Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ARC.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the CCRA.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.
Principal Issues:
Will debt issued by a limited partnership, where the only assets held by the corporate partners are units of a limited partnership whose assets are 100% Canadian, be considered foreign property for purposes of section 206 of the Income Tax Act? Will the substantial Canadian presence test in clause 206(1.1)(d)(iii)(C) apply?
Position: Question of fact.
Reasons:
The debt issued by the limited partnership is by common law considered to be issued by the partners. The debt will not be considered foreign property for purposes of section 206 of the Act, where each corporate partner's proportional share of "employment expenses" for purposes of clause 206(1.1)(d)(iii)(C) exceeds the $250,000 threshold. Given the fact that the assets of the limited partnership are 100% Canadian and the terms of the limited partnership arrangement, i.e., the corporate general partner has no substantive economic interest in the partnership, 01%, the corporate general partner's nominal interest need not be considered when determining whether this test is met.
XXXXXXXXXX 2003-001484
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling - XXXXXXXXXX
This letter is a reply to your letter dated XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of XXXXXXXXXX. We acknowledge receipt of the related documentation submitted by you and the information provided in our various telephone conversations (XXXXXXXXXX).
Definitions
In this ruling, the following terms have the meanings specified:
a) "Act" means the Income Tax Act, R.S.C. 1985 (5th Supp.) c.1, as amended to the date hereof, and unless otherwise stated, every reference herein to a part, section, subsection, paragraph, subparagraph or clause is a reference to the relevant provision of the Act;
b) "LPII" means XXXXXXXXXX limited partnership that is a Canadian limited partnership for the purposes of the Act;
c) "LPI" means XXXXXXXXXX limited partnership which is a Canadian limited partnership for the purposes of the Act;
d) "Aco" means XXXXXXXXXX , a private corporation incorporated under the laws of XXXXXXXXXX;
e) "CCRA" means the Canada Customs and Revenue Agency;
f) "General Partner" means the general partner of LPI, XXXXXXXXXX, a private corporation incorporated under the laws of XXXXXXXXXX;
g) "Limited Partnership Agreement" means the amended and restated limited partnership agreement dated XXXXXXXXXX for LPI between the General Partner and LPII;
h) "Bco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;
i) "Services Agreement" means the agreement dated XXXXXXXXXX between LPI and LPII governing the provision of administrative and other services to LPII by LPI;
j) "Cco" means XXXXXXXXXX, a corporation incorporated under the laws of Canada;
k) "Dco" means XXXXXXXXXX;
l) "Eco" means XXXXXXXXXX, a corporation incorporated under the laws of Canada;
m) "Fco" means XXXXXXXXXX, a corporation incorporated under the laws of Canada; and
n) "Gco" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX.
Facts
1. LPI was formed as a limited partnership under the laws of XXXXXXXXXX pursuant to the provisions of a limited partnership agreement dated XXXXXXXXXX that was later amended and restated on XXXXXXXXXX. LPI's head office is located at XXXXXXXXXX. The XXXXXXXXXX office of the CCRA services LPI.
2. LPI was formed for the specific purpose of acquiring the XXXXXXXXXX business previously carried on by Eco. LPI acquired such XXXXXXXXXX business in XXXXXXXXXX, pursuant to a purchase and sale agreement dated XXXXXXXXXX, as amended by subsequent agreements, between LPI, Fco and Eco.
3. XXXXXXXXXX.
4. LPI has assets of over $XXXXXXXXXX.
5. All of LPI's assets are located in Canada.
6. LPII is the sole limited partner of LPI, holding a XXXXXXXXXX% limited partnership interest in LPI. Over $XXXXXXXXXX was invested to acquire this interest.
7. As at XXXXXXXXXX, the capitalization of LPI consisted of the following:
? $XXXXXXXXXX for limited partnership interests issued to the LPII.
? a $XXXXXXXXXX by Dco.
? a $XXXXXXXXXX by Dco.
? a $XXXXXXXXXX by LPII.
8. The General Partner holds a XXXXXXXXXX% general partnership interest in LPI. XXXXXXXXXX% of the issued shares of the General Partner are owned by a wholly-owned Canadian subsidiary of Cco. The other XXXXXXXXXX% of the issued shares of the General Partner are owned by a wholly-owned Canadian subsidiary of Gco. The General Partner was incorporated for the specific purpose of acting as general partner of LPI. The General Partner has a registered office in Canada. The general partnership interest in LPI is the primary asset held by the General Partner.
9. The business and affairs of LPI are managed by the General Partner pursuant to the Limited Partnership Agreement. Pursuant to the terms of the Limited Partnership Agreement, the General Partner is prohibited from undertaking any business activity other than acting as general partner of LPI, except for certain services that it may provide to LPII on behalf of LPI pursuant to the Services Agreement.
10. The General Partner currently employs approximately XXXXXXXXXX full-time employees to carry out the management, technical, administrative and general labour activities in connection with the operation of LPI's XXXXXXXXXX business.
11. Pursuant to the Limited Partnership Agreement, the General Partner is entitled to full cost reimbursement for all direct expenses incurred on LPI's behalf, including those related to its employees, salary expenses, costs of benefits, as well as general overhead expenses. Further, LPI is obligated, pursuant to the terms of an assignment, assumption and indemnity agreement between the General Partner and LPI, to indemnify the General Partner for any contributions, costs, expenses, claims, demands, actions, causes of action, damages, losses, or liabilities, pertaining to all employee-related liabilities and expenses including, without limitation, salary, benefits, withholding tax, pension plan contributions and severance incurred by the General Partner on behalf of LPI in the performance of its duties.
12. During the XXXXXXXXXX calendar year, the General Partner incurred employee related expenses of over $XXXXXXXXXX. LPI reimbursed the General Partner monthly for all such employee related expenses in accordance with the terms of the Limited Partnership Agreement.
13. LPI does not directly employ any employees.
14. The taxation year-end of LPI is XXXXXXXXXX.
15. Currently, the assets of LPII consist of the limited partnership interest in LPI and the XXXXXXXXXX of LPI. The XXXXXXXXXX held by LPII has a face amount of $XXXXXXXXXX. LPII may make other investments in the future.
16. Aco is the general partner of LPII and holds a XXXXXXXXXX% general partner interest. Aco holds no assets other than its general partnership interest in LPII. XXXXXXXXXX% of the issued shares of Aco are held by a wholly-owned Canadian subsidiary of Cco. The other XXXXXXXXXX% of issued shares of Aco are held by a wholly-owed Canadian subsidiary of Gco. Aco was incorporated for the specific purpose of acting as general partner of LPII. Aco has a registered office in Canada.
17. LPII is owned, indirectly, by Cco, Gco, Dco and Bco, through their respective wholly-owned subsidiaries (with the exception of Dco which has another nominal shareholder XXXXXXXXXX), each of which is a private corporation incorporated under the laws of Canada for the specific purpose of acting as a limited partner in LPII (collectively, referred to herein as the "Limited Partners"). The CCRA business numbers of the wholly-owned Canadian subsidiaries of Cco, Gco, Dco and Bco are respectively; XXXXXXXXXX.
18. Through their respective Canadian subsidiaries:
a) Cco owns, beneficially and of record, a XXXXXXXXXX% limited partnership interest in LPII;
b) Gco owns, beneficially and of record, a XXXXXXXXXX% limited partnership interest in LPII;
c) Dco owns, beneficially and of record, a XXXXXXXXXX% limited partnership interest in LPII; and
d) Bco owns, beneficially and of record, a XXXXXXXXXX% limited partnership interest in LPII.
19. To the best of LPI's knowledge, the partnership interest in LPII is the only asset owned by each of the Limited Partners.
20. Collectively, the Limited Partners have invested over $XXXXXXXXXX to acquire their limited partnership interests in LPII.
21. The taxation year-end of each of the Limited Partners is XXXXXXXXXX with the exception of Bco that has a XXXXXXXXXX year-end.
22. Each of the Limited Partners has a registered office in Canada.
Proposed Transactions
23. LPI is proposing to raise capital by issuing senior bonds XXXXXXXXXX with the XXXXXXXXXX and XXXXXXXXXX (the "Senior Bonds").
24. The Senior Bonds will have a fixed principal amount, interest rate and maturity date. Interest on the bonds will be payable semi-annually until maturity. The bonds will be secured by a first floating charge security interest in and to the present and future property and assets of LPI. Some of the Senior Bonds will be redeemable in whole or in part at LPI's option. The Senior Bonds will not be convertible or exchangeable, either at the option of LPI or the bondholder, for any other securities.
25. The estimated amount of net proceeds to LPI from the offering of the Senior Bonds is at least $XXXXXXXXXX.
26. XXXXXXXXXX.
Purpose of the Proposed Transactions
27. The purpose of the proposed transactions is to enable LPI to raise capital for the purpose of re-paying certain short-term indebtedness incurred by LPI in connection with the acquisition of the XXXXXXXXXX business in XXXXXXXXXX with the balance to be used as working capital and for general purposes in the business.
28. We understand that, to the best of your knowledge and that of LPI, LPII, Aco, the General Partner and the Limited Partners none of the issues involved in the ruling request is:
(i) in an earlier return of Aco, the General Partner, the Limited Partners or a related person;
(ii) being considered by a tax services office or tax centre in connection with a previously filed tax return of Aco, the General Partner, the Limited Partners or a related person;
(iii) under objection by Aco, the General Partner, the Limited Partners or a related person;
(iv) before the courts; or,
(v) the subject of a ruling previously issued by the Directorate.
Ruling
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are as described above, we rule as follows:
A. The substantial Canadian presence exception in clause 206(1.1)(d)(iii)(C) will apply to each of the Limited Partners such that the Senior Bonds issued by LPI will not, at the time of issue in XXXXXXXXXX, constitute foreign property under section 206 of the Act.
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
Manager
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy & Legislation Branch
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