21 November 1990 Internal T.I. 9029437 F - Resource Expenses of a Limited Partner

SUBJECT:  24(1) Paragraph 96(2.5)(b) of Income Tax Act the ("Act")

We are writing in reply to your memorandum dated October 9, 1990 wherein you have requested a technical interpretation in relation to certain Private Placement Offering Memoranda (the "Offering Memoranda") under which 24(1) were, offered for sale to certain investors.

You mentioned the following points:

1.     Under section 66.8 of the Act, resource expenses of a limited partner are restricted to the at-risk amount of the limited partner.

2.     Paragraph 66.8(3)(a) provides that

(a)       the expressions "at-risk amount" of a partnership and "limited partner" of a partnership have the meanings assigned by subsections 96(2.2) and (2.4), respectively, except that, with respect to the definition of limited partner, the definition of "exempt interest" in subsection 96(2.5) shall be read as though the reference therein to

(i)     "February 25, 1986" were a reference to "June 17, 1987",

(ii)     "February 26, 1986" were a reference to "June 18, 1987",

(iii)     "January 1, 1987", were a reference to "January 1, 1988",

(iv)     "June 12, 1986", were a reference to "June 18, 1987", and

(v)     "prospectus, preliminary prospectus or registration statement" were read as "prospectus, preliminary prospectus, registration statement, offering memorandum or notice that is required be filed before any distribution of securities may commence";

3.     Subsection 96(2.4) provides that, inter alia, a taxpayer who is a member of a partnership at a particular time is a limited partner of that partnership at that time if his partnership interest is not an exempt interest at that time.

4.     An exempt interest is defined at subsection 96(2.5) which, as modified by paragraph 66.8(3)(a), provides in general terms that an exempt interest is an interest in a partnership that was actively carrying on business before June 18, 1987 and continuously thereafter where there has not after June 17, 1987 been a substantial contribution of capital to the partnership or a substantial increase in the indebtedness of the partnership.

5.     Paragraph 96(2.5)(b) as modified by paragraph 66.8(3)(a) provides that an amount would not be considered to be substantial where the amount was raised pursuant to the terms of, inter alia, an offering memorandum that is required to be filed before any distribution of securities may commence filed before June 18, 1987 with a public authority in Canada pursuant to and in accordance with the securities legislation of Canada or of any province, and, where required by law, accepted for filing by such public authority.

6.     24(1)

YOUR QUESTION

You ask whether the Offering Memoranda is an offering memorandum or notice that is required to be filed with a public authority in Canada pursuant to the securities legislation in Canada or Alberta for purposes of applying paragraph 96(2.5)(b) of the Act.

OUR COMMENTS

Notwithstanding whether the Offering Memoranda are required to be filed with a federal or provincial authority pursuant to securities legislation of the appropriate jurisdiction, it is clear that paragraph 96(2.5)(b) applies, inter alia, only to an offering memorandum which has been filed and where required by the relevant jurisdictional securities legislation, has been accepted for filing pursuant to and in accordance with federal or provincial securities legislation in Canada.

The purpose of subsection 96(2.5) was to provide for a "grandfathering" of partnership interests with the advent of the "at-risk" rules contained in subsections 96(2.1) to (2.7). Grandfathered partnership interests are those which qualify as exempt interests under subsection 96(2.5) - reference February 26, 1986 Budget Papers and October, 1986 Technical Notes issued by Department of Finance at pages 33 and 36 respectively. These grandfather rules are restrictive provisions and should be read restrictively - see "the Grandfathering Rules" in the article entitled The "At-Risk" Rules for Limited Partnerships, Edwin C. Harris, 1986 Conference Report at pages 26:5 to 26:9.

One of the conditions which must be satisfied in order for paragraph 96(2.5)(b) to apply is that the Offering Memoranda must be filed before a specified date in accordance with the securities legislation of Canada or a province. Mr. Rob Veltri of the Calgary D.O. has confirmed  24(1)

It is therefore our view that the Offering Memoranda would not meet the requirements of paragraph 96(2.5)(b) which only provides for offering memoranda, inter alia, which have been filed with a public authority.

The Resource Industries Section is not aware or any administrative positions by virtue of which the Offering Memoranda would be considered as having satisfied the provisions of paragraph 96(2.5)(b) notwithstanding that they have not been filed with a public authority in accordance with securities legislation of Canada or a province.

Section ChiefResource Industries SectionBilingual Services and Resource Industries DivisionRulings Directorate