Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues:
1) Can a partnership that is a member of a partnership elect under subsection 97(2)?
2) Do the interest free loans and the agreement to pay interest on the debt instrument cause any member of the partnership to be a limited partner or a specified member?
3) Are the partnerships a "tax shelter" as per section 237.1?
4) Is the debt instrument "foreign property" to specified pension funds?
5) Will subsection 103(1) apply to redetermine the allocation of partnership income?
6) Will subparagraphs 53(1)(e)(i) and 53(2)(c)(i) be applied so as to avoid double taxation?
7) Will subsection 85(1) and 88(1) be available so as to have all assets held in the entity with the latter year end?
8) Will GAAR apply to recharacterize any of these rulings?
Position:
1) Yes.
2) No.
3) No, provided that no representations are made.
4) Not in this fact situation.
5) Not in this fact situation.
6) Yes.
7) Yes.
8) No.
Reasons:
1) this interpretation is accepted and is described in ¶ 3 or IT-413R
2) The purpose of these arrangements is not to reduce the loss of any partner but to XXXXXXXXXX. Thus the purpose test in 96(2.2)(d) is not met.
3) We cannot control or be made aware of all possible representations, thus the ruling must contain this caveat.
4) The debt does not come within any of the technical definitions within subsection 206(1).
5) The threshold for the application of subsections 103(1) or (1.1) has not been met given the facts provided.
6) This position is described in Income Tax Technical News #5.
7) Routine application but required as a ruling to be covered off in the GAAR ruling.
8) All of the transactions do not result in a tax benefit, are done for bona fide purposes or do not result in a misuse or abuse of the Act.
XXXXXXXXXX
XXXXXXXXXX 993226
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1999
Dear Sirs:
Re: XXXXXXXXXX
This letter cancels and replaces our ruling letter #992666 (as a result of certain amendments requested to be made to that letter) and is in response to your letter dated XXXXXXXXXX and the numerous subsequent revisions thereto wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX.
Except as otherwise noted, all statutory references in this request for advance income tax rulings are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act").
Our understanding of the relevant facts, proposed transactions and purposes of the proposed transactions is as follows:
Relevant Facts
1. XXXXXXXXXX was organized as a limited partnership under the law of XXXXXXXXXX pursuant to a partnership agreement dated XXXXXXXXXX (as amended by resolutions dated XXXXXXXXXX) to XXXXXXXXXX. The current limited partners of XXXXXXXXXX with their percentage holdings are as follows:
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
The address of XXXXXXXXXX is XXXXXXXXXX, and its tax identification number is XXXXXXXXXX business number is XXXXXXXXXX.
2. XXXXXXXXXX is one of the limited partners of XXXXXXXXXX a limited partnership organized under the laws of XXXXXXXXXX owns all of the limited partnership units of XXXXXXXXXX Partnership which have an aggregate adjusted cost base of nil. XXXXXXXXXX partnership's general partner is XXXXXXXXXX a Canadian controlled private corporation within the meaning assigned to that term in subsection 125(7) of the Act and also a taxable Canadian corporation. The taxation year of XXXXXXXXXX ends on XXXXXXXXXX business number is XXXXXXXXXX. The term adjusted cost base as used here and subsequently has the meaning assigned by section 54 of the Act.
3. XXXXXXXXXX is a Limited Partnership for Canadian tax purposes and also a "Canadian Partnership" within the meaning assigned to that term in section 102 of the Act since all its members are resident in Canada. The taxation year of XXXXXXXXXX ends on XXXXXXXXXX and its financial year (and fiscal period) ends on XXXXXXXXXX.
4.
XXXXXXXXXX
5.
XXXXXXXXXX
6.
XXXXXXXXXX
The taxation year of XXXXXXXXXX ends on XXXXXXXXXX and its financial year ends on XXXXXXXXXX address is XXXXXXXXXX, and its business number is XXXXXXXXXX business number is XXXXXXXXXX.
7. XXXXXXXXXX is a "Canadian Partnership" for Canadian tax purposes within the meaning assigned to that term in section 102 of the Act since all of its members are resident in Canada. As such, XXXXXXXXXX filed an election under subsection 97(2) of the Act upon the transfer of their business assets (XXXXXXXXXX) to XXXXXXXXXX.
8.
XXXXXXXXXX
9.
XXXXXXXXXX
10.
XXXXXXXXXX
11.
XXXXXXXXXX
12.
XXXXXXXXXX
13.
XXXXXXXXXX
14.
XXXXXXXXXX
(i) XXXXXXXXXX;
(ii) XXXXXXXXXX;
(iii) XXXXXXXXXX; and
(iv) XXXXXXXXXX.
15.
XXXXXXXXXX
16.
XXXXXXXXXX
17.
XXXXXXXXXX
18.
XXXXXXXXXX
19. XXXXXXXXXX:
- XXXXXXXXXX
- XXXXXXXXXX
- XXXXXXXXXX
- XXXXXXXXXX
- XXXXXXXXXX.
20.
XXXXXXXXXX
21.
XXXXXXXXXX
22.
XXXXXXXXXX:
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
23.
XXXXXXXXXX
Additional Information
24. To the best of your knowledge and that of XXXXXXXXXX and the other parties to this ruling request, none of the issues involved in this ruling request are:
- in an earlier return of the parties or related persons,
- being considered by a tax services office or taxation centre in connection with a previously filed tax return of the parties or related persons,
- under objection by one of the parties or a related person,
- before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has not expired, and
- the subject of a ruling previously issued by the Directorate, other than ruling 3-992401 dated XXXXXXXXXX, 1999.
25. The tax services office of XXXXXXXXXX is XXXXXXXXXX and their taxation center is XXXXXXXXXX.
Proposed Transactions
Subject to the receipt of a favorable advance income tax ruling, the following transactions will be undertaken:
26. XXXXXXXXXX will transfer all of his shares in XXXXXXXXXX and all his limited partner units in XXXXXXXXXX Partnership to XXXXXXXXXX in exchange for common shares of XXXXXXXXXX. Elections under section 85 of the Act will be made within the time referred in subsection 85(6) of the Act at the agreed amount equal to the adjusted cost base of the particular asset transferred.
27. As a consequence of the transfer by XXXXXXXXXX of the limited partner units in XXXXXXXXXX Partnership to XXXXXXXXXX, as described in paragraph 26 above, XXXXXXXXXX Partnership will cease to exist. XXXXXXXXXX will then be wound up into XXXXXXXXXX under the relevant corporate law, and accordingly all of the XXXXXXXXXX partnership interests owned by XXXXXXXXXX will be transferred and assigned to XXXXXXXXXX will be registered as a partner of XXXXXXXXXX.
28.
XXXXXXXXXX
However, no additional partnership percentage interest will be issued to XXXXXXXXXX. The interests of the partners of XXXXXXXXXX will be the same before and after the contribution. An election under subsection 97(2) of the Act will be filed to avoid any gain on the transfer. XXXXXXXXXX will have the right and agree to conduct certain activities which include XXXXXXXXXX.
29. XXXXXXXXXX will assume existing liabilities of XXXXXXXXXX in reduction of XXXXXXXXXX capital accounts in XXXXXXXXXX pursuant to an assumption of liabilities agreement. The interests of the partners of XXXXXXXXXX will be the same before and after the assumption of liabilities agreement.
30. The XXXXXXXXXX investors will contribute $XXXXXXXXXX to XXXXXXXXXX partnership agreement will be amended so that there will be no allocation to the XXXXXXXXXX investors of profits and losses (including any gain arising on the transfers described in paragraph 37 below) on or before the day of their entry into XXXXXXXXXX.
31. A new XXXXXXXXXX partnership, XXXXXXXXXX will be organized between XXXXXXXXXX as described in paragraphs 32 and 33 below. The XXXXXXXXXX investors will use XXXXXXXXXX unlimited liability companies as the vehicle to make their investment in XXXXXXXXXX.
32. A XXXXXXXXXX amount will be contributed into XXXXXXXXXX in exchange for a general partnership interest in XXXXXXXXXX will be ultimately controlled by XXXXXXXXXX.
33. XXXXXXXXXX investors (including XXXXXXXXXX) will contribute $XXXXXXXXXX through another XXXXXXXXXX Unlimited Liability Company ("XXXXXXXXXX") in exchange for a limited partnership interest in XXXXXXXXXX.
34. XXXXXXXXXX will transfer all of its assets (XXXXXXXXXX) and all of its liabilities toXXXXXXXXXX in exchange for a general partnership interest in XXXXXXXXXX.
35.
XXXXXXXXXX
36. XXXXXXXXXX will be a limited partnership for Canadian tax purposes and also a "Canadian Partnership" within the meaning assigned to that term in section 102 of the Act since all its members are resident in Canada. The financial year of XXXXXXXXXX would end on XXXXXXXXXX and the taxation year would end on XXXXXXXXXX.
37. Pursuant to subsection 97(2) of the Act, the transfer of assets (XXXXXXXXXX) by XXXXXXXXXX to XXXXXXXXXX will be effected at an elected transfer price equal to the cost basis of the assets except with respect to certain assets (XXXXXXXXXX) where the elected transfer price would be set at an amount that would trigger a gain. Such gain would be equal to:
- the XXXXXXXXXX limited partnership losses as defined in subsection 96(2.1) of the Act (as at XXXXXXXXXX) estimated at approximately $XXXXXXXXXX, and
- the total proceeds of disposition to be paid to XXXXXXXXXX and XXXXXXXXXX in respect of their XXXXXXXXXX partnership interests (being $XXXXXXXXXX).
38. XXXXXXXXXX partnership agreement would be amended (by way of a separate agreement with all the partners and XXXXXXXXXX) to allocate a capital gain of XXXXXXXXXX. As well, the amendments will provide that none of the losses for the year ending XXXXXXXXXX will be allocable to the departing partners in view of the fact that the redemption price for units has been established at a fixed amount independent of the loss (or profit) position at XXXXXXXXXX.
39. XXXXXXXXXX will distribute $XXXXXXXXXX through a capital reduction in order to redeem on the closing date the departing partners of XXXXXXXXXX. The departing partners will be paid by XXXXXXXXXX on the closing date. The interests of the partners of XXXXXXXXXX will be the same before and after the $XXXXXXXXXX capital distribution.
It is intended (pursuant to a provision in the option agreement discussed in paragraph 16 above) that the XXXXXXXXXX will exercise the option and then, prior to closing, transfer the rights and obligations under the option agreement to XXXXXXXXXX except the obligation XXXXXXXXXX of the option agreement (XXXXXXXXXX).
After the redemption of XXXXXXXXXX and when XXXXXXXXXX is no longer a partner of XXXXXXXXXX pursuant to the relevant partnership law, the XXXXXXXXXX will assign the obligation XXXXXXXXXX of the option agreement to XXXXXXXXXX will not be a party to the assignment and will therefore have no right or claim against XXXXXXXXXX but only against the XXXXXXXXXX.
40. XXXXXXXXXX requires the admission of a new general XXXXXXXXXX. Thus, on that date, XXXXXXXXXX will become the general partner of XXXXXXXXXX with a nominal equity interest.
41.
XXXXXXXXXX
42.
XXXXXXXXXX
43.
XXXXXXXXXX
44. XXXXXXXXXX:
- XXXXXXXXXX
- XXXXXXXXXX
45.
XXXXXXXXXX
46. An election will be filed by XXXXXXXXXX under subsection 20(24) of the Act to enable XXXXXXXXXX to deduct the payment of $XXXXXXXXXX. The election will also enableXXXXXXXXXX to recognize the XXXXXXXXXX revenue for tax purposes under paragraph 12(1)(a) of the Act and to claim a reserve under subparagraph 20(1)(m)(ii) of the Act.
47. XXXXXXXXXX will cease to exist and be liquidated into XXXXXXXXXX under subsection 98(3) of the Act on a tax free basis.
Purposes of The Proposed Transactions
The purposes of the proposed transactions are to:
- XXXXXXXXXX
- XXXXXXXXXX
- XXXXXXXXXX
- XXXXXXXXXX
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the proposed transactions and the purposes of the proposed transactions and the proposed transactions are carried out as described herein and in accordance with the documents and agreements submitted in respect of this request, that each of XXXXXXXXXX is a partnership at law and that there are no material differences in the terms and conditions of the final signed documents and agreements from the drafts submitted with this request our rulings are as follows:
A) Provided that XXXXXXXXXX is a Canadian partnership immediately after the transfer described in paragraph 28 above, that the assumption of liabilities described in paragraph 29 above is executed separately from the transfer of property and that XXXXXXXXXX executes the prescribed Form T2059 and files the form within the time prescribed therefor under subsection 96(4) of the Act (or files the form within the time prescribed in subsection 96(5) of the Act and pays the requisite penalty), the provisions of 97(2) of the Act will apply to the transfer of any property of XXXXXXXXXX that is capital property, eligible capital property or inventory by XXXXXXXXXX to XXXXXXXXXX referred to in paragraph 28 above.
B) Subparagraph 53(2)(c)(v) will apply to reduce the adjusted cost base of XXXXXXXXXX partnership interest in XXXXXXXXXX by (i) the assumption by XXXXXXXXXX of the XXXXXXXXXX liabilities pursuant to the agreement referred to in paragraph 29 above and (ii) by the $XXXXXXXXXX cash distribution referred to in paragraph 39 above.
C) Provided that XXXXXXXXXX is a Canadian partnership immediately after the transfer described in paragraph 37 above, and that XXXXXXXXXX executes the prescribed Form T2059 and files the form within the time prescribed therefor under subsection 96(4) of the Act (or files the form within the time prescribed in subsection 96(5) of the Act and pays the requisite penalty), the provisions of 97(2) of the Act will apply to the transfer of any property of XXXXXXXXXX that is capital property, eligible capital property or inventory by XXXXXXXXXX to XXXXXXXXXX referred to in paragraph 37 above.
D) Neither the interest free loan from XXXXXXXXXX to XXXXXXXXXX as described in paragraph 44 above nor the agreement to provide the annual grant to cover the interest on the debt as described in paragraph 43 above will cause XXXXXXXXXX or XXXXXXXXXX to be a limited partner of XXXXXXXXXX or XXXXXXXXXX, as the case may be, by virtue of paragraph 96(2.4)(b).
E) Provided neither XXXXXXXXXX nor XXXXXXXXXX is a limited partner of XXXXXXXXXX or XXXXXXXXXX, as the case may be, and that XXXXXXXXXX remain actively engaged in activities of the partnership business that are other than the financing of the partnership business, neither XXXXXXXXXX nor XXXXXXXXXX will be a "specified member" of XXXXXXXXXX or XXXXXXXXXX, as the case may be, as that term is defined in subsection 248(1) of the Act.
F) Provided that, as of the date of this letter, the only statements and representations made or (as contemplated in subsection 237.1(1) of the Act at the definition of "tax shelter") proposed to be made in connection with interests acquired in XXXXXXXXXX after the date of this letter, are those in Exhibit XXXXXXXXXX, which was submitted as part of the advance income tax ruling request dated XXXXXXXXXX, none of XXXXXXXXXX will be considered to be a tax shelter within the meaning of subsection 237.1(1) of the Act.
However, nothing in this ruling should be construed as implying that XXXXXXXXXX will not become tax shelters upon the happening of a future event or a future statement or representation including any revised Exhibit XXXXXXXXXX.
G) Notwithstanding the additional facts presented in this ruling request, we confirm that, subject to the conditions set out therein, the rulings given in advance income tax ruling 3-992401 dated XXXXXXXXXX, 1999, will continue to be binding on the Canada Customs and Revenue Agency (the "CCRA").
H) Provided that XXXXXXXXXX has included or will have included an amount in respect of the undertakings related to the XXXXXXXXXX as described in paragraph 21 above, in computing its income from its business pursuant to 12(1)(a) of the Act which includes the time of the transfer of the assets described in paragraph 37 above or any preceding taxation year, the payment made by XXXXXXXXXX to XXXXXXXXXX in consideration for the assumption by XXXXXXXXXX of those undertakings, to the extent that the payment is reasonable:
(i) may, pursuant to paragraph 20(24)(a) of the Act, be deducted in computing the income of XXXXXXXXXX for its fiscal period in which the payment takes place; and
(ii) will, pursuant to paragraph 20(24)(b) of the Act, be deemed to be an amount described in paragraph 12(1)(a) thereof in respect of XXXXXXXXXX.
I) Provided that each of XXXXXXXXXX are Canadian partnerships pursuant to subsection 102(1) of the Act and the proceeds from the issuance of the debt instrument are used in the manner described in this ruling letter, the debt instrument to be issued by XXXXXXXXXX to an investor, as described in paragraph 43 above, and for which the proposed offering documents were contained in Exhibit XXXXXXXXXX of your ruling request, will not constitute foreign property to that institutional investor for the purposes of Part XI of the Act.
J) Subsections 103(1) and (1.1) of the Act will not apply to redetermine the allocation of any income or loss of the partnership as described in paragraphs 30 and 38 above.
K) In order to avoid double taxation in the context of a partner who:
(1) held their partnership interest as capital property,
(2) ceased to be a member of XXXXXXXXXX when their partnership interest is redeemed during a particular fiscal year of XXXXXXXXXX (the "Redemption Year"), and
(3) before the end of the Redemption Year, received full payment of all their rights to receive any property of or from XXXXXXXXXX in satisfaction of their partnership interest in XXXXXXXXXX held immediately before the time that they cease to be a member thereof,
subparagraph 53(1)(e)(i) of the Act will be applied, as the case may be, so that any portion of XXXXXXXXXX income for tax purposes (computed at the end of the Redemption Year) that is allocated to that partner and that is attributable to that partner's partnership interest which is redeemed during the Redemption Year, will in the Redemption Year, be included in calculating the partner's adjusted cost base of that interest redeemed, and as a consequence, will, in the same year, be included in the calculation of the partner's gain or loss on the disposition of such partnership interest.
L) The provisions of subsection 98(5) of the Act will apply to the dissolution of the XXXXXXXXXX Partnership provided that XXXXXXXXXX continues to carry on the business of the XXXXXXXXXX Partnership using the partnership property received as proceeds of disposition of the partnership interest in the transaction described in paragraphs 26 and 27 above.
M) Provided that XXXXXXXXXX is a Canadian partnership at the time it ceases to exist as described in paragraph 47 above, the assets of XXXXXXXXXX may be distributed to its partners as described in paragraph 47 above in accordance with, and to the extent permitted by, the provisions of subsection 98(3) of the Act.
N) The provisions of subsection 85(1) of the Act will apply to the disposition by XXXXXXXXXX of his shares in XXXXXXXXXX and his limited partnership units in XXXXXXXXXX Partnership to XXXXXXXXXX as described in paragraph 26 above provided that XXXXXXXXXX jointly elect in prescribed form and in accordance with subsection 85(6) of the Act and the property is eligible property as described in subsection 85(1.1), and the provisions of subsection 88(1) of the Act will apply to the winding-up of XXXXXXXXXX into XXXXXXXXXX as described in paragraph 27 above.
O) Subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the rulings given.
Opinion
Provided that XXXXXXXXXX rights to receive any property of or from the partnership in satisfaction of XXXXXXXXXX interest in the partnership immediately before the redemption (i.e. the time XXXXXXXXXX ceases to be a member of the partnership) are satisfied in full on or immediately after the redemption, it is our view that the assignment of the obligation under XXXXXXXXXX of the option agreement as described in paragraph 39 above, in and by itself, will not cause XXXXXXXXXX to be deemed to continue to have an interest in the partnership pursuant to paragraph 98.1(1)(a) of the Act. Whether or not XXXXXXXXXX rights have been satisfied in full is a question of fact and law.
Comments
Whether or not any of XXXXXXXXXX cease to be a partnership by virtue of any transactions described in this letter is subject of the relevant partnership law and as such we are unable to provide any ruling on this matter.
These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on the CCRA, provided that the proposed transactions described herein are completed by XXXXXXXXXX. Our opinion is given in accordance with the practice referred to in paragraph 22 of Information Circular 70-6R3 and is not binding on the CCRA.
Our rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any tax implications of the facts or proposed transactions.
Yours truly,
Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch