that is, specified foreign property), and that the partnership’s cost of real estate rental property also exceeds $100,000. When the residence of each of the other partners is unknown to the individual, two situations can apply:
Violations of these rules can easily occur. If a partnership is managed by a US-resident person and the majority of the partners are US residents, it is unlikely that the person managing the partnership will seek Canadian tax advice. Because the “less than 90 percent non-resident partner” filing threshold for form T1135 is low and does not mirror the filing requirement for partnership information returns, it may be easy to overlook a T1135 filing obligation on the assumption that a partnership is a “foreign partnership.”
In the absence of full information about the residence status of other partners, the best compliance strategy for a Canadian partner may be to protectively file form T1135 in respect of the taxpayer’s interest in the partnership. However, a partnership’s filing obligations cannot be avoided by such a filing (nor can any related penalties for failing to file).
Additional complexities can arise if the partnership is formed in a foreign jurisdiction. The foreign partnership must first be characterized for Canadian tax purposes as either a partnership or another form of business (for example, a corporation). The CRA will compare the relevant characteristics of the foreign partnership to recognized forms of business under Canadian law in order to classify the foreign partnership for Canadian tax purposes. If the foreign partnership is classified as a corporation for Canadian tax purposes, other foreign reporting requirements, such as form T1134 (“Information Return Relating to Controlled and Not-Controlled Foreign Affiliates”), may be required.
Canadian Tax Focus
Volume 4, Number 4, November 2014
©2014, Canadian Tax Foundation
Related Topics:Canada Revenue Agency; U.S. Tax; International Tax
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