Principal Issues: 1. Whether subsection 98(3) will apply to the wind-up of the limited partnership. 2. Whether subsection 248(21) will apply to the partition. 3. Whether subsection 245(2) will apply to the proposed transactions. 4. Whether subsection 40(3.4) applies to suspend a capital loss on the transfer of a capital property when the transferor partnership ceases to exist within 30 days after the disposition. 5. Whether an election under 40(3.12) can be made with respect to the last fiscal period of the partnership where the provisions of paragraph 98(1)(a) applied.
Position: 1. Yes. 2. The partition will not constitute a disposition within the meaning of subsection 248(1), of property by the former partners of the limited partnership. 3. No. 4. No conclusion reached; ruling withdrawn. 5. Unable to rule. The question does not relate to a proposed transaction and will be further analysed in XXXXXXXXXX, if necessary. May result in timing issues with respect to adjusted cost base adjustments to the partnership interest.
Reasons: See below.
XXXXXXXXXX 2021-089507
XXXXXXXXXX 2021
Dear Sir,
Re: Request for Advance Income Tax Ruling
XXXXXXXXXX
This is in response to your letter dated XXXXXXXXXX requesting advance income tax rulings for the XXXXXXXXXX and XXXXXXXXXX account. We have also taken into account the information you have sent to us by email, as well as additional information submitted during telephone conversations (XXXXXXXXXX).
To the best of your knowledge and that of the parties involved in the transactions, none of the proposed transactions or matters covered by this request are the same as or substantially comparable to any transaction or matter that:
i. was addressed in a previously filed tax return of the taxpayer, or a related person, that is
A. is under review by the Canada Revenue Agency with respect to that return;
B. is the subject of an objection by the taxpayer or the related person;
C. is the subject of a legal proceeding, either in progress or completed, involving the taxpayer or the related person;
ii. has been the subject of an advance ruling request previously reviewed by the Income Tax Rulings Directorate.
Definitions
Unless otherwise indicated:
i. all statutory references are to provisions of the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended (the "Act")
ii. all words and phrases used in this application and defined in the Act shall have the meaning given to them in the Act;
iii. all monetary amounts are in Canadian dollars
iv. words importing the singular number shall include the plural and vice versa, where the context so requires.
In this letter, with the exception of paragraph 27, the parties involved in the proposed transactions (described below) will be identified as follows:
"Aco" means XXXXXXXXXX, a corporation governed by the CBCA;
"Bco" means XXXXXXXXXX, a corporation governed by the CBCA;
"Carry LP" means XXXXXXXXXX;
"Fund LP" means XXXXXXXXXX;
"General Partner LP” means XXXXXXXXXX;
"Individual A" means XXXXXXXXXX, a resident of Canada;
"Individual B" means XXXXXXXXXX, a resident of Canada;
"New LP" means the new limited partnership to be created under the XXXXXXXXXX in connection with the Proposed Transactions;
"Partners" means, collectively, the Limited Partners and the General Partner of LP Funds;
"Pco" means XXXXXXXXXX, a corporation governed by the CBCA that deals at arm's length with the LP Fund;
"Pubco" means XXXXXXXXXX, a corporation governed by the XXXXXXXXXX.
The following abbreviations, phrases and terms have the meanings described below.
"ACB" means "adjusted cost base" as defined in Section 54;
"Affiliated Persons" has the meaning set out in Section 251.1(1).
"Canadian partnership" has the meaning set out in subsection 102(1);
"Canadian resident" means a resident of Canada for the purposes of the Act;
"capital property" has the meaning set out in section 54;
"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44;
"CCPC" means "Canadian-controlled private corporation" as defined in subsection 125(7);
"cost amount" has the meaning set out in subsection 248(1);
"CRA" means the Canada Revenue Agency;
"fair market value" or "FMV" means the highest price available in an open and unrestricted market between informed and prudent parties, acting at arm's length and under no compulsion to act, expressed in terms of money;
"Fund LP Agreement" means the Amended and Restated Limited Partnership Agreement of Fund LP dated XXXXXXXXXX, which is governed by the laws of the Province of XXXXXXXXXX;
"Majority Interest Partner" has the meaning set forth in subsection 248(1);
"New LP Units" means the New LP Units of the same class to be issued to the limited partners of New LP in connection with the Proposed Transactions;
"Non-Rollover Shares" means shares of the capital stock of Pubco held by Fund LP that are not Rollover Shares;
"Other Investments" means the investments held by Fund LP, other than the Rollover Shares and the Non-Rollover Shares, as described in paragraph 11 below;
"Proposed Transactions" means the transactions described in paragraphs 19 through 25 below;
"public corporation" has the meaning assigned by the definition in subsection 89(1);
"Rollover Shares" means XXXXXXXXXX shares of the capital stock of Pubco held by Fund LP;
"TCC" means "taxable Canadian corporation" as defined in subsection 89(1);
XXXXXXXXXX;
XXXXXXXXXX;
XXXXXXXXXX.
Facts
1. Aco is a CCPC and a TCC, all of the issued and outstanding shares of whose capital stock are held by Individual A. Aco's fiscal period end is XXXXXXXXXX.
2. Bco is a CCPC and a TCC. Individual A and Individual B hold XXXXXXXXXX% and XXXXXXXXXX% respectively of the issued and outstanding shares of the capital stock of Bco.
3. Carry LP is a limited partnership created on XXXXXXXXXX under the XXXXXXXXXX. Carry LP is a Canadian partnership. Bco is the sole general partner of Deferred Interest LP. Bco directs the affairs of Deferred Interest LP with full power and authority to manage and carry on its activities. The limited partnership interests in Deferred Interest LP are owned, directly or indirectly, by Individual A or Individual B, or members of their respective families.
4. General Partner LP is a limited partnership formed on XXXXXXXXXX by virtue of XXXXXXXXXX. General Partner LP is a Canadian partnership. Bco is the sole general partner of General Partner LP. Bco directs the affairs of General Partner LP with full power and authority to manage and operate its business on an exclusive basis. Bco has full power and authority, for and on behalf of General Partner LP, to do all acts and things and to make all decisions. The limited partners of General Partner LP are Individual A (XXXXXXXXXX%) and Individual B (XXXXXXXXXX%).
5. Fund LP is a limited partnership created on XXXXXXXXXX under the XXXXXXXXXX. Fund LP is a Canadian partnership.
6. General Partner LP is the sole general partner of Fund LP and holds all of the XXXXXXXXXX Units of Fund LP. General Partner LP directs the affairs of Fund LP with full power and authority to manage and operate its business on an exclusive basis. As such, General Partner LP is entitled to receive an amount as a priority distribution pursuant to Section XXXXXXXXXX of the Fund LP Agreement, as well as a portion of any "Distributable Proceeds" (as defined in the Fund LP Agreement) pro-rated with the holders of XXXXXXXXXX units of Fund LP up to its "Contributed Capital" (as defined in the Fund LP Agreement) pursuant to Section XXXXXXXXXX of the Fund LP Agreement, which amount is nominal, in the case of General Partner LP.
7. Aco is a limited partner of Fund LP and holds XXXXXXXXXX units of Fund LP, representing XXXXXXXXXX% of the outstanding XXXXXXXXXX units. As at XXXXXXXXXX, Aco's ACB of its XXXXXXXXXX units of Fund LP was $XXXXXXXXXX. Pursuant to Article XXXXXXXXXX of the Fund LP Agreement, Aco is entitled to receive, pro rata with the holders of XXXXXXXXXX Fund LP Units and XXXXXXXXXX Fund LP Units, any "Distributable Proceeds" (as defined in the Fund LP Agreement) up to its "Contributed Capital" (as defined in the LP Fund Agreement). Pursuant to Article XXXXXXXXXX of the Fund LP Agreement, once the full amount of the "Contributed Capital" has been distributed by the Fund LP, Aco is entitled to receive, pro rata with the holders of XXXXXXXXXX units of the Fund LP, any "Distributable Proceeds" up to the "Preferred Return" (as defined in the Fund LP Agreement). Pursuant to Article XXXXXXXXXX of the Fund LP Agreement, Aco is entitled to receive, pro rata with the holders of XXXXXXXXXX Units and XXXXXXXXXX LP Units, XXXXXXXXXX% of any "Distributable Proceeds" once an amount equal to the "Contributed Capital" and "Preferred Return" has been distributed to the holders of XXXXXXXXXX Units and XXXXXXXXXX LP Units.
8. Carry LP is a limited partner of Fund LP and holds all of the XXXXXXXXXX units of Fund LP. Pursuant to section XXXXXXXXXX of the Fund LP Agreement, Carry LP, as a holder of XXXXXXXXXX units, is entitled to receive XXXXXXXXXX% of any "Distributable Proceeds" (as defined in the Fund LP Agreement) after an amount equal to the "Contributed Capital" and "Preferred Return" (as defined in the Fund LP Agreement) has been distributed to holders of XXXXXXXXXX units and XXXXXXXXXX units. Carry LP also holds XXXXXXXXXX XXXXXXXXXX units. In this regard, Carry LP is treated in a similar manner to other holders of XXXXXXXXXX units. As at XXXXXXXXXX, the ACB for Carry LP of its total interest in Fund LP was $XXXXXXXXXX.
9. None of the Partners is, as far as Fund LP is concerned, a majority interest partner. None of the Partners is an affiliate of Fund LP.
10. Since XXXXXXXXXX, the limited partners holding XXXXXXXXXX units of the Fund LP have made capital contributions to the Fund LP pursuant to the Fund LP Agreement. XXXXXXXXXX. No other transactions affecting the ACB to the Partners of their interest in LP Fund have occurred since XXXXXXXXXX.
11. The investments of the Funds LP, together with their approximate FMV and ACB, for the Funds LP are as follows
Investments Approximate FMV ACB
XXXXXXXXXX XXXXXXXXXX XXXXXXXXXX
Other Investments
XXXXXXXXXX
12. The investments of the Funds LP described in paragraph 11 above are held as capital property.
13. Fund LP has no debt.
14. Fund LP has granted a block of options ("call" options) in favour of Pco to acquire a total of XXXXXXXXXX shares in the capital stock of Pubco at a predetermined price under certain conditions. As the exercise price of the options is lower than the current FMV of the shares of the capital stock of Pubco, Fund LP expects that Pco will exercise the options at such time as it considers appropriate. Consequently, LPF must retain sufficient shares in the capital stock of Pubco to allow Pco to exercise its options.
15. Pubco is an TCC and a public corporation whose shares are listed on the XXXXXXXXXX and XXXXXXXXXX, under the symbol XXXXXXXXXX. The shares of the capital stock of Pubco held by Funds LP represent approximately XXXXXXXXXX% of the issued and outstanding shares of the capital stock of Pubco.
16. XXXXXXXXXX.
17. Shares in the capital stock of Pubco held by Funds LP are held on its behalf electronically through the direct registration system. This system allows holders to hold their registered securities in electronic format, without the need to have paper certificates issued to evidence ownership. Each securityholder's account is therefore registered in the electronic register (or in their broker's nominee account with the Canadian Depository for Securities, if applicable), the registration of which is evidenced by a direct registration notice showing their holdings in this system. Therefore, no share certificates are issued in the name of Funds LP.
18. The articles of incorporation of Pubco do not prohibit the issue of fractional shares.
Proposed Transactions
The Proposed Transactions will be carried out in the order indicated below. The transactions described in paragraphs 23 to 25 below will be carried out on the same day.
19. Prior to XXXXXXXXXX, Fund LP will, in one or more transactions on the facilities of XXXXXXXXXX or XXXXXXXXXX or otherwise, dispose of a sufficient number of shares of the capital stock of Pubco to be able to pay the amounts to which holders of XXXXXXXXXX Units and XXXXXXXXXX Units of Fund LP are entitled pursuant to Sections XXXXXXXXXX and XXXXXXXXXX of the Fund LP Agreement (such amounts being the "Contributed Capital" of the Limited Partners and the General Partner and the "Preferred Return", all as provided in the Fund LP Agreement). The capital gain realized by the Fund LP on this transaction will be allocated to the holders of XXXXXXXXXX Units and XXXXXXXXXX Units in accordance with Article XXXXXXXXXX of the Fund LP Agreement.
20. The proceeds from the sale of the shares of the capital stock of Pubco described in the preceding paragraph will be distributed to the Fund LP Partners in accordance with the Fund LP Agreement, according to the following schedule:
a. On or before XXXXXXXXXX, a portion of the proceeds not exceeding, for each of the Partners, the ACB to it of its interest in Fund LP at that time;
b. After XXXXXXXXXX, the balance of the proceeds.
Once this transaction is completed, any "Distributable Proceeds" (as defined in the Fund LP Agreement) will be allocated among the Partners in the proportions set out in section XXXXXXXXXX of the Fund LP Agreement. Consequently, Carry LP (as a holder of XXXXXXXXXX units) will be entitled to receive XXXXXXXXXX% of any future distribution (excluding its rights as a holder of XXXXXXXXXX units) and holders of XXXXXXXXXX units and XXXXXXXXXX units (including Aco and Carry LP) will be entitled to receive XXXXXXXXXX% of any future distribution. Consequently, from that date, each Partner's indirect interest (where expressed as a percentage) in each of the Fund LP's properties will be fixed and unchanging. Specifically, taking into account the XXXXXXXXXX XXXXXXXXXX units held by Carry LP (in addition to the XXXXXXXXXX units), its interest in each of the properties will be approximately XXXXXXXXXX%.
21. General Partner LP, as general partner, and Fund LP, as limited partner, will form New LP.
a. The interests of all Limited Partners in New LP will be represented by New LP Units.
b. The partnership agreement of New LP will be substantially identical to the Fund LP Agreement, except that distributions to Limited Partners will be made in proportion to the New LP Units held by its partners.
c. As general partner, General Partner LP will direct the affairs of New LP with full power and authority to manage and operate its business on an exclusive basis. General Partner LP will have full power and authority, for and on behalf of New LP, to do any act and make any decision, among other things.
22. Fund LP will transfer the Rollover Shares and the Other Investments to New LP. In return, New LP will issue XXXXXXXXXX New LP Units.
New LP and Fund LP will jointly make the election referred to in subsection 97(2) in the prescribed form and within the time period referred to in subsection 96(4), in respect of the Rollover Shares and the Other Investments.
The amount agreed to by New LP and Fund LP in respect of the Rollover Shares and each of the Other Investments will be equal to the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii) (i.e., the FMV at the time of the transfer and the ACB for Fund LP at the time of the transfer, respectively).
As a result of the transfer of the Rollover Shares, New LP will become a party to the option agreements with Pco, as described in paragraph 14 above.
23. Within 30 days after the transaction described in the preceding paragraph, Fund LP will be wound-up pursuant to XXXXXXXXXX.
All of the property of Fund LP, being the New LP Units and the Non-Rollover Shares, will be distributed, in the proportions set out in the Fund LP Agreement, to the persons who are partners of Fund LP immediately prior to its winding-up (i.e. the Partners), so that immediately thereafter each of the Partners will have an undivided interest in each of the allocated properties which, when expressed as a percentage of all undivided interests in those properties, will be equal to its undivided interest, when so expressed, in each such other property.
Specifically, pursuant to Article XXXXXXXXXX of the Fund LP Agreement:
a. Carry LP, as a holder of XXXXXXXXXX Units, will receive an undivided interest of XXXXXXXXXX% in each of the Non-Rollover Shares and the New LP Units; and
b. Each of the holders of XXXXXXXXXX Units and XXXXXXXXXX Units (including Aco and Carry LP) will receive an undivided interest in each of the Non-Rollover Shares and New LP Units equal to the product of XXXXXXXXXX% multiplied by the ratio of the number of XXXXXXXXXX Units or XXXXXXXXXX Units held by the relevant Partner to the total number of XXXXXXXXXX Units and XXXXXXXXXX Units outstanding at the time of the dissolution
The LP Fund Partners will jointly make the election provided for in subsection 98(3) in the prescribed form and within the period provided for in subsection 96(4).
Each of the Partners may, independently of the other Partners, designate an amount pursuant to paragraph 98(3)(c) not exceeding the limits set out in that paragraph in respect of its undivided interest in the Non-Rollover Shares.
24. The Partners will enter into a partition agreement to terminate their co-ownership with respect to the Non-Rollover Shares and New LP Units distributed in the transaction described in the preceding paragraph.
Each of the Partners will receive a fraction of each Non-Rollover Share and each New LP Unit equal to the percentage of its undivided interest in each such property immediately prior to the partition.
Pursuant to the partition agreement, each of the Partners will have, in respect of each Non-Rollover Share and each New LP Unit, an interest whose FMV immediately after the partition, expressed as a percentage of the FMV of all new interests in such property immediately after the partition, will be equal to the FMV of that Partner's undivided interest immediately before the partition, expressed as a percentage of the FMV of all undivided interests in such property immediately before the partition.
25. The Partners, with the exception of Carry LP, will sell their respective non-whole fractions of Non-Rollover Shares to Carry LP for cash consideration equal to the FMV thereof.
Purpose of Proposed Transactions
26. The purpose of the Proposed Transactions is to allow each of the Shareholders to be able to retain or dispose of, freely and at its discretion, the Non-Rollover Shares without the involvement of the other Shareholders.
Additional Information
27. The main contact details for the parties covered by the advance ruling are:
XXXXXXXXXX
28. As the transactions described in paragraphs 23, 24 and 25 above will all take place on the same day, and although they constitute separate legal transactions, for the purposes of registration in the Pubco electronic securities register, the holding of the Non-Rollover Shares will pass directly from Fund LP to the Partners without reflecting their undivided holding by the Partners.
Ruling
Provided that the statement of relevant facts, the Proposed Transactions and the Additional Information constitute full disclosure of all relevant facts and proposed transactions and that the Proposed Transactions are carried out as described above, our decisions are as follows:
A. Subject to the application of subsection 69(11), the provisions of subsection 97(2) will apply to the transfer of the Rollover Shares from Fund LP to New LP such that the amount agreed to in respect of the Rollover Shares will be deemed to be the proceeds of disposition of the Rollover Shares to Fund LP and the cost to New LP of acquiring the Rollover Shares. For greater certainty, paragraph 85(1)(e.2) (because of the application of paragraph 97(2)(a)) will not apply to the transfer of the Rollover Shares.
B. The provisions of section 98(3) will apply upon the winding up of Fund LP and the allocation to the Partners of an undivided interest in each of the New LP Units and in each of the Non-Rollover Shares, as described in paragraph 23 above, such that:
(i) Fund LP shall be deemed by virtue of paragraph 98(3)(f) to have disposed of each of its New LP Units and Non-Rollover Shares and to have received proceeds of disposition equal to the ACB to Fund LP of such units and shares immediately prior to their distribution;
(ii) the cost to each of the Partners of its undivided interest in each of the New LP Units and Non-Rollover Shares will be determined pursuant to paragraphs 98(3)(b) and (c); and
(iii) the proceeds of disposition to each Partner of its interest in Fund LP will be determined by virtue of paragraph 98(3)(a).
C. The partition, as described in paragraph 24 above, shall not constitute a disposition to the Shareholders of their undivided interest in each of the Non-Rollover Shares and the New LP Shares.
D. The provisions of subsection 245(2) will not apply as a result of and by reason of the relevant transactions described above for the purpose of redetermining the tax consequences confirmed in the rulings above.
These rulings are subject to the limitations and general conditions set out in Information Circular 70-6R11 dated April 1, 2021, issued by the CRA and are binding on the CRA provided that the Proposed Transactions described in paragraphs 19 to 25 are completed by XXXXXXXXXX. These determinations are based on the current Act and do not take into account any proposed amendments to the Act.
Other Comments
The decisions rendered should not be construed as an acquiescence by the CRA that:
(a) we have considered the other tax consequences that may result from the Proposed Transactions set out herein, including the tax treatment of the loss that will be realized by Fund LP on the transfer of the Other Investments to New LP; and
(b) the amount attributed to a property in the statement of facts and Proposed Transactions truly represents the FMV or ACB of a property.
A statement of our fees for the time spent on your file will be sent to you under separate cover.
Best regards,
XXXXXXXXXX
for the Director
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch