Subsection 5908(10)
Articles
Marc Ton-That, Melanie Huynh, ""Inconsistent Treatment of Partnerships in the Foreign Affiliate Rules,"", 2009 Conference Report (Toronto: Canadian Tax Foundation, 2010), 24:1-61.
Double taxation due to no adjustment for stub income (p. 24:18)
Suppose that FA 1 and FA 2 dispose of their interests in P to an unrelated person at a gain before the end of a calendar year, and P has income for the period up to the disposition time. Pursuant to the partnership agreement, a portion of the stub period income is allocated to FA 1 and FA 2 and thus included in their earnings. Under regulation 5907(12)(a)(i), there is no increase in FA 1's and FA 2's ACB in their respective interests in P, because FA 1 and FA 2 do not yet have a completed taxation year. The result is a double counting of the income amount, because the capital gain to FA 1 and FA 2 is higher than it would otherwise be had the ACB been properly adjusted. If the interests in P qualify as excluded property at the time of disposition, the phantom capital gain gives rise to exempt surplus (50 percent of the gain) and taxable surplus (the other 50 percent of the gain) in FA 1 and FA 2. When the interests in P are not excluded property, one-half of the phantom gain also gives rise to FAPI.
If P generates a loss instead of income from its active business, FA 1's and FA 2's share of the loss will reduce the ACB in their respective interests in P; thus, the incidence of double counting is avoided. The ACB adjustment is made under regulation 5907(12)(b)(i), which, unlike regulation 5907(12)(a)(i), does not require FA 1 and FA 2 to have a completed taxation year at the time of the ACB computation.
The same concerns also arise if the partnership is liquidated or dissolved into FA 1 and FA 2.
Subsection 5908(4)
Administrative Policy
21 February 2013 T.I. 2012-0435881E5 - Wind-up and Reg. 5908
Parent, and its immediate wholly-owned subsidiary (Subsidiary), have 1% and 99% respective partnership interests in Partnership, which owns all 100 of the common shares of a foreign corporation ("FA"). Upon the winding-up of Subsidiary under s. 88(1), Partnership ceases to exist.
As the winding-up of Subsidiary will result in the deemed ownership of shares of FA decreasing from 99 to nil under draft s. 5908(1), this will cause draft s. 5908(2)(a) to deem Subsidiary to have disposed of the 99 common shares of FA previously deemed to be owned by it. Moreover, since after the wind-up, Parent owns those 99 common shares as a consequence of the transaction or event that gave rise to the disposition by Subsidiary, s. 5908(4) will deem Subsidiary to have disposed of the 99 common shares to Parent, so that s. 5905(5) will apply.
Subsection 5908(8)
Subsection 5908(9)
Articles
Michael Colborne, Michael McLaren, "Section 93 Elections — Proposed Amendments", Canadian Tax Journal, Vol. 58, 2010, p.357.
Preserves surplus adjustments for multi-tier partnerships (p. 378).
[P]roposed regulation 5908 ensures that a corporate partner of a partnership holding foreign affiliate shares is required to adjust the surplus balances of a foreign affiliate in which the partnership holds an interest in the same manner as every other Canadian-resident corporate shareholder pursuant to proposed regulations 5902(1)(b),5905(1), and 5905(5). Proposed regulation 5908(9) preserves this result through multiple tiers of partnerships by deeming a member of a partnership (the first partnership) that is a member of another partnership (the second partnership) to, itself, be a member of the second partnership for the purposes of proposed regulation 5908.