The Canada Customs and Revenue Agency won’t be going after non-residents who invest through partnerships and retain Canadian investment managers and advisors.

Canada usually attempts to tax non-residents on their income from sources in Canada, including income from carrying on a business in Canada.

Under the Income Tax Act a “qualified non-resident” is not considered to be carrying on business in Canada simply because he or she engages a Canadian firm to provide investment management and administration services. But a partnership is a “qualified non-resident” only if none of its members is resident in Canada. The venture capital community has suggested that this is potential impediment to venture capital investment in Canada.

The federal government wants to enable non-resident members of a partnership to avail themselves of the qualified non-resident exemption. The definition of “qualified non-resident” will be changed so that it won’t include a partnership. Instead the exemption will apply separately to each partner.

The rule will also be changed to provide that a “qualified non-resident” is not considered to be carrying on business in Canada just because a Canadian resident provides investment management and administration services to the non-resident or to a partnership of which the non-resident is a member. These changes will apply to the 2002 and subsequent tax years.