2005 Ruling 2004-0094821R3 - Carrying on Business in Canada

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.

Principal Issues: Whether the Administrator or the Funds carry on business in Canada by contracting certain mid-office and back-office services described in the ruling letter to a Canadian corporation?

Position: No.

Reasons: Based on the facts and proposed transactions as described in the ruling letter.

XXXXXXXXXX 2004-009482

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("Canco")
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers. In response to our e-mail dated XXXXXXXXXX, you provided us a revised ruling request dated XXXXXXXXXX . We also acknowledge the information you provided through various e-mails of XXXXXXXXXX and your letter of XXXXXXXXXX.

Canco's tax affairs are administered by the XXXXXXXXXX Tax Services Office and it files its tax returns at the XXXXXXXXXX Taxation Centre under Account Number #XXXXXXXXXX.

To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayers or a related person;

(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;

(iii) is under objection; or

(iv) is before the courts or, if a judgement has been issued, the time limit for an appeal has not expired.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Definitions

In this letter the following terms have the meanings specified:

(a) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;

(b) "Administrator" means XXXXXXXXXX;

(c) "Canco" means XXXXXXXXXX, a corporation incorporated under the Business Corporations Act (XXXXXXXXXX);

(d) "Constitutive Documents" means (i) in relation to each corporate fund, its Memorandum and Articles of Association and such other documents (if any) under or pursuant to which that fund is constituted; and (ii) in relation to the fund which is a partnership, its Limited Partnership Agreement and such other documents under or pursuant to which the fund is established;

(e) "Forco" means XXXXXXXXXX a corporation incorporated pursuant to the laws of the XXXXXXXXXX. Forco does not have an office or employees in Canada;

(f) "Fund Documents" in relation to each fund means its Constitutive Documents and its Offering Documents;

(g) "Funds" means collectively the XXXXXXXXXX;

(h) "Investment Manager" means XXXXXXXXXX, a limited partnership organized under the laws of the State of XXXXXXXXXX , U.S.;

(i) "Master Fund" means the XXXXXXXXXX, a company incorporated under the laws of the XXXXXXXXXX;

(j) "Offering Documents" in relation to each fund means any prospectus, offering memorandum, private placement memorandum, information memorandum, circular, listing particulars, notice or other similar document issued by that fund from time to time relating to that fund and/or the offering of its shares or interests (as the case may be), including without limitation the Subscription Documents attached thereto or provided therewith to prospective investors, in each case as the same may be amended, supplemented or superseded from time to time;

(k) "Offshore Feeder Fund" means the XXXXXXXXXX, a company incorporated under the laws of the XXXXXXXXXX;

(l) "Subscription Documents" in relation to each Fund means at any time the subscription agreement or other subscription application from a prospective shareholder to subscribe for shares in that Fund or from a prospective limited partner to subscribe for interests in that Fund, in each case in the form required under its Fund Documents applicable at that time; and

(m) "US Feeder Fund" means the XXXXXXXXXX, a limited partnership organized under the laws of the State of XXXXXXXXXX, U.S.

Facts

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

The Administrator

1. The Administrator has not been continued under the laws of Canada and does not have an office or physical presence in Canada.

2. None of the XXXXXXXXXX directors of the Administrator are, or will be, resident in Canada and no meetings of the board of directors of the Administrator are, or will be, held in Canada.

3. The Administrator has approximately XXXXXXXXXX employees and all these employees are located in a foreign jurisdiction.

4. The Administrator provides certain accounting, administrative, registrar and transfer agency, corporate secretarial and other services to approximately XXXXXXXXXX different fund clients who are all offshore or U.S. funds, either directly or indirectly through affiliate corporations in Canada or the U.S. In particular, the Administrator provides services to the Funds under an administration agreement between the Administrator and the Funds dated XXXXXXXXXX (the "Administration Agreement").

The Funds

5. Each of the Offshore Feeder Fund and the Master Fund carries on the business of an open-ended investment company. The US Feeder Fund carries on business of an investment partnership. The Offshore Feeder Fund and the US Feeder Fund will each invest substantially all of their assets in the Master Fund. The Master Fund's objective is to provide stable and superior returns that are uncorrelated with the equity and fixed income markets, primarily by establishing both long and short positions in the credit fixed income obligations of companies based in developed countries.

6. No Funds have been or will be continued under the laws of Canada and no Funds have or will have an office or physical presence in Canada.

7. The registered and principal office of each of the Offshore Feeder Fund and the Master Fund is in the XXXXXXXXXX. The principal office of the US Feeder Fund is in the U.S. None of the Funds have any employees. However, the Funds retain the Administrator, the Investment Manager, one or more prime and/or other brokers to transact the Funds' trades, an auditor and one or more legal counsels.

8. None of the directors/general partners of the Funds are, or will be, resident in Canada and no meetings of the boards of directors of the Funds are, or will be, held in Canada.

9. The investment decisions of the Funds are made by the Investment Manager who is not a resident of Canada. Hence, the investment decisions are not made in Canada.

10. The trading and investment activities of the Funds are managed by the Investment Manager. The Investment Manager of the Funds is not, and will not be, a resident of Canada.

11. The common shares of the Offshore Feeder Fund and the Master Fund and the interests in the US Feeder Fund will not be marketed for sale in Canada, although sophisticated Canadian investors may purchase the common shares or interests directly from transfer agents located outside of Canada or through registered dealers located inside Canada.

Canco

12. Canco is a taxable Canadian corporation within the meaning assigned under subsection 89(1) of the Act. All of the shares of Canco are owned by Forco. Canco has an office in XXXXXXXXXX and currently employs approximately XXXXXXXXXX people. It presently has XXXXXXXXXX directors XXXXXXXXXX whom are residents of Canada and neither of them are directors of the Administrator. All meetings of the board of directors are held in Canada. Canco is an affiliate of the Administrator since they are ultimately controlled by the same corporate entity. All of Canco's clients are affiliates of Canco. Except as described herein, Canco does not have any direct contact with the public.

13. As permitted under the Administration Agreement, the Administrator has entered into a framework services agreement, dated XXXXXXXXXX (the "Framework Services Agreement") with Canco pursuant to which Canco provides on an out-sourced basis, on behalf of the Administrator, for a fee equal to cost plus XXXXXXXXXX%, certain of the services which the Administrator undertook to provide to the Funds. Details of the out-sourcing of the services from the Administrator to Canco are contained in the Framework Services Agreement between the Administrator and Canco.

14. The services currently being out-sourced by the Administrator to Canco are accounting, administrative, and clerical services (the "Out-Sourced Services") and can and will include the following:

(a) preparing and maintaining all customary financial and accounting books in appropriate form and in sufficient detail to support an annual independent audit of the financial condition of the Funds, including, but not limited to:

? processing of trade-related transactions and corporate actions;
? processing of non-trade related transactions (cash movements, etc.);
? reconciliation of bank accounts;
? calculation of income and expense accruals;
? calculation of management and incentive/performance fees/allocations with supporting schedules; and
? reconciliation of the Funds' portfolio holdings.

(b) making books and records available to the Funds' auditors and answering questions with respect to same;

(c) based on accounting records, calculating the fees and expenses of each of the other services providers to the Funds, including the fees payable to the Funds' Investment Manager, its auditors and other service providers, non-Canadian taxes, non-Canadian filing and registration fees and other costs and expenses incurred for the account of the Funds (other than transaction costs and related expenses relating to the investment program);

(d) preparing periodic (daily, weekly, monthly, quarterly and/or annual) financial statements for the Funds containing statements of net assets and liabilities, operations, changes in net assets and subsidiary or detailed reports, as may be requested by the Administrator;

(e) independently pricing the Funds' portfolio of securities and computing the market value and net asset value of the assets held by the Funds, and the net asset value per share or interest on a periodic basis (daily, weekly, monthly or quarterly) and where a fund is established as a limited partnership, maintaining capital accounts for each member of the partnership;

(f) calculating proceeds for the redemption of shares/interests of the Funds;

(g) calculating the amount of dividends/distributions that may be paid by the Funds in accordance with the Funds' governing documents and as may be declared by the Funds' boards of directors/managing partner;

(h) placing on ledgers any capital information (i.e. share/interest subscription and redemptions) based on information received from the Administrator; and

(i) any other accounting and accounting related functions incidental to the foregoing.

15. No employees of the Administrator are involved in the day-to-day activities of Canco.

Other Information

16. Pursuant to the Framework Services Agreement with the Administrator, Canco has no right to directly affect the legal relations of the Administrator or the Funds as regards to other persons. Specifically, it has no authority to make contracts on behalf of the Administrator or the Funds. Furthermore, the Framework Services Agreement provides that there is no agency relationship between the Administrator and Canco, nor is there an agency relationship between the Funds and Canco.

17. The shareholders of or investors in the Funds deal at arm's length with the Administrator and Canco. Each of the Administrator and Canco deals at arm's length with the Investment Manager.

18. All marketing efforts on behalf of the Funds are undertaken by employees of the Investment Manager. The Administrator and Canco will not be involved in any marketing efforts on behalf of the Funds. Canco does not and will not offer anything for sale in Canada on behalf of the Funds or the Administrator.

Proposed Transactions

19. The Administrator and Canco wish to expand the list of Out-Sourced Services that Canco may provide to the Funds on behalf of the Administrator under the Framework Services Agreement to include various share registrar and transfer agency and other services which are also listed under the Framework Services Agreement, such as the following:

(a) processing subscription/contribution, transfer, redemption/withdrawal, and conversion documentation in compliance with applicable anti-money laundering regulations and processing payments in respect thereof;

(b) processing dividends and other distributions declared by the Funds and processing the payments in respect thereof;

(c) conducting all necessary anti-money laundering due diligence in respect of subscriptions/contributions, transfers, redemptions/withdrawals of Funds' shares/interests;

(d) publishing the net asset value per share/interest (of each class, and series, appropriate) as requested by the Funds;

(e) disbursing of management and incentive/performance fees/allocations to the Funds' Investment Manager;

(f) establishing and maintaining a register or registers of shareholders/members of the Funds; establishing and maintaining capital accounts in respect of the fund established as a limited partnership;

(g) issuing and cancelling share certificates in respect of the Funds that are corporate entities;

(h) dealing with, and replying to, all correspondence and other communications addressed to the Funds in relation to the subscription/contribution, redemption/withdrawal, transfer, and, where relevant, conversion of shares/interests of the Funds;

(i) dispatching to shareholders/members of the Funds' notices, proxies, and proxy statements prepared by or on behalf of the Funds in connection with the holding of meetings of shareholders/members;

(j) preparing and issuing to shareholders/members account statements showing their holdings in the Funds on such periodic basis as provided for by the Funds;

(k) dispatching to shareholders/members of the Funds and anyone else entitled to receive the same copies of the audited annual financial statements;

(l) supplying the directors/managing partner and/or the Investment Manager of the Funds with information in connection with the Funds; and

(m) providing some or all of the following middle office services:

? Supporting the Funds' Investment Manager in entering and confirming trades in the Administrator's order manager system;
? Making necessary entries in the order manager system in setting up and entering over the counter trades (OTC trades) in the order manager system;
? Supporting the Funds' Investment Manager in setting up and entering OTC trades in the order manager system;
? Calculating payments under swap reset processes;
? Supporting and assisting the Investment Manager of the Funds and entering trades to process swap resets;
? Sending the Funds' prime broker a file of trades entered into by the Investment Manager for the Funds on a daily basis;
? Reconciling trades and positions to the prime broker; and notifying the Funds Investment Manager of any trade breaks;
? Processing all mandatory corporate actions on the Funds' securities;
? Receiving trade confirmations from counter parties in respect of OTC trades made by the Funds' Investment Manager, informing the Funds' Investment Manager of any discrepancies, and reporting missing trade confirmations to the Funds' Investment Manager; and
? Reconciling OTC trades/positions to the Funds' counter party on such trades on a weekly/monthly basis.

20. The Administrator will continue to provide directly to the Funds the corporate and legal support services as required under the Administration Agreement. These services are significant and include:

(a) Publishing the Net Asset Value per Share (of each class if appropriate) as requested by the Funds;

(b) Disbursement of the incentive/performance fees to the Investment Manager;

(c) Dispatching to shareholders notices, proxies and proxy statements prepared by or on behalf of the Funds in connection with the holding of meetings of shareholders;

(d) Dispatching to shareholders and anyone else entitled to receive the same in accordance with the Fund Documents and any applicable law copies of the audited annual financial statements;

(e) Providing the registered office of the Funds in the XXXXXXXXXX;

(f) Providing the services of an individual or corporation to serve as the Secretary of the Funds in the XXXXXXXXXX;

(g) Maintaining the register of directors and officers of the Funds in the XXXXXXXXXX in accordance with the relevant XXXXXXXXXX legislation and the Fund Documents;

(h) Filing statutory returns by the Funds and documents required under the relevant XXXXXXXXXX legislation, provided always that the requisite information to enable the Administrator and/or XXXXXXXXXX to do so is available;

(i) Maintaining copies of the quarterly accounts and of any audited financial statement of the Funds required to be kept in the XXXXXXXXXX in accordance with the applicable XXXXXXXXXX legislation;

(j) When requested to do so by the Funds, convening, attending and conducting meetings of the directors, and take, draft and circulate minutes thereof;

(k) Providing a board room and other support facilities for directors' and/or shareholders' meetings held in XXXXXXXXXX (subject to the Administrator's office space limitations);

(l) Disbursing payments of the annual government and registration fees payable by the Funds in the XXXXXXXXXX and all other costs and expenses incurred for the account of the Funds;

(m) Maintaining the principal corporate and administrative records of the Funds; and

(n) Maintaining the Funds' minute books.

The Administrator will also provide one or more directors of the Funds, if requested.

21. No resolution will be passed by the Administrator to appoint Canco as its agent, nor by the Funds to appoint Canco as its agent, nor will a resolution be passed by Canco accepting an appointment of agency by the Administrator or the Funds.

22. The accounts of Canco will show its profits as its own, with no liability to account therefore to the Administrator or the Funds.

23. Canco will employ the persons who will perform all the Out-Sourced Services, including those share registrar and transfer agency and other services described in paragraph 19 above. The various contracts entered into by Canco in the course of carrying on its business in Canada will create rights and obligations that are personal to Canco vis-à-vis the third parties.

24. Canco will have limited contact with investors of the Funds when Canco is providing shareholder services to the Funds. Canco's contact with the investors will be limited to that necessary to perform the services set out in paragraph 19 above, including processing subscriptions for shares or interests in the Funds, processing redemptions of shares or interests and processing transfers of shares or interests. In particular, Canco does not and will not handle the receipt of monies paid by investors upon the investors' subscription for interests in the Funds as such subscription monies will always be wired or otherwise transmitted by the investors directly into the Funds' bank accounts. Subscriptions are accepted or rejected by the Funds, not by Canco or the Administrator. The Funds establish the investment criteria that must be met before a subscription for shares or interests in the Funds will be accepted. After receiving a completed subscription form from a potential investor, Canco will simply confirm that the subscription form and the subscription that it represents meets the criteria established by the Funds. If the criteria are not met, Canco will notify the Funds. The Funds will independently either waive the criteria or refuse to accept the subscription. If the subscription is accepted by the Funds, Canco will record the investor's investment in the Funds' register and will issue share or interest certificate to the investor.

25. Redemptions of shares or interests of the Funds will be processed in a similar manner as subscriptions. An investor will send the redemption request to Canco which will process the request and amend the Funds' records appropriately. Canco will advise the Funds accordingly and the Funds will send or wire the redemption proceeds directly to the investor.

26. Canco will also prepare and despatch to investors monthly statements showing their holdings of shares/interests in the Funds, as well as trade confirmations confirming subscriptions/redemptions/transfers etc.

Purpose of the Proposed Transactions

The purpose of expanding the list of Out-Sourced Services which Canco may perform as an independent contractor of the Administrator is that additional resources are required to perform certain services that are owing by the Administrators to the Funds under the Administration Agreement. The provision of the Out-Sourced Services by Canco as described in paragraph 14 has been successful and it has been determined that Canco should provide additional services. Furthermore, the additional services which Canco may perform are an excellent opportunity for Canco to grow and employ additional residents of Canada.

Rulings Given

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 completed in the manner described above, we rule that the provision of the additional services described in paragraph 19 under the Framework Services Agreement between the Administrator and Canco will not, in and by itself, cause the Administrator, the Master Fund or the Offshore Feeder Fund to be carrying on business in Canada for the purposes of paragraph 2(3)(b), subsection 115(1) or Part XIV of the Act.

The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency ("CRA") provided that the proposed transactions commence on or before XXXXXXXXXX.

These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Other Comments

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. Specifically, nothing in this ruling should be construed as implying that the CRA has agreed or reviewed the fees paid or that will be paid by the Administrator to Canco with respect to the services provided by Canco as described in paragraphs 14 and 19 above, or more particularly, the application of section 247 of the Act.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch

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