Principal Issues: Whether the investments by XXXXXXXXXX Canadian Advisor would result in the Fund being considered to be carrying on business in Canada.
Position: No.
Reasons: The activities of XXXXXXXXXX Canadian Advisor would satisfy the requirements of subsection 115.2(2) of the Act such that the Fund would not be considered to be carrying on business in Canada.
XXXXXXXXXX 2006-017240
XXXXXXXXXX, 2006
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
XXXXXXXXXX
This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayers. We acknowledge receipt of the additional information provided to us in the XXXXXXXXXX.
Unless otherwise stated, all references herein to a statute are to the Income Tax Act R.S.C. 1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
Definitions
(a) "LLC" is XXXXXXXXXX, hereinafter referred to as the "Fund";
(b) XXXXXXXXXX;
(c) "XXXXXXXXXX Canadian Advisor" is XXXXXXXXXX;
(d) "Exchange" is the XXXXXXXXXX;
(e) "OPCO" is XXXXXXXXXX;
(f) "USCO" is XXXXXXXXXX;
(g) "Manager" is XXXXXXXXXX;
(h) "Mr. A" is XXXXXXXXXX;
(i) "Fund A" is XXXXXXXXXX;
(j) "Fund B" was XXXXXXXXXX;
(k) "Fund C" is XXXXXXXXXX;
(l) XXXXXXXXXX;
(m) "ServiceCo" is a person that collects and publishes or disseminates information relating to prices and indices, which reflect a composite of prices, for the Products. A ServiceCo collects this information from transactions involving the trading of a particular Product on an organized trading facility, such as OPCO, the Exchange or the XXXXXXXXXX, the trading of a particular Product in private transactions or both;
(n) "Products" means XXXXXXXXXX;
(o) "Proposed Derivative Contracts" mean Product-based derivative contracts in which (a) the Product that is the underlying reference Product is a type of Product that can be purchased and sold on or through OPCO or the Exchange, or a similar organized electronic trading facility, and (b) the settlement terms include a reference to a price, an average price or an index reflecting a composite measure of prices reported or published by a ServiceCo which price, prices or index will be based, at least in part, on trading of a Product on OPCO or the Exchange, or a similar organized electronic trading facility, and/or trading of a Product in private transactions;
(p) "Canadian investor" has the meaning assigned by subsection 115.2(1) of the Act;
(q) "Canadian service provider" has the meaning assigned by subsection 115.2(1) of the Act;
(r) "Designated Entity" has the meaning assigned by paragraph 115.2(3)(b) of the Act;
(s) "Designated investment services" has the meaning assigned by subsection 115.2(1) of the Act;
(t) "Qualified Investment" has the meaning assigned by subsection 115.2(1) of the Act.
Facts
The Fund
1. The Fund was XXXXXXXXXX.
2. As of XXXXXXXXXX, the Fund has three shareholders that are the beneficial owners of the shares in the Fund in approximately the following percentages: Fund A (XXXXXXXXXX%), Fund B (XXXXXXXXXX%) and Fund C (XXXXXXXXXX%). No other person holds an equity interest in the Fund.
3. Fund A is a XXXXXXXXXX limited liability company formed on XXXXXXXXXX. It is not a resident of Canada for purposes of the Act. Fund A is a "feeder" fund that invests in the Fund. The equity interests in Fund A are widely held such that the total of the fair market value of equity interests in Fund A that are beneficially owned by persons or partnerships (other than Designated Entities) that are affiliated with XXXXXXXXXX Canadian Advisor does not and will not exceed XXXXXXXXXX% of the fair market value of all equity interests in Fund A. To the best of the reasonable efforts and knowledge of the Manager, there are currently no Canadian resident investors in Fund A and it has no intention of having Canadian residents invest in Fund A.
4. Fund B is a XXXXXXXXXX limited liability company formed on XXXXXXXXXX. It is not a resident of Canada for purposes of the Act. Fund B is a "feeder" fund that invests in the Fund. To the best of the reasonable efforts and knowledge of the Manager, there are currently no Canadian resident investors in Fund B and it has no intention of having Canadian residents invest in Fund B.
5. Fund C was incorporated on XXXXXXXXXX and is a XXXXXXXXXX exempted company. XXXXXXXXXX. Fund C is not a resident of Canada for purposes of the Act. Fund C is a "feeder" fund that invests in the Fund. The shareholders of Fund C include investors who are resident of Canada (the "Canadian Investors"). The equity interests in Fund C are widely held such that the total of the fair market value of equity interests in Fund C that are beneficially owned by persons or partnerships (other than Designated Entities) that are affiliated with XXXXXXXXXX Canadian Advisor does not and will not exceed XXXXXXXXXX% of the fair market value of all equity interests in Fund C. Fund C is not affiliated with XXXXXXXXXX Canadian Advisor. To the best of the reasonable efforts and knowledge of the Manager, as of XXXXXXXXXX, the fair market value of Canadian investors' interests in Fund C represent less than XXXXXXXXXX% of the assets under management in Fund C.
6. The Fund is, and at all relevant times will be, a non-resident of Canada for purposes of the Act. The Fund has no operations in Canada other than through the activities of XXXXXXXXXX Canadian Advisor.
7. The objective of the Fund is to provide returns on capital for its investors through diverse trading strategies. The Fund buys and sells a broad range of equity and debt securities, derivative and other financial instruments, commodities and commodities futures.
8. As of the date hereof, the Fund has not, directly or through any agent, filed any document with a public authority in Canada in accordance with the securities legislation of Canada or of any province in order to permit the distribution of interests in the Fund to persons resident in Canada.
9. As of the date hereof, the Fund has not, directly or through any agent, directed any promotion of investments in itself to residents of Canada, nor has the Fund sold any investment in itself to residents of Canada.
The Manager
10. Manager was incorporated under the laws of XXXXXXXXXX, is managed and controlled in the United States and is not managed or controlled in Canada. Manager is not, and at all relevant times will not be, a resident of Canada for the purposes of the Act. Manager is controlled by Mr. A. Mr. A is not a resident of Canada for purposes of the Act.
11. Under the terms of an advisory agreement between Manager and the Fund, Manager is responsible for the management and control of the investing activity of the Fund and the investment of its assets. Manager is responsible for all aspects of the Fund's trading and investing operations and performs these services itself or arranges for the performance of these services by other service providers.
12. To the extent the Manager arranges for services to be provided to the Fund by other entities, the Manager manages, coordinates and oversees the service providers and the provision and performance of their services. XXXXXXXXXX.
XXXXXXXXXX.
13. XXXXXXXXXX.
14. XXXXXXXXXX.
XXXXXXXXXX Canadian Advisor
15. XXXXXXXXXX Canadian Advisor is a privately held XXXXXXXXXX unlimited liability company incorporated under the laws of XXXXXXXXXX on XXXXXXXXXX. XXXXXXXXXX Canadian Advisor is a corporation that is resident in Canada for the purposes of the Act. All of the issued and outstanding shares of XXXXXXXXXX Canadian Advisor are owned by a wholly owned subsidiary of a corporation that is owned XXXXXXXXXX% by Manager and XXXXXXXXXX % by a company that is a sister company to the Manager. The sister company is not a resident of Canada for the purposes of the Act.
16. XXXXXXXXXX Canadian Advisor is registered XXXXXXXXXX under the Securities Act (XXXXXXXXXX). XXXXXXXXXX Canadian Advisor provides designated investment services to the Fund pursuant to an investment advisory agreement entered into with the Fund. The designated investment services include the buying and selling of commodities and commodities futures listed on commodities and commodities futures exchanges, and various derivatives based thereon. These commodities and commodities derivatives fall within paragraphs (d) and (f) of the definition of Qualified Investment but do not include Proposed Derivative Contracts. The activity of XXXXXXXXXX Canadian Advisor is subject to general oversight by the Manager as described in paragraph 12 above.
Additional Facts
17. The Exchange is an electronic trading facility through which participants buy and sell, among other things, certain Products and derivative contracts associated with Products.
18. USCO is a U.S.-based corporation that, among other things, operates the Exchange.
19. OPCO is a XXXXXXXXXX corporation that operates an electronic trading facility through which participants buy and sell physical and derivative Product-related contracts.
20. We understand that, to the best of your knowledge and that of the Fund, XXXXXXXXXX Canadian Advisor (the "Taxpayers"), none of the issues involved in the ruling request:
(i) is in an earlier return of any of the Taxpayers or a related person,
(ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the Taxpayers or a related person,
(iii) is under objection by any of the Taxpayers or a related person, or
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
Proposed Transactions
21. Subject to the receipt of a favourable advance income tax ruling, XXXXXXXXXX Canadian Advisor will, on behalf of the Fund, enter into Proposed Derivative Contracts.
Purpose of the Proposed Transactions
22. The purpose of the Proposed Transactions is to enable the Fund to realize a profit through the purchase and sale of Proposed Derivative Contracts by XXXXXXXXXX Canadian Advisor on its behalf.
The Manager and/or its affiliates carrying on business outside of Canada, on behalf of the Fund, enter into a broad range of commodity based derivative contracts including contracts that are similar to the Proposed Derivative Contracts. XXXXXXXXXX. It is desirable that XXXXXXXXXX Canadian Advisor be able to enter into Proposed Derivative Contracts so that it can, in Canada on behalf of the Fund, enter into the same types of commodity based derivative contracts as those entered into by the Manager on behalf of the Fund in the United States.
Ruling
Provided that:
(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;
(b) the proposed transactions are completed in the manner described above; and
(c) there are no other transactions which may be relevant to the ruling requested, our ruling is as follows:
A. Subsection 115.2(2) of the Act will apply to the Fund such that the services provided by XXXXXXXXXX Canadian Advisor, as described in paragraph 21 above, will not, in and by themselves, cause the Fund to be carrying on business in Canada for the purposes of subsection 115(1) and Part XIV of the Act.
This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Revenue Agency ("CRA") on May 17, 2002, and is binding on the CRA provided that one or more Proposed Derivative Contracts are entered into by XXXXXXXXXX Canadian Advisor, on behalf of the Fund, before XXXXXXXXXX.
The ruling given is based solely on the facts, proposed transactions and purposes of the proposed transactions described above. Facts and proposed transactions that form part of any agreements, and that are not described above, do not form part of the facts and proposed transactions on which this advance income tax ruling is based.
Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described herein.
This ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein. In particular, nothing in this advance income tax ruling should be construed as implying that the CRA has agreed with, or reviewed, the tax consequences resulting from the possible application of section 94.1 of the Act, the proposed amendments to that section or the proposed enactments of sections 94.2 and 94.3 of the Act, to the Canadian resident investors of Fund C.
Yours truly,
XXXXXXXXXX
for Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch