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:
Rulings requested for the following:
1. Provided that partnership otherwise qualifies as a "qualified limited partnership under Regulation 5000(7), it would not cease to be such by virtue that it:
(a) receives income that consists of commitment fees, standby fees and completion fees
(b) pays a management fee to the general partner, and
(c) incurs insurance expense for maintaining a surety bond against potential losses resulting from gross negligence, wilful misconduct, fraud and theft by the general partner, employees and officers and agents.
2. The management fee will be deductible by the partnership and will not be considered as an allocation of income by the partnership.
Position:
3. Subject to a caveat, rulings given.
Reasons:
4. Commitment fee, standby fee and completion fee income, if any, received by the partnership would represent a minor part of its revenue. In order to qualify as a qualified limited partnership, among other things, the partnership's undertaking must be the investing of funds which include debt obligations. Such fee income may be considered to lead to the partnership's substantial business of investments in debt obligations of corporations. For this reason, it would not be unreasonable to provide a ruling in respect of such fee income with the caveat "provided that the partnership qualifies....in all other respects".
5. The payment of a management fee by the partnership is not related to the ownership of units of the partnership. Such fee is based on specific management services to be provided by the general partner in respect of the business of the partnership, pursuant to the partnership agreement. Accordingly, the fee should represent an expense to the partnership rather than an allocation of partnership profits.
6. The payment for insurance protection by the partnership against potential risks in carrying on the partnership's undertaking should be considered as a normal business expense. However, for the sake of the requirement regarding the partnership's undertaking under Regulation 5000(7)(f), a ruling is given subject to the caveat mentioned in 4 above.
Attention: XXXXXXXXXX
Dear Sirs:
Re: Advance Ruling Request
XXXXXXXXXX
This is in reply to your letters dated XXXXXXXXXX in which you requested an advance ruling on behalf of Canco and the above-named Partnership, in connection with the proposed transactions described below.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts and Proposed Transactions
1. In this letter:
(a) "Act" means Income Tax Act (Canada);
(b) "Canco" means XXXXXXXXXX;
(c) "General Partner" of the Partnership means Subco 1;
(d) "Holdco" means XXXXXXXXXX;
(e) "Limited Partner" means an investor who executes the subscription agreement, acquires Units and has been accepted by the General Partner, and whose name has been entered in the register of limited partners;
(f) "Mr. "X"" means XXXXXXXXXX;
(g) "Partnership" means XXXXXXXXXX;
(h) "Partnership Agreement" means the limited partnership agreement;
(i) "Regulations" means the Regulations to the Act;
(j) "Subco 1" means XXXXXXXXXX;
(k) "Subco 2" means XXXXXXXXXX;
(l) "Unit" means a unit of the Partnership.
2. Canco is a Canadian corporation incorporated under the laws of Canada in XXXXXXXXXX.
3. Canco is owned as to XXXXXXXXXX% by Holdco, a Canadian corporation, XXXXXXXXXX.
4. Canco will incorporate Subco 1 under the laws of Canada as a subsidiary wholly-owned corporation. Subco 1 will be a taxable Canadian corporation within the meaning of subsection 89(1) of the Act.
5. Subco 2 will be incorporated under the laws of Canada as a subsidiary wholly-owned corporation of Canco. Subco 2 will be a taxable Canadian corporation within the meaning of subsection 89(1) of the Act.
6. Pursuant to the Partnership Agreement, the Partnership will be formed under the laws of the province of XXXXXXXXXX with Subco 1 as General Partner and Subco 2 together with XXXXXXXXXX other persons as initial limited partners. The principal office of the General Partner and the Partnership shall be maintained at XXXXXXXXXX.
7. The Partnership will be organized for the purposes of investing in XXXXXXXXXX debt securities of Canadian companies ("investees")
XXXXXXXXXX
The Partnership will also provide bridge financing in order to facilitate the closing of a transaction when there is a high degree of confidence that the bridge securities can be refinanced. In the event that the Partnership does not have its Contributed Capital (as defined in the Partnership Agreement) fully invested in XXXXXXXXXX debt securities and bridge securities, any surplus Contributed Capital will be invested in Canadian money market instruments
XXXXXXXXXX
All of the above described securities and instruments will be "specified property" within the meaning assigned by subsection 5100(1) of the Regulations.
8. The Partnership will raise a minimum of $XXXXXXXXXX and a maximum of $XXXXXXXXXX by the issue of the Units under an Offering Memorandum (the "offering"). A maximum of XXXXXXXXXX Units will be issued at a price of $XXXXXXXXXX per Unit. The minimum commitment to the Partnership by a Limited Partner will be $XXXXXXXXXX, subject to the right of the General Partner to accept commitments of a lesser amount.
The initial closing of the offering will occur as soon as practicable after the date of the ruling letter. The General Partner will choose to establish the Partnership with minimum capital commitments of $XXXXXXXXXX. Where the maximum offering is not raised at the initial closing, subsequent closings will occur at the discretion of the General Partner, provided that the final closing will occur no later than 180 days after the initial closing.
9. As described in paragraph 6 above, the Partnership will initially have XXXXXXXXXX Limited Partners. Based on paragraph 8 above, there could be a total of approximately XXXXXXXXXX Limited Partners based on the maximum number of Units being subscribed. However, this number will be less if some Limited Partners become "Co-Founders" and subscribe for a minimum commitment of $XXXXXXXXXX each. Co-Founders will be entitled to preferential treatment to co-invest with the Partnership.
10. Certain of the Limited Partners of the Partnership will be persons who are exempt from tax under Part I of the Act and who are subject to the foreign property limitations contained in Part XI of the Act.
11. The Partnership will be organized and operated so as to qualify as a "qualified limited partnership" within the meaning of subsection 5000(7) of the Regulations. As such, the Partnership shall at all times limit its activities to the making of investments in the securities of investees and other permitted investments. It is anticipated, given the potential composition of the Limited Partners, that the Partnership will constitute a financial institution within the meaning of subsection 142.2 of the Act.
12. In light of the nature of the investments to be made by the Partnership and given the economic realities of the market place, passive transaction income directly related to the making available of capital, namely commitment fees, standby fees and completion fees may be generated. A commitment fee is described as a charge in consideration for the conditional or firm undertaking to make Partnership capital available to an investee. Generally, this income will be earned, as described in paragraph 15 below, whether or not the financing actually closes and may be structured as a single payment which will become due upon the signing of a commitment letter or as a series of payments, one of which will become due upon the signing of a commitment letter and the other payments will only become due if the investee chooses not to close.
In those circumstances where the closing is delayed beyond a predetermined date, a "standby fee" may be charged for making capital available for the extended period. In this case, the fee may be structured as a single payment which will become due upon the firm undertaking to make the capital available in such circumstances or as a series of payments, one of which will become due immediately upon the making available of the capital and another of which will only become due at the time of closing. Finally, a completion or closing fee may be charged as remuneration for the provision of capital if the transaction closes.
13. The Partnership Agreement will provide that the income or loss of the Partnership is to be allocated such that:
(a) short-term investment income earned on Contributed Capital (as defined in the Partnership Agreement) before it is initially invested in subordinated debt securities or bridge securities, will be allocated to the General Partner and Limited Partners pro rata to their Contributed Capital after being reduced by such pro rata share of the expenses of the Partnership incurred during the period in which the short-term income accrues; and
(b) initially, XXXXXXXXXX% of Net Profit or Net Loss (as such terms are defined in the Partnership Agreement) will be allocated to the Limited Partners in the ratio in which the number of Units held by each Limited Partner bears to the total number of Units held by all Limited Partners at the time of the allocation, until the Limited Partners will have received by way of distributions, amounts which, in the aggregate, are equal to their Contributed Capital and the Preferential Return (as such terms are defined in the Partnership Agreement); and XXXXXXXXXX% of such Net Profit or Net Loss shall be allocated to the General Partner. Thereafter, Net Profit or Net Loss will be allocated, as to XXXXXXXXXX% to the Limited Partners based on the ratio described above, and as to XXXXXXXXXX% to the General Partner.
14. The General Partner will be responsible for managing the Partnership. For its services to the Partnership, as described in the Partnership Agreement, the General Partner will receive the following annual management fee (the "Management Fee"):
(a) XXXXXXXXXX% of the Committed Capital (as such term is defined in the Partnership Agreement) during the first five years of the Partnership; and
(b) XXXXXXXXXX% of the Adjusted Invested Capital (as defined in the Partnership Agreement) during the remainder of the term of the Partnership.
15. As described in paragraph 12 above, the Partnership may earn passive transaction income from investees and prospective investees in connection with any financing proposal, financing commitment or investment made by it. However, under the particular arrangement with the Partnership, Subco 1 will utilize its best efforts to find investees which will be willing to pay passive transaction fees for the use of the Partnership's capital. For such efforts, Subco 1 shall charge a market-rate passive transaction fee to such investees and prospective investees. Subco 1 shall remit to the Partnership the balance of such passive transaction fees received after deducting and retaining for its own account:
(a) in respect of an investment in securities which is a senior bridge financing: XXXXXXXXXX of the aggregate passive transaction fees received;
(b) in respect of any other investment in securities: XXXXXXXXXX of the aggregate passive transaction fees received; and
(c) in respect of a transaction where Partnership funds are not advanced to the prospective investee: XXXXXXXXXX of the aggregate passive transaction fees received.
16. The Partnership, during its term, will maintain in force insurance by way of a surety bond in the amount of $XXXXXXXXXX to cover losses incurred by it as a result of any gross negligence, wilful misconduct, fraud, theft or action not taken honestly and in good faith by the General Partner, officers, employees or agents of the Partnership.
17. The fiscal year of the Partnership shall end on XXXXXXXXXX.
18. The Partnership shall be dissolved upon the occurrence of any one of the following events:
(a) the bankruptcy, insolvency or dissolution of the General Partner, unless, within a specified period, another general partner has been designated by the Limited Partners;
(b) all securities and other assets of the Partnership have been disposed of at any time after XXXXXXXXXX;
(c) XXXXXXXXXX or any extended date as is agreed upon by Extraordinary Resolution.
19. To the best of your knowledge and that of the taxpayers listed in the captioned subject described above
(i) none of the issues involved in this advance income tax ruling request are under objection or appeal or are being considered by any tax services office or taxation centre of the Department in connection with a tax return already filed, and
(ii) none of the issues involved in the requested rulings are the subject of any notice of objection or are under appeal.
Purpose of the Proposed Transactions
20. The purpose of the proposed transactions is to bring together a pool of capital in order to provide subordinated debt financing to mid-level Canadian corporations.
Rulings Given
Provided that the above statements of facts and proposed transactions and purpose of the proposed transactions are accurate and constitute complete disclosure of all of the relevant facts and proposed transactions, and that the proposed transactions are carried out as set forth herein and the Partnership is a partnership at law, the following rulings are given:
(1) Provided that the Partnership qualifies as a "qualified limited partnership" within the meaning of subsection 5000(7) of the Regulations in all other respects
(a) the receipt of passive transaction fee income by the Partnership
(b) the payment of the Management Fee by the Partnership to Subco 1
(c) the purchase of a surety bond as insurance against potential losses of the Partnership, as described in paragraph 15 above will not, together or independently, in and of themselves, cause the Partnership to be denied the status of a "qualified limited partnership" within the meaning of subsection 5000(7) of the Regulations.
(2) Provided that the Management Fee is incurred to earn income and the amount thereof is reasonable in the circumstances, the Management Fee will be deductible in computing the Partnership's income pursuant to section 9 of the Act and will not be considered to be an allocation of the Partnership's income.
The above rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada on December 30, 1996 and are binding on Revenue Canada, provided that the proposed transactions are initiated not later than XXXXXXXXXX.
These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments. Except as expressly stated, our Rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly, (a) the reasonableness of any of the expenses of the Partnership and (b) the existence of a reasonable expectation of profit of the Partnership or any partner of the Partnership.
Furthermore, these rulings are also based on our understanding that the facts and proposals set out above will be in accordance with the final documents and agreements with respect to these facts and proposals.
A material difference between the final wording of one of these documents, including the Partnership Agreement, the subscription agreement and the Offering Memorandum, and the facts and proposals as set out above will affect the rulings given.
Yours truly
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and Interpretations Directorate
Policy and Legislation Branch
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