Principal Issues: [TaxInterpretations translation] (1) Is an amount owing by a limited partner to a limited partnership to be included in computing the at-risk amount for the purposes of paragraph 96(2.2)(c) of the Income Tax Act?
(2) Do loans incurred as part of a Tower Structure reflect a legitimate business transaction?
Position: (1) No, if it is the result of a legitimate business transaction.
(2) Question of fact. Unable to provide further details.
Reasons: Paragraph 96(2.2)(c) generally does not apply to amounts owed by a Limited Partner to the Partnership to the extent that such borrowings arise out of legitimate business transactions that are not related to the acquisition of an interest of the Limited Partner, and to the extent that the terms are consistent with the terms of normal commercial agreements comparable to those between parties dealing at arm's length. The fact that the borrowings are made pursuant to a Tower Structure does not permit us to automatically conclude that they are not the result of legitimate business transactions.
December 21, 2009
Quebec Tax Services Office Headquarters Business and Partnerships Division Attention: Marie-Andrée Houle François Bordeleau
2008-029613
At-risk amount of a limited partner
This is in response to your letter dated September 25, 2008, in which you requested our opinion regarding the application of subsection 96(2.2)(c) of the Income Tax Act (the "Act"). This letter is in response to various emails that the Business and Partnerships Section exchanged with you or persons in your Department regarding this matter.
Unless otherwise indicated, all legislative references herein are to the provisions of the Act.
In particular, your application describes a complex factual situation involving what is commonly referred to as a Tower Structure. We summarize these facts below.
Canco, which is a Canadian corporation for purposes of the Act, owns XXXXXXXXXX% of the shares of another Canadian corporation, Subco. Canco also owns XXXXXXXXXX% of the shares of USco, which was formed in the United States and operates primarily in the United States. USco owns XXXXXXXXXX% of USLLC, a limited liability corporation formed under the laws of the State of Maine.
The General Partnership (a partnership) is owned in equal (50%) shares by USLLC and Third Party USLLC (an unrelated corporation).
In XXXXXXXXXX, Canco and Subco formed USLP (a limited partnership). In this transaction, Canco acquired XXXXXXXXXX% of the units as a limited partner of USLP in consideration for its shares in USco having a fair market value of $XXXXXXXXXX and Subco acquired XXXXXXXXXX% of the units of USLP for an amount of $XXXXXXXXXX. As a result of this transaction, USLP holds XXXXXXXXXX% of the shares of USco. USLP also holds XXXXXXXXXX% of NSULC, an unlimited liability corporation formed under the laws of Nova Scotia. NSULC owns XXXXXXXXXX% of Finance USLLC, a limited liability corporation created under the laws of Delaware.
Canco's corporate group has two loans from unrelated corporations and financial institutions. The first loan was received in XXXXXXXXXX from a U.S. incorporated insurance company in the amount of $XXXXXXXXXX and the second loan was received in XXXXXXXXXX from a U.S. bank in the amount of $XXXXXXXXXX. The details of both loans can be found in your interpretation request.
For the purposes of the provisions of the Act, Finance USLLC and NSULC are considered to be corporations and USLP is considered to be a partnership. The terms and conditions of the loan agreements are consistent with the terms and conditions of normal commercial agreements comparable to those entered into between parties dealing at arm's length.
With respect to the various transactions, you wish to know whether an amount owed by a limited partner to a limited partnership should be included in the calculation of the at-risk amount for the purposes of paragraph 96(2.2)(c). You also wish to know whether loans made in connection with a Tower Structure are loans reflecting a legitimate business transaction.
Our Comments
Under the provisions of subsection 96(2.2)(c), a limited partner's at-risk amount is generally required to be reduced by the amount owing to the partnership or to a person or partnership with which the partnership does not deal at arm's length by the limited partner or by a person or partnership with which the limited partner does not deal at arm's length.
However, it is the CRA's view that paragraph 96(2.2)(c) generally does not apply to amounts owing by a limited partner, or a person with whom the limited partner does not deal at arm's length, to a partnership, or to a person or partnership with whom the partnership does not deal at arm's length, to the extent that such amounts arise out of legitimate business transactions that are not related to the acquisition of an interest of the limited partner, and to the extent that the terms and conditions are consistent with the terms and conditions of normal business arrangements comparable to those between parties dealing at arm's length with each other.
In the present case, it is a question of fact and law to determine whether General Partnership is related to Canco and Finance USLLC is related to USLP in respect of the XXXXXXXXXX loan and whether USco is related to Canco and Finance USLLC is related to USLP in respect of the XXXXXXXXXX loan. To the extent that these entities are related, we are of the view that subsection 96(2.2)(c) would not be applicable for the purpose of reducing Canco's at-risk amount to the extent that the various borrowings have a legitimate business purpose and are not related to the acquisition of Canco's interest in USLP. The fact that the various borrowings are made pursuant to a Tower Structure does not permit us to conclude that they do not have a legitimate business purpose.
For your information, unless exempted, a copy of this memorandum will be severed using the Access to Information Act criteria and placed in the Canada Revenue Agency's electronic library. A severed copy will also be distributed to the commercial tax publishers for inclusion in their databases. The severing process will remove all material that is not subject to disclosure, including information that could disclose the identity of the taxpayer. Should your client request a copy of this memorandum, the electronic library version can be provided. Alternatively, the client may request a severed copy using the Privacy Act criteria, which does not remove client identity. Requests for this latter version should be made by you to Ms. Jackie Page at (819) 994-2898. A copy will be sent to you for delivery to the client.
We hope that the above comments are of assistance.
Best regards,
François Bordeleau, LL.B.
Manager
Business and Partnerships Section
Business and Partnerships Division
Income Tax Rulings Directorate.