Canada: IRS Should Allow QCIV Self-Designation Under FIRPTA

As part of the Protecting Americans from Tax Hikes Act of 2016 (the ''PATH Act''),1 Congress enacted a new exemption from the Foreign Investment in Real Property Tax Act of 1980 (''FIRPTA'')2 for foreign entities that are ''qualified shareholders'' of certain publicly traded real estate investment trusts (''REITs'') and other entities.3 In order to be a qualified shareholder, a foreign entity must be a ''qualified collective investment vehicle'' (''QCIV''). As discussed below, most entities that are qualified shareholders are likely to require specific designation by the Treasury Department.4 This article suggests procedures that Treasury should adopt for foreign entities to obtain such designation, and provides an example of how the suggested procedures would apply to a publicly listed Canadian REIT.

Congress has not provided guidance on why it required specific designation for foreign entities to qualify as QCIVs or how the designation process should be implemented. The procedure for obtaining designation suggested in this article — referred to herein as ''deemed designation'' — was selected because that method would enable the Treasury Department and the Internal Revenue Service (''IRS'') to make designation available quickly and with a comparatively small burden on government resources.5 Moreover, since the goal of the PATH Act is to encourage foreign investment in U.S. real estate and infrastructure assets, deemed designations would enable the IRS to carry out Congress's intent to provide relief without excessive delay to a class of investors that could potentially contribute significant amounts of capital to the U.S. economy .

The IRS is rumored to be considering doing nothing to provide a designation procedure. Instead, the IRS would make investors wait for an applicable tax treaty to be amended to allow for a reduced rate of withholding with respect to REIT dividends even for a holder of more than 10% of the REIT's stock (which would enable an investor to qualify as a qualified shareholder under §897(k)(3)(B)(i)). Such an approach would effectively write the qualified shareholder exemption out of the Code because the U.S. Model Tax Treaty does not include a provision that would enable investors to qualify under §897(k)(3)(B)(i) and, even if the Treasury Department renegotiates an existing tax treaty, the tax treaty approval process has been blocked for years through the efforts of Sen. Rand Paul (R-Tenn.). With Sen. Paul's recent re-election, there is currently no prospect for any new treaties to become effective. We hope that the Treasury Department and the IRS will give effect to Congress's intent as expressed in the PATH Act and provide some way — such as the procedures described in this article — for foreign institutional investors to access the qualified shareholder exemption.


In 1980, Congress enacted FIRPTA, which generally imposes a tax on a foreign person's disposition of an interest in real property located in the United States. This tax on disposition applies to a foreign person's disposition of a ''United States real property interest'' (''USRPI''), which includes direct interests in real property located in the United States as well as interests in partnerships, corporations and certain trusts whose assets include more than a threshold amount of USRPIs. Under §897(h), any distribution from a REIT or regulated investment company (''RIC'') is treated as gain from the disposition of a USRPI to the extent that the distribution is attributable to the disposition of a USRPI by the REIT or RIC.

One goal of the PATH Act, signed into law on December 18, 2015, is to encourage foreign institutional investors to increase their investments in U.S. real estate and infrastructure assets. The Senate conference report on the PATH Act described the purpose of the PATH Act as follows:

It is essential to increase foreign investment in U.S. real estate. Increased investment in building and infrastructure will create American jobs. Increased investment will also provide equity capital for existing U.S. real estate ventures that have outstanding loans that are maturing, and will thus reduce the potential for foreclosures. [FIRPTA] contains tax rules that impose significant penalties on foreign investment in domestic real estate through REITs that do not exist in other types of U.S. corporate investments such as corporate stocks and bonds.6

The PATH Act attempts to meet this goal by providing a number of exemptions from FIRPTA targeted for large institutional investors outside of the United States.7 These exemptions are generally much broader than previously enacted exemptions, and they apply both to dispositions of USRPIs and to distributions from REITs that are recharacterized as gain from the disposition of a USRPI under §897(h)(1). The new provisions include the following:

  • Foreign pension funds that meet certain requirements have been granted a complete exemption from FIRPTA.8
  • An interest in a publicly traded REIT is exempt from FIRPTA for a foreign investor that holds less than a threshold amount of the publicly traded REIT's shares.9 The PATH Act increased the threshold from 5% to 10%.10
  • Publicly traded investment funds that meet certain requirements (referred to as ''qualified shareholders'') have been granted a potentially complete exemption from FIRPTA.11

The exemption for qualified shareholders is the main focus of this article. In order to be a qualified shareholder, a foreign person must either (a) be eligible for the benefits of a comprehensive income tax treaty with the United States that includes an exchange of information program and have its principal class of interests listed and regularly traded on a recognized stock exchange or (b) be a limited partnership in a jurisdiction with an agreement for the exchange of tax information and have at least 50% of the value of its limited partnership units regularly traded on the New York Stock Exchange or NASDAQ Stock Market. In addition, in order for a foreign person that satisfies either (a) or (b) to be a qualified shareholder, it must (c) be a QCIV and (d) meet certain recordkeeping requirements.

A qualified shareholder that is a REIT enjoys an exemption from FIRPTA only to the extent that the qualified shareholder does not have any ''applicable investors.''12 For this purpose, an applicable investor is a person that is not itself a qualified shareholder and that holds more than 10% of the qualified shareholder's stock.

Certain distributions from corporations (including all REITs, which are automatically classified as corporations for U.S. federal tax purposes) are treated as capital gain under applicable provisions of the Code. This is the case for distributions in excess of a shareholder's basis in the corporation's stock, certain distributions in redemption of a shareholder's stock, and certain liquidations of a corporate subsidiary where the parent holds less than 80% of the subsidiary's stock. Under §897(k)(2)(C), these types of distributions are recharacterized as an ordinary REIT dividend when received by a qualified shareholder (except to the extent that there are applicable investors on the qualified shareholder).

As noted above, only QCIVs can be qualified shareholders. Section 897(k)(3)(B) defines a QCIV as a foreign person

  1. which, under a comprehensive income tax treaty, is eligible for a reduced rate of withholding with respect to ordinary dividends paid by a REIT even if such person holds more than 10% of the stock of such REIT,
  2. which—

    1. is a publicly traded partnership that is not treated as a corporation for U.S. federal tax purposes,
    2. is a withholding foreign partnership,
    3. if such foreign partnership were a U.S. corporation, would be a U.S. real property holding corporation (determined without regard to paragraph (1)) at any time during the 5-year period ending on the date of disposition of, or distribution with respect to, such partnership's interests in a REIT, or
  3. which is designated as a QCIV by the Secretary and is either—

    1. fiscally transparent within the meaning of Code section 894, or
    2. required to include dividends in its gross income, but entitled to a deduction for distributions to persons holding interests (other than interests solely as a creditor) in such foreign person.13

As of the time of this writing, the test in clause (i) above is likely to be met only by certain entities formed under the laws of the Netherlands, Australia, or possibly a limited number of other jurisdictions.

The number of entities that qualify under clause (ii) is also likely to be small. Therefore, the test with the broadest potential applicability is the test articulated in clause (iii) above, which requires the Treasury Department, through delegation to the IRS, to designate entities as QCIVs.

To read this article in full, please click here.

Originally published by Bloomberg BNA's Tax Management International Journal.


1. Enacted as part of the Consolidated Appropriations Act, Pub. L. No. 114-113, §322(a)(1).

2 Pub. L. No. 96-499.

3 §897(k)(2). All section (''§'') references are to the U.S. Internal Revenue Code of 1986, as amended, or the Treasury regulations thereunder, unless otherwise indicated.

4 See §897(k)(3)(B).

5 A discussion of procedures to provide QCIV designation was included in a recent bar report submitted to the Treasury Department and the IRS by the New York State Bar Association's Tax Section. New York State Bar Association Tax Section, Report on the Changes to FIRPTA Under the Protecting Americans from Tax ct. 3, 2016) (the ''NYSBA Report'').

6 S. Rep. No. 114-25 (Apr. 14, 2015), 2.

7 Foreign investors should bear in mind that, even if they qualify for an exemption from FIRPTA, income from FIRPTA assets may still be subject to U.S. federal income tax if that income is effectively connected to a trade or business of the foreign investor in the United States.

8 §897(l).

9 §897(c)(3).

10 §897(k)(1).

11 §897(k)(2) and §897(k)(3).

12 §897(k)(2)(D).

13 Emphases added.

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.

To print this article, all you need is to be registered on

Click to Login as an existing user or Register so you can print this article.

In association with
Up-coming Events Search
Font Size:
Mondaq on Twitter
Register for Access and our Free Biweekly Alert for
This service is completely free. Access 250,000 archived articles from 100+ countries and get a personalised email twice a week covering developments (and yes, our lawyers like to think you’ve read our Disclaimer).
Email Address
Company Name
Confirm Password
Mondaq Topics -- Select your Interests
 Law Performance
 Law Practice
 Media & IT
 Real Estate
 Wealth Mgt
Asia Pacific
European Union
Latin America
Middle East
United States
Worldwide Updates
Check to state you have read and
agree to our Terms and Conditions

Terms & Conditions and Privacy Statement (the Website) is owned and managed by Mondaq Ltd and as a user you are granted a non-exclusive, revocable license to access the Website under its terms and conditions of use. Your use of the Website constitutes your agreement to the following terms and conditions of use. Mondaq Ltd may terminate your use of the Website if you are in breach of these terms and conditions or if Mondaq Ltd decides to terminate your license of use for whatever reason.

Use of

You may use the Website but are required to register as a user if you wish to read the full text of the content and articles available (the Content). You may not modify, publish, transmit, transfer or sell, reproduce, create derivative works from, distribute, perform, link, display, or in any way exploit any of the Content, in whole or in part, except as expressly permitted in these terms & conditions or with the prior written consent of Mondaq Ltd. You may not use electronic or other means to extract details or information about’s content, users or contributors in order to offer them any services or products which compete directly or indirectly with Mondaq Ltd’s services and products.


Mondaq Ltd and/or its respective suppliers make no representations about the suitability of the information contained in the documents and related graphics published on this server for any purpose. All such documents and related graphics are provided "as is" without warranty of any kind. Mondaq Ltd and/or its respective suppliers hereby disclaim all warranties and conditions with regard to this information, including all implied warranties and conditions of merchantability, fitness for a particular purpose, title and non-infringement. In no event shall Mondaq Ltd and/or its respective suppliers be liable for any special, indirect or consequential damages or any damages whatsoever resulting from loss of use, data or profits, whether in an action of contract, negligence or other tortious action, arising out of or in connection with the use or performance of information available from this server.

The documents and related graphics published on this server could include technical inaccuracies or typographical errors. Changes are periodically added to the information herein. Mondaq Ltd and/or its respective suppliers may make improvements and/or changes in the product(s) and/or the program(s) described herein at any time.


Mondaq Ltd requires you to register and provide information that personally identifies you, including what sort of information you are interested in, for three primary purposes:

  • To allow you to personalize the Mondaq websites you are visiting.
  • To enable features such as password reminder, newsletter alerts, email a colleague, and linking from Mondaq (and its affiliate sites) to your website.
  • To produce demographic feedback for our information providers who provide information free for your use.

Mondaq (and its affiliate sites) do not sell or provide your details to third parties other than information providers. The reason we provide our information providers with this information is so that they can measure the response their articles are receiving and provide you with information about their products and services.

If you do not want us to provide your name and email address you may opt out by clicking here .

If you do not wish to receive any future announcements of products and services offered by Mondaq by clicking here .

Information Collection and Use

We require site users to register with Mondaq (and its affiliate sites) to view the free information on the site. We also collect information from our users at several different points on the websites: this is so that we can customise the sites according to individual usage, provide 'session-aware' functionality, and ensure that content is acquired and developed appropriately. This gives us an overall picture of our user profiles, which in turn shows to our Editorial Contributors the type of person they are reaching by posting articles on Mondaq (and its affiliate sites) – meaning more free content for registered users.

We are only able to provide the material on the Mondaq (and its affiliate sites) site free to site visitors because we can pass on information about the pages that users are viewing and the personal information users provide to us (e.g. email addresses) to reputable contributing firms such as law firms who author those pages. We do not sell or rent information to anyone else other than the authors of those pages, who may change from time to time. Should you wish us not to disclose your details to any of these parties, please tick the box above or tick the box marked "Opt out of Registration Information Disclosure" on the Your Profile page. We and our author organisations may only contact you via email or other means if you allow us to do so. Users can opt out of contact when they register on the site, or send an email to with “no disclosure” in the subject heading

Mondaq News Alerts

In order to receive Mondaq News Alerts, users have to complete a separate registration form. This is a personalised service where users choose regions and topics of interest and we send it only to those users who have requested it. Users can stop receiving these Alerts by going to the Mondaq News Alerts page and deselecting all interest areas. In the same way users can amend their personal preferences to add or remove subject areas.


A cookie is a small text file written to a user’s hard drive that contains an identifying user number. The cookies do not contain any personal information about users. We use the cookie so users do not have to log in every time they use the service and the cookie will automatically expire if you do not visit the Mondaq website (or its affiliate sites) for 12 months. We also use the cookie to personalise a user's experience of the site (for example to show information specific to a user's region). As the Mondaq sites are fully personalised and cookies are essential to its core technology the site will function unpredictably with browsers that do not support cookies - or where cookies are disabled (in these circumstances we advise you to attempt to locate the information you require elsewhere on the web). However if you are concerned about the presence of a Mondaq cookie on your machine you can also choose to expire the cookie immediately (remove it) by selecting the 'Log Off' menu option as the last thing you do when you use the site.

Some of our business partners may use cookies on our site (for example, advertisers). However, we have no access to or control over these cookies and we are not aware of any at present that do so.

Log Files

We use IP addresses to analyse trends, administer the site, track movement, and gather broad demographic information for aggregate use. IP addresses are not linked to personally identifiable information.


This web site contains links to other sites. Please be aware that Mondaq (or its affiliate sites) are not responsible for the privacy practices of such other sites. We encourage our users to be aware when they leave our site and to read the privacy statements of these third party sites. This privacy statement applies solely to information collected by this Web site.

Surveys & Contests

From time-to-time our site requests information from users via surveys or contests. Participation in these surveys or contests is completely voluntary and the user therefore has a choice whether or not to disclose any information requested. Information requested may include contact information (such as name and delivery address), and demographic information (such as postcode, age level). Contact information will be used to notify the winners and award prizes. Survey information will be used for purposes of monitoring or improving the functionality of the site.


If a user elects to use our referral service for informing a friend about our site, we ask them for the friend’s name and email address. Mondaq stores this information and may contact the friend to invite them to register with Mondaq, but they will not be contacted more than once. The friend may contact Mondaq to request the removal of this information from our database.


This website takes every reasonable precaution to protect our users’ information. When users submit sensitive information via the website, your information is protected using firewalls and other security technology. If you have any questions about the security at our website, you can send an email to

Correcting/Updating Personal Information

If a user’s personally identifiable information changes (such as postcode), or if a user no longer desires our service, we will endeavour to provide a way to correct, update or remove that user’s personal data provided to us. This can usually be done at the “Your Profile” page or by sending an email to

Notification of Changes

If we decide to change our Terms & Conditions or Privacy Policy, we will post those changes on our site so our users are always aware of what information we collect, how we use it, and under what circumstances, if any, we disclose it. If at any point we decide to use personally identifiable information in a manner different from that stated at the time it was collected, we will notify users by way of an email. Users will have a choice as to whether or not we use their information in this different manner. We will use information in accordance with the privacy policy under which the information was collected.

How to contact Mondaq

You can contact us with comments or queries at

If for some reason you believe Mondaq Ltd. has not adhered to these principles, please notify us by e-mail at and we will use commercially reasonable efforts to determine and correct the problem promptly.