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:
If the other partners are US residents, the partnership itself
should not be required to file form T1135 because it will not be a
specified Canadian entity. However, the individual will be required
to file form T1135 in respect of his or her partnership
If instead another 6 percent of the partners are Canadian
residents, and the remaining 89 percent of the partners are US
residents, the partnership will be required to file form T1135 in
respect of its real estate rental property because it will be a
specified Canadian entity. The individual partners will not have to
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
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.
The content of this article is intended to provide a general
guide to the subject matter. Specialist advice should be sought
about your specific circumstances.
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