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: 1- Whether certain of the general partners are deemed limited partners by virtue of the application of 96(2.4)(b) or (c) and 40(3.14)(b) or (c). 2- Whether the general partners meet the exception in paragraph (b)(i) of the "specified member" definition.
Position: 1- Favourable narrow rulings provided. 2- Question of fact. Comments provided.
Reasons: 1- Paragraphs 96(2.4)(b) and 40(3.14)(b) have similar wording and refer to paragraph 96(2.2)(d) which contains a "purpose" test that is considered not to be met in the circumstances due to the nature of the particular agreements. For paragraphs 96(2.4)(c) and 40(3.14)(c), condition (ii) is not met. 2- Question of fact which cannot be determined until after the fact.
XXXXXXXXXX 2010-039127
XXXXXXXXXX , 2012
Dear Sirs:
Re: XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
(collectively the "Taxpayers")
Advance Income Tax Ruling Request
This is in reply to your letter of XXXXXXXXXX , as amended XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the above-named parties. We also acknowledge the information provided during our telephone conversations and correspondence concerning your request.
We understand that, to the best of your knowledge and that of the Taxpayers, none of the issues involved in the ruling request is:
(i) in an earlier return of the Taxpayers or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Taxpayers or a related person,
(iii) under objection by the Taxpayers or a related person,
(iv) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired, and
(v) the subject of a ruling previously considered by the Income Tax Rulings Directorate for the Taxpayers or a related person.
This document is based solely on the facts, transactions and additional information described below. Any information or documentation submitted in the course of processing your request does not form part of the facts, transactions and additional information and any references thereto are provided solely for the convenience of the reader.
DEFINITIONS
Unless otherwise expressly stated, every reference herein to the "Act" or to a part, subdivision, section or subsection, paragraph or subparagraph and clause or subclause is a reference to the relevant provision of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c.1, as amended from time to time and consolidated to the date of this letter, and the Income Tax Regulations thereunder are referred to as the "Regulations".
In this letter, all monetary amounts are expressed in Canadian dollars unless otherwise indicated, and the following terms or expressions have the meaning specified:
"AB General Partnership Agreement" means the final amended and restated general partnership agreement of AB Partnership to be entered into between ACo and BCo which will amend and restate the initial general partnership agreement of the AB Partnership entered into on XXXXXXXXXX between ACo and BCo in its entirety.
"AB Partnership" means XXXXXXXXXX , a general partnership formed under the laws of XXXXXXXXXX on XXXXXXXXXX and to be governed by the AB General Partnership Agreement, having its head office located at XXXXXXXXXX . AB Partnership's filer identification number is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office.
"AB Partnership Management Committee" means the management committee to be formed by ACo and BCo with the exclusive power and authority to manage the business and affairs of AB Partnership.
"ABC General Partnership Agreement" means the general partnership agreement of ABC Partnership XXXXXXXXXX between AB Partnership and CCo.
"ABC Partnership" means XXXXXXXXXX , a general partnership between AB Partnership and CCo, formed under the laws of XXXXXXXXXX on XXXXXXXXXX and governed by the ABC General Partnership Agreement.
"ABC Partnership Management Committee" means the management committee of ABC Partnership, which has been formed by AB Partnership and CCo, with the exclusive power and authority to manage the business and affairs of ABC Partnership.
"ACB" means "adjusted cost base" as defined in subsection 248(1).
"ACo" means XXXXXXXXXX , a wholly-owned subsidiary of Parent A incorporated under the XXXXXXXXXX . ACo has its head office located at XXXXXXXXXX and its business number is XXXXXXXXXX . ACo deals with the XXXXXXXXXX Tax Services Office. ACo is a Taxable Canadian Corporation.
"BCo" means XXXXXXXXXX , a wholly-owned subsidiary of Parent B incorporated under the CBCA. BCo has its head office located at XXXXXXXXXX and its business number is XXXXXXXXXX . BCo deals with the XXXXXXXXXX Tax Services Office. BCo is a Taxable Canadian Corporation.
"Bipartite Agreement" means the final agreement between Land Owner and ABC Partnership, XXXXXXXXXX , as described in paragraphs 18 to 19.
"Business of AB Partnership" has the meaning ascribed thereto in paragraph 29.
"Business of ABC Partnership" has the meaning ascribed thereto in paragraph 42.
"CBCA" means the Canada Business Corporations Act, R.S.C. 1985, c. C-44, as amended through the date hereof.
"CCo" means XXXXXXXXXX , a wholly-owned subsidiary of Parent C incorporated under the CBCA. CCo has its head office located at XXXXXXXXXX and its business number is XXXXXXXXXX . CCo deals with the XXXXXXXXXX Tax Services Office. CCo is a Taxable Canadian Corporation.
"Comfort Letter" means the comfort letter dated October 28, 2010 from the Department of Finance Canada recommending the amendment to subsection 1100(26) of the Regulations.
"Compensation Agreement" means the letter of agreement dated XXXXXXXXXX between the Land Owner, Parent A and Parent C as described in paragraph 3.
"Consideration Payments" means the payments, as further described in paragraph 18, to be payable by ABC Partnership to Land Owner under the Bipartite Agreement.
"CRA" means the Canada Revenue Agency.
"Draft Maintenance Agreement" means the draft XXXXXXXXXX attached to the letter of intent dated XXXXXXXXXX and to be entered into between Supplier and ABC Partnership pursuant to which Supplier will provide all services required for the maintenance of the XXXXXXXXXX.
"Draft Supply Agreement" means the contract attached to the letter of intent for the sale of, among other things, XXXXXXXXXX between Supplier, Parent C and Parent A dated XXXXXXXXXX .
"Exclusivity Agreement" means the agreement signed with an effective date of XXXXXXXXXX between AB Partnership, Parent C and Land Owner and pursuant to which AB Partnership and Parent C obtained an exclusive right to negotiate and enter into of additional agreements, the whole on substantially the same terms and conditions as the Bipartite Agreement, pursuant to which AB Partnership and/or Parent C would develop and operate additional XXXXXXXXXX projects on the Private Lands.
"FMV" means fair market value.
"GP" means XXXXXXXXXX , a company incorporated under the XXXXXXXXXX . GP has its head office located at XXXXXXXXXX and its business number is XXXXXXXXXX . GP deals with the XXXXXXXXXX Tax Services Office.
"XXXXXXXXXX Contracts" means the XXXXXXXXXX supply agreements dated XXXXXXXXXX , entered into by XXXXXXXXXX , as the purchaser XXXXXXXXXX , and Parent C and ACo as the suppliers XXXXXXXXXX from the Project.
"Land Owner" means XXXXXXXXXX .
"Long Term Debt" means the overall financing of the Project XXXXXXXXXX as described in paragraph 34.
"Maintenance Agreements" means the final XXXXXXXXXX entered into between Supplier and ABC Partnership, with substantially the same terms and conditions as the Draft Maintenance Agreement.
"Operator" means Parent C.
"Option" means the irrevocable and exclusive option granted, under the Option Agreement, by Parent A to Parent B and to any of its wholly-owned subsidiaries to XXXXXXXXXX .
"Option Agreement" means the option agreement dated XXXXXXXXXX pursuant to which, among other things, Parent A granted to Parent B and to any of its wholly-owned subsidiaries the Option.
"Paid-up capital" or "PUC" has the meaning assigned by subsection 89(1).
"Parent A" means XXXXXXXXXX , a limited partnership formed under the laws of XXXXXXXXXX and governed by the XXXXXXXXXX partnership agreement, executed on XXXXXXXXXX whose core business is the XXXXXXXXXX . Parent A has its head office located at XXXXXXXXXX and its filer identification number is XXXXXXXXXX and its partnership number is XXXXXXXXXX . Parent A deals with the XXXXXXXXXX Tax Services Office.
"Parent B" means XXXXXXXXXX , a publicly listed corporation incorporated under the CBCA whose core business is the XXXXXXXXXX . Parent B has its head office located at XXXXXXXXXX and its business number is XXXXXXXXXX . Parent B deals with the XXXXXXXXXX Tax Services Office.
"Parent C" means XXXXXXXXXX , a company incorporated under the CBCA whose core business is the XXXXXXXXXX . Parent C has its head office located on XXXXXXXXXX and its business number is XXXXXXXXXX . Parent C deals with the XXXXXXXXXX Tax Services Office.
"Principal Business Corporation" means a corporation that satisfies the conditions of paragraph 1100(26)(a) of the Regulations.
"Private Lands" means the private lands owned by Land Owner and located XXXXXXXXXX .
"Project" means the XXXXXXXXXX and located on the Private Lands.
"Proposed Transactions" means the transactions described in paragraphs 27 to 37.
XXXXXXXXXX
"Reorganization" means XXXXXXXXXX .
"Schedule II" means Schedule II of the Regulations.
"Service Agreement" means the agreement between ABC Partnership and the Operator concerning the operational aspect of the Project, as described in paragraphs 23 to 26.
"Subject Transactions" means the transactions described in paragraphs 15 to 26.
"Supplier" means XXXXXXXXXX , a company incorporated under the laws of XXXXXXXXXX with its head office located at XXXXXXXXXX . Supplier is a wholly-owned subsidiary of XXXXXXXXXX , a legal person incorporated under the laws of XXXXXXXXXX .
"Supply Agreement" means the final purchase and sale agreement between ABC Partnership and Supplier for the sale, among other things, of XXXXXXXXXX , the whole on substantially the same terms and conditions as the Draft Supply Agreement.
"Taxable Canadian Corporation" has the meaning assigned by subsection 89(1).
XXXXXXXXXX
Our understanding of the facts, transactions and the purpose of the Subject Transactions and Proposed Transactions is as follows:
FACTS
1. On XXXXXXXXXX , Parent A and Parent C entered into an agreement relating to XXXXXXXXXX .
2. On XXXXXXXXXX , Parent A and Parent C entered into a letter of intent with Supplier for the sale of XXXXXXXXXX to be used in connection with the Project. The letter of intent provides that the parties will enter into a definitive Supply Agreement substantially in the form of the Draft Supply Agreement attached to the letter of intent.
3. On XXXXXXXXXX , Land Owner, Parent A and Parent C entered into the Compensation Agreement whose purpose was to specify the intended modes of compensation to Land Owner. XXXXXXXXXX In addition, the parties agreed that Land Owner would receive payments under leases which were still to be drafted and which would serve to finalize the agreement between the parties.
4. XXXXXXXXXX
5. On XXXXXXXXXX , Parent A incorporated ACo. The Board of Directors of ACo is composed of XXXXXXXXXX directors. ACo's capital stock consists of one class of common shares. ACo has XXXXXXXXXX as its taxation year end for the purposes of the Act.
6. XXXXXXXXXX
7. On XXXXXXXXXX , Parent C and ACo entered into the letter of understanding entitled XXXXXXXXXX whose purpose was to establish the principal terms that would serve as a basis for drafting a formal service agreement. Until such time as a formal service agreement is drafted and signed, this letter of understanding binds the parties and constitutes an agreement between them concerning the provision of services for the operation, maintenance and administration of the Project.
8. XXXXXXXXXX
9. On XXXXXXXXXX Parent B incorporated BCo under the CBCA and subscribed for common shares for nominal cash consideration.
10. Parent B is a XXXXXXXXXX % limited partner in Parent A, GP is a XXXXXXXXXX % general partner in Parent A and XXXXXXXXXX is a XXXXXXXXXX limited partner in Parent A. Parent B became a limited partner in Parent A as part of the Reorganization.
11. On XXXXXXXXXX , Land Owner, Parent C and ACo entered into an agreement entitled XXXXXXXXXX .
12. On XXXXXXXXXX , the AB Partnership was formed as a general partnership under the laws of XXXXXXXXXX by ACo and BCo, as general partners.
13. On XXXXXXXXXX , ACo transferred to AB Partnership all of its rights, title and interest to the Project in consideration for units of AB Partnership. As part of this transaction, ACo transferred its rights and interests in the XXXXXXXXXX Contracts to AB Partnership. Also, all of the rights and obligations of ACo under the binding agreement referred to in paragraph 7 were assigned to and assumed by AB Partnership.
14. On XXXXXXXXXX , Parent B exercised through its wholly owned subsidiary, BCo, the Option by acquiring from ACo XXXXXXXXXX % of the units of AB Partnership. As a result, BCo now owns XXXXXXXXXX % of the issued and outstanding units of AB Partnership, while ACo owns the remaining XXXXXXXXXX % of the issued and outstanding units of AB Partnership.
SUBJECT TRANSACTIONS
15. On XXXXXXXXXX , Parent C incorporated CCo under the CBCA and subscribed for common shares for nominal cash consideration.
16. On XXXXXXXXXX , AB Partnership and CCo entered into the ABC General Partnership Agreement and formed ABC Partnership. Under the ABC General Partnership Agreement:
(a) The income and losses for tax purposes of ABC Partnership for each fiscal year will be allocated at the end of the year among its partners, AB Partnership and CCo, in proportion to the number of partnership units held by each of them at the end of each fiscal year.
(b) A partner of ABC Partnership will be required to qualify as a Principal Business Corporation or a partnership that meets the conditions of subsection 1100(26) of the Regulations as described in the Comfort Letter. The partners of ABC Partnership will not be entitled to participate in any activities whatsoever other than (i) the holding of its interest in the ABC Partnership (ii) activities related to the Business of ABC Partnership, (iii) activities described in subsection 1100(26) of the Regulations, (iv) the lending of funds to affiliates, and (v) investing funds received from distributions of the ABC Partnership into short-term fixed return investments provided that the partners of ABC Partnership shall not engage in active lending or investing of such funds.
(c) The ABC Partnership Management Committee will manage the business and affairs of ABC Partnership. The ABC Partnership Management Committee will be composed of XXXXXXXXXX representatives from each of CCo and AB Partnership for a total of XXXXXXXXXX representatives.
In addition, the ABC Partnership Management Committee will be composed solely of directors or employees of the members of ABC Partnership including, where the member is itself a partnership, directors or employees of the member's corporate partners. The representatives from CCo will be directors or employees of CCo. The representatives from AB Partnership will be directors or employees of the members of the AB Partnership or employees of the AB Partnership.
17. On XXXXXXXXXX , the ABC Partnership entered into the Supply Agreement.
18. On XXXXXXXXXX , ABC Partnership and Land Owner entered into the Bipartite Agreement which provides for the following:
(a) Under the Bipartite Agreement,
(i) Land Owner will lease to ABC Partnership certain parcels of land located on the Private Lands. These parcels will be leased for the sole purpose of carrying on the Project.
(ii) ABC Partnership will acquire XXXXXXXXXX from Land Owner. More specifically, Land Owner will transfer XXXXXXXXXX with respect to certain parcels of land located on the Private Lands.
(iii) ABC Partnership will acquire XXXXXXXXXX from Land Owner on certain parcels of land located on the Private Lands.
(b) The following amounts will be payable under the Bipartite Agreement (the "Consideration Payments"):
(i) From the date of XXXXXXXXXX . This is an annual amount, payable quarterly, which will be indexed XXXXXXXXXX . This amount is a fixed amount XXXXXXXXXX and
(ii) In the years XXXXXXXXXX , the sum of $XXXXXXXXXX per XXXXXXXXXX during the opening period of the construction site XXXXXXXXXX .
No other amount will be paid to the Land Owner in relation to the Project.
(c) The term of the Bipartite Agreement will terminate on the latest expiry date of the XXXXXXXXXX . The Bipartite Agreement will be renewed thereafter automatically for additional successive periods of one year each unless ABC Partnership advises that it terminates the Bipartite Agreement.
19. The Bipartite Agreement XXXXXXXXXX becomes the final agreement as to the payments to be made to Land Owner under the leases contemplated in the Compensation Agreement. For greater certainty, the provisions in the Bipartite Agreement supersede XXXXXXXXXX of the Compensation Agreement.
20. With respect to the Project, there is no other agreement and there will be no other agreement between the Land Owner, on the one hand, and any of the entities named in this ruling or any of their respective subsidiaries, on the other hand, except for the Bipartite Agreement, the Compensation Agreement and the Exclusivity Agreement. For greater certainty, the Bipartite Agreement will supersede all prior understandings and agreements between the Land Owner and any of the entities named in this ruling (or any of their respective subsidiaries) except for the Compensation Agreement and the Exclusivity Agreement.
21. On XXXXXXXXXX , AB Partnership and Parent C respectively transferred their rights relating to the Project to ABC Partnership in consideration for an interest therein on a rollover basis pursuant to subsection 97(2). As part of this transaction, AB Partnership and Parent C transferred their rights in the XXXXXXXXXX Contracts to ABC Partnership.
22. On XXXXXXXXXX , Parent C transferred its interest in ABC General Partnership to CCo on a rollover basis pursuant to subsection 85(1).
Service Agreement
23. On XXXXXXXXXX (as part of the transaction described in paragraph 21), the binding agreement referred to in paragraph 7 was assigned to ABC Partnership and became the Service Agreement as between ABC Partnership and Operator.
24. The role and responsibilities of the Operator under the Service Agreement will be to supervise the day-to-day operation of the Project (more particularly the operation of the XXXXXXXXXX ) and to manage and supervise the activities carried out in accordance with the Maintenance Agreement. The main terms and conditions of the Service Agreement are as follows:
- The Operator will operate and maintain the Project.
- The Operator will be involved in the XXXXXXXXXX . The Operator will operate and administer the Project within the scope of the various legislations and contractual arrangements and within the various budgets established. This shall include, among other things, providing engineering services, hiring and supervising required employees, implementing the operations manuals and procedures, maintaining of the XXXXXXXXXX .
- With respect to the administration, the Operator will prepare an annual budget for the XXXXXXXXXX and an annual budget for operating expenses and capital expenditures which will be submitted to the partners for approbation. The Operator will supervise any service providers involved in the Project, find insurance and recommend insurance coverage, pay the expenses provided in the budgets, alert partners in case of damages XXXXXXXXXX and maintain relationships with suppliers and other third parties including the Land Owner and XXXXXXXXXX .
- The Operator will prepare and remit to the partners monthly reports on the XXXXXXXXXX activities, and a quarterly report for XXXXXXXXXX as well as any other report that is required under the contracts for the XXXXXXXXXX or the financing agreements.
25. The service fee to be earned by the Operator under the Service Agreement will be comprised of the following three components:
- A fixed annual amount of $XXXXXXXXXX (indexed) which is intended to compensate the Operator for the fixed costs associated with the operation of the Project and the time that its own employees will devote to the operation of the Project;
- An amount equal to the variable costs incurred by the Operator which will be recharged to ABC Partnership and reimbursed on a strict cost recovery basis; and
- XXXXXXXXXX
For greater certainty, no other amount will be paid to the Operator under the Service Agreement.
26. The purpose of the Service Agreement is to compensate Operator for its services based on negotiated terms, and not to reduce the impact, in whole or in part, of any loss that CCo may sustain because CCo is a member of the ABC Partnership or holds or disposes of an interest in the ABC Partnership. The terms of the Service Agreement are to be commercial.
PROPOSED TRANSACTIONS
27. ABC Partnership has entered into the Maintenance Agreement and will enter into any other agreements required in connection with the Project. All necessary consents and modifications to existing agreements will be obtained to reflect the appropriate contracting parties, terms and conditions as described herein.
28. The ABC General Partnership Agreement will be amended to delete Clause XXXXXXXXXX as this clause states that each financing agreement shall include appropriate provisions to ensure enforcement solely against the units of the ABC Partnership pledged as security.
29. The general partnership agreement of the AB Partnership entered into on XXXXXXXXXX will be amended and restated in its entirety by the AB General Partnership Agreement. Under the AB General Partnership Agreement:
(a) The principal business of AB Partnership will be to participate, as a general partner of ABC Partnership, in the development and operation of the Project and in the carrying-on of the Business of ABC Partnership (the "Business of AB Partnership") through its participation in ABC Partnership.
(b) The income and losses for tax purposes of AB Partnership for each fiscal year will be allocated at the end of the year among its partners, ACo and BCo, in proportion to the number of partnership units held by each of them at the end of each fiscal year.
(c) A partner of AB Partnership will be required to qualify as a Principal Business Corporation that satisfies the conditions of paragraph 1100(26)(a) of the Regulations. The partners of AB Partnership will not be entitled to participate in any activities whatsoever other than (i) activities related to the Business of AB Partnership and to the Business of ABC Partnership, (ii) activities described in subsection 1100(26) of the Regulations, (iii) the lending of funds to affiliates, and (iv) investing funds received from distributions of AB Partnership into short-term fixed return investments provided that the partners of AB Partnership shall not engage in active lending or investing of such funds.
(d) The AB Partnership Management Committee will manage the business and affairs of AB Partnership. The AB Partnership Management Committee will be formed and each of ACo and BCo will have the right to nominate a number of representatives to AB Partnership Management Committee in proportion to their interest in AB Partnership. The AB Partnership Management Committee will be initially composed of XXXXXXXXXX representatives from each of ACo and BCo for a total of XXXXXXXXXX representatives.
In addition, the AB Partnership Management Committee will be composed solely of directors or employees of the members of AB Partnership. The representatives from ACo will be directors or employees of ACo. The representatives from BCo will be directors or employees of BCo.
Further, the AB General Partnership Agreement will not contain any clause that ensures (or requires agreements to include appropriate provisions to ensure) that the obligations of a partner under any agreement may be enforced solely against the units of the AB Partnership pledged as security.
30. AB Partnership and CCo will contribute to ABC Partnership the capital required by ABC Partnership, estimated at about $XXXXXXXXXX , in proportion to their respective interest in the ABC Partnership. XXXXXXXXXX .
31. CCo will finance its share of the capital contribution to ABC Partnership by issuing common shares to Parent C. Parent C will use cash on hand, cash from operations or existing credit facilities for its contribution to the capital of CCo.
32. In the case of AB Partnership, its share of the capital contributions to ABC Partnership will be financed from the capital contribution by its general partners, ACo and BCo. In turn, BCo will issue common shares to Parent B and ACo will issue common shares to Parent A. It is expected that the capital contribution by Parent A and Parent B to, respectively, ACo and BCo will be financed from cash on hand, cash from operations, existing credit facilities or issuance of partnership interests by Parent A and capital issuance by Parent B.
33. No financing undertaken by any of Parent A, Parent B, ACo, BCo, AB Partnership, Parent C or CCo to finance the acquisition of their respective direct or indirect interests in the Project will be guaranteed by ABC Partnership.
34. ABC Partnership has arranged for debt financing under which it can borrow up to $XXXXXXXXXX of Long Term Debt. The Long Term Debt will be provided by a group of arm's length institutional investors and/or financial institutions to ABC Partnership and will be used, among other things, to finance the acquisition of the XXXXXXXXXX . The interest rate on the Long Term Debt will be a commercial arm's length rate. The Long Term Debt will be secured by, among other things, a first-ranking hypothec on the XXXXXXXXXX , pledges of partnership interests in ABC Partnership held by AB Partnership and CCo and other assets used in the Project and its aggregate maturity will exceed XXXXXXXXXX years. The Long Term Debt will be full recourse against all the assets of the ABC Partnership and, under the legal principles governing general partnerships, against all of the assets of the partners of ABC Partnership and all the assets of the partners of AB Partnership. For additional clarity, nothing in the loan documentation (or in any other agreement) will limit, in any manner, the rights and recourse of the lenders against the ABC Partnership, the partners of ABC Partnership and the partners of AB Partnership.
35. During fiscal years XXXXXXXXXX , access roads will be built and other construction work will be carried out in connection with the XXXXXXXXXX .
36. Supplier will deliver XXXXXXXXXX pursuant to the Supply Agreement and Supplier will undertake the maintenance of such XXXXXXXXXX pursuant to the Maintenance Agreement.
XXXXXXXXXX Contracts
37. Under the XXXXXXXXXX Contracts, ABC Partnership will sell and XXXXXXXXXX will purchase XXXXXXXXXX .
38. XXXXXXXXXX . Therefore, the participation of any other party in the Project has to respect the initial structure established, on the one hand, between ACo, Parent C and such third parties and, on the other hand, between A Co and Parent C. AB Partnership was created as a common vehicle through which Parent B (through its subsidiary BCo) could participate in the Project along with ACo, without otherwise unduly affecting the various rights negotiated between ACo, Parent C and third parties.
39. XXXXXXXXXX
40. XXXXXXXXXX
41. ACo and Parent C have negotiated the terms and conditions of their participation in the Project since XXXXXXXXXX , first in the form of a term sheet of co-ownership agreement, then subsequently in the form of a general partnership agreement. The ABC General Partnership Agreement was negotiated so as to adapt the principles set out in the term sheet of co-ownership agreement to a partnership structure.
42. The principal business of ABC Partnership will be to XXXXXXXXXX on the portions of the Private Lands that are subject to the Bipartite Agreement using XXXXXXXXXX acquired under the Supply Agreement and to XXXXXXXXXX pursuant to the XXXXXXXXXX Contracts or any other XXXXXXXXXX contracts (the "Business of ABC Partnership"). The Business of ABC Partnership will be managed exclusively by the ABC Partnership Management Committee which will delegate certain operational aspects of the Project (such as the operation of the XXXXXXXXXX ) to the Operator in accordance with the Service Agreement and to the Supplier pursuant the Maintenance Agreement.
43. The Project is intended to be operational by XXXXXXXXXX .
44. A summary of the estimated costs of the Project is as follows:
XXXXXXXXXX
45. The principal business of Parent A, Parent B and Parent C is in the XXXXXXXXXX sector and, as such, the business of the Project would form an integral part of the principal business of Parent A, Parent B and Parent C if the Project was conducted directly by them. However, each of Parent A, Parent B and Parent C has decided to undertake the Project through a separate wholly-owned corporation. The Project is the first XXXXXXXXXX project for each of Parent A and Parent B and thus a departure from their core business of XXXXXXXXXX . As such, the Project represents the undertaking of the new segment of XXXXXXXXXX as part of their XXXXXXXXXX sector operations. As for Parent C, the Project is its first XXXXXXXXXX project that is being undertaken with outside partners.
46. Parent A is XXXXXXXXXX . Since the Project is XXXXXXXXXX , Parent A will undertake the Project through a separate subsidiary.
47. Parent B is XXXXXXXXXX .
48. XXXXXXXXXX . As a result of the above, Parent B cannot participate directly in AB Partnership.
49. XXXXXXXXXX . As a result of the above, Parent C cannot participate directly in ABC Partnership.
50. If the Project were conducted in a separate corporation, the level of financing would be reduced by $XXXXXXXXXX to $XXXXXXXXXX . This is because the lenders would consider the tax liability at the level of the corporation, which would adversely affect the cash flow available to service the debt. This reduced leverage would significantly affect the financial return of the Project. XXXXXXXXXX .
PURPOSE OF THE SUBJECT TRANSACTIONS AND THE PROPOSED TRANSACTIONS
The purpose of the Subject Transactions and the Proposed Transactions is to structure and to operate the Project in the most effective manner from a commercial and financial perspective for each of the Taxpayers.
RULINGS
Provided that
(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts and additional information, transactions and purposes of the Subject Transactions and Proposed Transactions,
(b) the Subject Transactions and Proposed Transactions are completed in the manner described above, and
(c) there are no other transactions which may be relevant to the rulings requested,
we rule as follows:
A. Paragraphs 96(2.4)(c) and 40(3.14)(c) will not apply to deem (i) ACo and BCo to be limited partners of AB Partnership and (ii) CCo to be a limited partner of ABC Partnership on the basis that one of the reasons for the existence of ACo, BCo and CCo can reasonably be considered to be to permit Parent A, Parent B and Parent C, respectively, to carry on its business (other than an investment business) in the most effective manner. This ruling will cease to apply, at a particular time, to the member (ACo, BCo or CCo), if, at that time, the principal business of its parent (Parent A, Parent B or Parent C, respectively) is not in the XXXXXXXXXX sector.
B. The general partners of AB Partnership and ABC Partnership will not be deemed to be limited partners pursuant to paragraphs 96(2.4)(b) and 40(3.14)(b) solely by reason of the payments to ABC Partnership for the purchase of XXXXXXXXXX under the XXXXXXXXXX Contracts as described in paragraph 37 above.
C. CCo will not be deemed to be a limited partner of ABC Partnership pursuant to paragraphs 96(2.4)(b) and 40(3.14)(b) solely by reason of the service fee to the Operator under the Service Agreement as described in paragraphs 23 - 26 above.
D. Subject to section 67, the portion of the Consideration Payments relating to the lease of the parcels of land on the Private Lands under the Bipartite Agreement will be deductible by ABC Partnership, in accordance with section 9, in computing its income or loss for the fiscal period in which the Consideration Payments are incurred.
For greater certainty, the portions of the Consideration Payments relating to the XXXXXXXXXX and to the XXXXXXXXXX will be payment on account of capital.
The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the Subject Transactions and the Proposed Transactions are completed on or before XXXXXXXXXX .
Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed, made any determination or accepted any method for determination in respect of:
a. the PUC of any share or the ACB or FMV of any property referred to herein;
b. whether or not any persons or partnerships referred to in this letter deal at arm's length;
c. whether or not the terms of a particular agreement or arrangement are commercial;
d. whether or not a person or partnership is carrying on a business or a particular business;
e. whether a particular property meets the requirements of Class XXXXXXXXXX or Class XXXXXXXXXX of Schedule II to the Regulations; or
f. any other tax consequence relating to the facts, Subject Transactions, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Subject Transactions and the Proposed Transactions would also be included in a series of transactions or events that include other transactions or events that are not described in this letter.
Deemed Limited Partner
Pursuant to sections 96(2.4) and 40(3.14), a general partner of a partnership may be deemed to be a limited partner of that partnership at a particular time, for certain purposes of the Act, if certain conditions are met at that time or within 3 years after that time. Since sections 96(2.4) and 40(3.14) may apply at any particular time if the conditions are met at that particular time, we are not able to confirm (except as expressly stated in the above rulings) that these provisions of the Act will never apply to deem the partners of AB Partnership and ABC Partnership to be limited partners.
In our view, at this particular time, AB Partnership will not be deemed to be a limited partner of ABC Partnership pursuant to paragraphs 96(2.4)(c) and 40(3.14)(c) given that AB Partnership is a general partnership and we have no reason to consider that its existence limits the liability of any person with respect to the interest in ABC Partnership. However, AB Partnership will be deemed to be a limited partner of ABC Partnership pursuant to paragraphs 96(2.4)(c) and 40(3.14)(c) at a particular time, if, at that time or within 3 years after that time, one of the reasons for the existence of AB Partnership can reasonably be considered to be to limit the liability of any person with respect to the interest in ABC Partnership unless it is reasonable to consider that one of the reasons for the existence of AB Partnership is to permit any person who has an interest in AB Partnership to carry on that person's business (other than an investment business) in the most effective manner.
Specified Member of a Partnership
The determination of whether or not a member of a partnership is a "specified member" of a partnership, as defined under subsection 248(1), is relevant to the application of subsection 40(3.1). A general partner of a partnership will be a "specified member" of the partnership under paragraph (b) of that definition unless one of the exceptions is met. Subparagraph (b)(i) of that definition provides an exception for a member who is actively engaged in those activities of the partnership business that are other than the financing of the partnership business, on a regular, continuous and substantial basis throughout that part of the period or year during which the business of the partnership is ordinarily carried on and during which the member is a member of the partnership.
In the case where the member is a general partnership or a corporation, it is possible, in our view, to consider the level of involvement of the member's partners, directors or employees in order to determine whether the member meets the exception provided in subparagraph (b)(i) of the definition of "specified member" in subsection 248(1). In our view, a person is actively engaged in the activities of a partnership business when that person is directly involved in the management and/or the daily activities of the business other than the financing of the partnership business. Criteria such as time, work and energy that a person devotes to the business are also considered. Moreover, the participation of the person must be regular, continuous and substantial. Where a person participates as a member on a management committee, the above criteria remain applicable and the level of involvement of the member on the management committee is to be considered. In our view, the specific role assigned to the member and the frequency and quality of the contributions of that particular member to the management of the business would be relevant to the determination.
It is a question of fact whether a particular person is actively engaged on a regular, continuous and substantial basis in those activities of the partnership business that are other than the financing of the partnership business and this determination can only be made after the fact. Therefore, we are not able to confirm that the partners of ABC Partnership and AB Partnership will not be specified members by virtue of the exception provided in subparagraph (b)(i) of the definition of "specified member" in subsection 248(1).
OPINION
Subsection 1100(26) of the Regulations as currently drafted will not apply to exclude ABC Partnership from the application of subsection 1100(24) of the Regulations. However, we understand that the Department of Finance Canada has issued a Comfort Letter on October 28, 2010 indicating that it was prepared to recommend to the Minister of Finance that subsection 1100(26) of the Regulations be amended to apply to partnerships, all the members of which were, throughout the fiscal period of the partnerships, described by paragraph 1100(26)(a) of the Regulations or partnerships to which subsection 1100(26) applies. If such amendment is enacted and is effective for the period in which the Proposed Transactions take place, subsection 1100(26) of the Regulations may apply to ABC Partnership, provided that the members of ABC Partnership are, throughout the fiscal period of the partnership, corporations described by paragraph 1100(26)(a) or partnerships to which subsection 1100(26) of the Regulations applies. The determination as to whether any partnership or corporation carries on a particular business is a question of fact and law.
The foregoing opinion is not a ruling and, as noted in Information Circular 70-6R5, is not binding on the CRA.
Yours truly,
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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