Amending the connected persons definition in relation to partnerships

The “connected person” definition contained in section 1 of the ITA is one of the most important sections that impacts income tax since various tax provisions, anti-avoidance sections in particular, are triggered if parties are connected persons. The definition encompasses various categories of persons including individuals, companies, trusts and partnerships. Arguably the “connected person” definition in relation to partnerships is one of the more controversial sub-definitions given its broad ambit.

21 Feb 2024 2 min read Special Edition Budget Speech Alert 2024 Article

Paragraph (c) to the definition defines a “connected person” in relation to any
member of a partnership as any other member as well as any connected person in relation to any member of that partnership. In essence, all partners in a partnership are connected persons in respect of one another and are also connected to all connected persons of the other partners.

The practical effect of the above is that various provisions of the ITA relating to connected persons are triggered if and when they transact with one another or with connected persons of other partners. This is also the case in respect of partners to an en commandite (i.e. limited) partnership notwithstanding the number of partners and whether or not they are disclosed. Some partners may therefore be transacting with one another without being able to know whether they are “connected persons” in relation to each other or not.

In light of the above, the Minister has proposed that the status of connected persons in relation to partners be reviewed, in particular in the context of a “qualifying investor” which is especially important for determining whether a permanent establishment exists. A “qualifying investor”, in the context of a partnership, is defined in section 1 of the ITA as, subject to certain exclusions, a member of a partnership whose liability to any creditor of the partnership is limited to that member’s contribution to the partnership.

It is currently unclear how the Minister plans to amend the definition of connected persons concerning partnerships in light of the “qualifying investor” definition. However, there may be an intention to exempt qualifying investors due to their isolated involvement in the partnership from a risk perspective.

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