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 the proposed Trust meets the definition of a “qualifying environmental trust” in subsection 211.6(1) of the Act.
2. Whether contributions made by the taxpayer to the Trust will be deductible in computing taxpayer’s income pursuant to paragraph 20(1)(ss) of the Act. 3. Whether Government of Canada bonds and Treasury Bills will be a “prohibited investment” of the Trust as that term is defined in subsection 211.6(1).
Position: 1. Yes; 2. Yes, provided that the Trust is a QET at the time of the contribution. 3. No.
Reasons: Legislative text.
XXXXXXXXXX 2015-061928
XXXXXXXXXX, 2015
Dear XXXXXXXXXX,
Re.: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to the letter dated XXXXXXXXXX requesting an advance income tax ruling on behalf of XXXXXXXXXX. We have also received XXXXXXXXXX’s letter dated XXXXXXXXXX requesting that XXXXXXXXXX, in its capacity as a trustee as described above, be part of this advance income tax ruling.
To the best of your knowledge and that of the taxpayers involved, none of the issues contained in this ruling is:
(a) in a previously filed income tax return of any of the taxpayers or a related person;
(b) being considered by a Tax Services Office or a tax centre in connection with a previously filed income tax return of any of the taxpayers or a related person;
(c) under objection by any of the taxpayers or a related person;
(d) before the courts; or
(e) the subject of a ruling previously issued by the Income Tax Rulings Directorate involving any of the taxpayers or a related person.
Unless otherwise stated, all statutory references are to the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended to the date of this letter (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition.
DEFINITIONS
In this letter, the following terms or expressions have the meanings specified:
“ACo” means XXXXXXXXXX, a company incorporated under the laws of the Province of XXXXXXXXXX;
“ACo Reclamation Trust” means the Pipeline reclamation trust settled pursuant to the ACo Trust Agreement;
“ACo Trust Agreement” means the trust agreement entered into by XXXXXXXXXX and ACo on XXXXXXXXXX and approved by the NEB on XXXXXXXXXX, the relevant terms of which are summarized in paragraph 9 below;
“Annual Contribution Amount” means “Annual Contribution Amount” as defined in the ACo Trust Agreement and means separate and identifiable charges for transportation services with respect to the Pipeline that the NEB will require shippers or ACo to pay and that the NEB will require to be contributed by ACo to the ACo Reclamation Trust;
“Beneficiary” or “Beneficiaries” means “Beneficiary” as defined in the ACo Trust Agreement and means the person or persons, including ACo, having Reclamation Obligations, and the Orphan Pipeline Fund;
“Fund” or “Funds” means “Fund” as defined in the ACo Trust Agreement and means collectively (i) all property (including money) held from time to time by the Trustee, in accordance with the ACo Trust Agreement including, without limitation, all property originally conveyed to the Trustee pursuant to such agreement and all subsequent contributions paid to the Trustee under any section of the ACo Trust Agreement, and (ii) any interest, dividends, gains, returns, proceeds or increase earned or realized by the Trust on such property, in accordance with the ACo Trust Agreement;
“NEB” means the National Energy Board, a board established under the National Energy Board Act, R.S.C. 1985, c. N-7, as amended, or any successor administrative body having authority to regulate ACo in respect of the operation and abandonment of the Pipeline;
“NEB MH-001-2013 Decision” means the NEB Reasons for Decision MH-001-2013 Set-aside and Collection Mechanisms, dated May 2014;
“Orphan Pipeline Fund” means a not-for-profit corporation that will be established pursuant to a statute of the Parliament of Canada and will maintain funds for the purpose of funding the reclamation of abandoned pipelines in Canada, consistent with the NEB’s Reason for Decision MH-001-2013;
“Pipeline” means XXXXXXXXXX;
“qualifying environmental trust” or “QET” has the meaning assigned to that term in subsection 211.6(1);
“Qualified Investments” means all or any of those investments that from time to time are qualified investments for a qualifying environmental trust (being, as of the date hereof, only those types of property described in paragraphs (a), (b), (c), (c.1), (d) and (f) of the definition of “qualified investment” in section 204) and that are not a “prohibited investment” as this term is defined in subsection 211.6(1);
“Reclamation Obligations” means “Reclamation Obligations” as defined in the ACo Trust Agreement and means with respect to the Pipeline, the duty to:
(a) carry out the physical abandonment, decommissioning or deactivation of the Pipeline, within the meaning ascribed to these terms by the National Energy Board Onshore Pipeline Regulations (SOR/99-294), as amended from time to time; including costs incurred to satisfy any conditions imposed by the NEB in any order or direction approving the decommissioning or deactivation of the Pipeline or granting leave to abandon the Pipeline;
(b) develop an abandonment plan and prepare an application for leave to abandon or for approval of the deactivation or decommissioning of the Pipeline; and
(c) carry out post-abandonment monitoring and remediation of the Pipeline site, where post-abandonment refers to the period of time after the conditions of an order or direction issued by the NEB granting leave to abandon have been satisfied;
and all costs incurred in respect of and as a consequence of the foregoing;
“Statement of Investment Policies and Procedures” means the written statement of investment policies and procedures established by ACo in respect of the Fund’s portfolio of investments and loans that sets out broad policies and procedures for the investment of the Fund;
“TSO” means the Tax Service Office;
“taxable Canadian corporation” has the meaning assigned by subsection 89(1); and
“Trustee” means “Trustee” as defined in the ACo Trust Agreement and means XXXXXXXXXX, and any other trust company that accepts the appointment as a trustee of the Fund, provided that throughout the time the Trustee is appointed under the ACo Trust Agreement, it is a trust company that is: (i) licensed under the Trust and Loan Companies Act (Canada) (S.C. 1991, c. 45); (ii) a corporation resident in Canada for the purposes of the Act, and (iii) authorized under the laws of Canada or a province to carry on the business of offering to the public its services as a trustee.
Our understanding of the statement of facts and proposed transactions is as follows:
STATEMENT OF FACTS
Background
1. In May 2009, the NEB issued the Reasons for Decision RH-2-2008 Land Matters Consultation Initiative Stream 3 in which it set out principles, a framework and a five-year action plan, with the goal of having all NEB-regulated pipeline companies begin to set aside funds to cover the costs of pipeline abandonment.
2. In May 2014, the NEB issued the NEB MH-001-2013 Decision. Among other things, the NEB supported pipeline companies to pursue and maintain a tax-efficient approach, including the use of a trust that complies with the QET provisions of the Act as a set-aside mechanism for pipeline abandonment funds.
3. ACo is a taxable Canadian corporation. The address of its head office is XXXXXXXXXX. Its business number is XXXXXXXXXX, its TSO is XXXXXXXXXX and it files its T2 Corporation Income Tax Return with the XXXXXXXXXX Tax Centre.
4. ACo is an indirect subsidiary of XXXXXXXXXX, a XXXXXXXXXX resident in XXXXXXXXXX.
5. The Trustee is a trust company that is:
a. licensed under the Trust and Loan Companies Act (Canada) (S.C. 1991, c. 45);
b. a corporation resident in Canada for the purposes of the Act; and
c. authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as a trustee.
6. The NEB approved the appointment of the Trustee in its NEB Letter Decision, dated XXXXXXXXXX.
7. ACo holds the regulatory authorization to operate the Pipeline, and it owns and operates the Pipeline which is situated in Canada. The site is used primarily for the operation of the Pipeline. ACo is responsible for the Reclamation Obligations in respect of the Pipeline.
The ACo Trust Agreement
8. The ACo Reclamation Trust, settled pursuant to the ACo Trust Agreement, is required to be maintained under an order made by the NEB.
9. For the purpose of this letter, a summary of the relevant terms of the ACo Trust Agreement includes the following:
a. The ACo Reclamation Trust is settled as a discretionary trust pursuant to the laws of the Province of XXXXXXXXXX.
b. Pursuant to XXXXXXXXXX, it is the express intention of the parties that the ACo Reclamation Trust be a QET for the duration of the trust term. The ACo Trust Agreement shall be read and interpreted in light of, and consistently with, the definition and attributes of a QET. The Beneficiaries and the Trustee shall ensure that no actions are taken which would jeopardize the status of the ACo Reclamation Trust as a QET.
c. The ACo Reclamation Trust is maintained for the sole purpose of funding the Reclamation Obligations.
d. Currently, the Beneficiaries of the ACo Reclamation Trust are ACo and the Orphan Pipeline Fund.
e. In accordance with XXXXXXXXXX, funds shall be contributed by ACo to the ACo Reclamation Trust at a minimum on an annual basis. The Annual Contribution Amount is made pursuant to the National Energy Board Act, R.S.C. 1985, c. N-7, or an order or direction made by the NEB. Contributions made by ACo are irrevocable and cannot revert to ACo except as otherwise provided by the ACo Trust Agreement.
f. Under XXXXXXXXXX, the Trustee has the power to appoint among the Beneficiaries of the ACo Reclamation Trust, at its discretion, funds from the Fund responding at the time of payment to the then existing Reclamation Obligations of each Beneficiary. The Trustee may make payment to, or for the benefit of, the appointed Beneficiary. Before making any discretionary payment, the Trustee must receive the approval of the NEB, which approval will include both the Reclamation Obligations being addressed and that person or those persons that are instructed to carry out work with respect to such Reclamation Obligations.
g. Pursuant to XXXXXXXXXX, if property remains in the Fund after all the Reclamation Obligations are discharged, then the Trustee, with the approval of the NEB, may distribute the Fund or any part thereof among any of the Beneficiaries of the ACo Reclamation Trust, including the Orphan Pipeline Fund, as the Trustee in its sole discretion sees fit.
h. Pursuant to XXXXXXXXXX, and in accordance with the applicable laws and the Statement of Investment Policies and Procedures, the Trustee will only acquire Qualified Investments and will not hold a “prohibited investment” as this term is defined in subsection 211.6(1).
i. The ACo Reclamation Trust is to be administered so that the Funds shall be used solely to: (i) discharge the Reclamation Obligations with respect to the Pipeline, (ii) compensate the Trustee or its agents for services rendered or expenses incurred in accordance with the ACo Trust Agreement, and (iii) discharge the tax obligations of the ACo Reclamation Trust, all as provided in XXXXXXXXXX.
j. In accordance with XXXXXXXXXX, distributions from the ACo Reclamation Trust to a Beneficiary or a third party are to be made for the sole purpose of discharging the Beneficiary’s Reclamation Obligations. The Trustee may make a distribution after a presentation of a direction or an order by the NEB issued in the name of the Beneficiary or the third party, as the case may be. The Trustee shall not make a distribution to a Beneficiary who is in default within the meaning of XXXXXXXXXX.
k. In the case of a sale, transfer or other disposition of the Pipeline, or a portion thereof, the Trustee may transfer the Fund, or a portion thereof, to another QET for the purpose of funding Reclamation Obligations in accordance with the ACo Trust Agreement and upon any order or direction from the NEB, including any such direction or order that is made pursuant to paragraphs 74(1)(a), (b) or (c) of the National Energy Board Act, R.S.C. 1985, c. N-7, as provided in XXXXXXXXXX.
l. Pursuant to XXXXXXXXXX, the terms of the ACo Reclamation Trust may be modified by ACo and the Trustee by an agreement in writing approved by the NEB, provided that the amendments are consistent with the purposes of the ACo Reclamation Trust as set out in the ACo Trust Agreement.
m. As provided in XXXXXXXXXX, the ACo Reclamation Trust may not be revoked by its Beneficiaries or ACo, acting as a whole, or the Trustee. The NEB, in the exercise of its statutory authority, may direct the termination of the ACo Reclamation Trust, and order such successive arrangements as are appropriate in view of fulfilling the purpose of the ACo Reclamation Trust.
n. Pursuant to XXXXXXXXXX, it is the express intention of the parties that the ACo Reclamation Trust be resident in XXXXXXXXXX for tax purposes.
PROPOSED TRANSACTIONS
10. The following transactions will be undertaken in accordance with the terms of the ACo Trust Agreement and in compliance with the relevant decisions, orders and directions of the NEB:
a. Commencing in the XXXXXXXXXX taxation year, ACo will make contributions to the ACo Reclamation Trust for the purpose of funding Reclamation Obligations.
b. Where the Pipeline ships third party products, ACo shall contribute monthly to the ACo Reclamation Trust an amount equivalent to the identifiable charges collected to pay for the future cost for the abandonment of the Pipeline.
c. Where the product shipped is owned by ACo, funds will be contributed to the ACo Reclamation Trust monthly.
d. The amount to be contributed to the ACo Reclamation Trust is based on the amount required to fulfill the Reclamation Obligations and is required to be pre-determined every five years by the NEB.
11. At all times, the Fund will be invested in accordance with the Statement of Investment Policies and Procedures. The Trustee shall not, at any time, borrow money for, or on behalf of, the ACo Reclamation Trust, and will only invest in property that is a Qualified Investment.
PURPOSE OF PROPOSED TRANSACTIONS
The purpose of the proposed transactions is to set aside funds for the sole purpose of funding the reclamation of a “qualifying site,” as that term is defined in subsection 211.6(1), through a mechanism that qualifies as a QET under the Act and that is in compliance with the NEB decisions, orders and directions applicable to ACo.
RULINGS
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are carried out as described above, we rule as follows:
A. Provided that the ACo Reclamation Trust is operated in accordance with the terms of the ACo Trust Agreement, the ACo Reclamation Trust will constitute a “qualifying environmental trust” as that term is defined in subsection 211.6(1).
B. Amounts contributed by ACo to the ACo Reclamation Trust will be deductible in computing the income of ACo pursuant to paragraph 20(1)(ss), provided that the ACo Reclamation Trust continues to qualify as a qualifying environmental trust at the time of the contribution.
C. In computing the income, non-capital loss and net capital loss of ACo, for the purposes of applying subsection 107.3(1), the entire amount of any income or loss of the ACo Reclamation Trust for any taxation year of the trust that ends in a particular taxation year of ACo can reasonably be considered to be ACo’s share of such income or loss.
D. A debt obligation that meets the definition of “qualified investment” in paragraph (b) of section 204 will not be a “prohibited investment” of the ACo Reclamation Trust for the purpose of the definition of that term in subsection 211.6(1).
Except as expressly stated, the rulings provided 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 expenditure referred to in this letter;
b. the person or persons subject to tax on funds distributed by the ACo Reclamation Trust;
c. whether the ACo Reclamation Trust is a valid trust at law; and
d. the application of any perpetuity legislation to the ACo Reclamation Trust.
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R6 dated August 29, 2014, and are binding on the Canada Revenue Agency provided that the proposed transactions are implemented as described above. For greater certainty, these advance income tax rulings are based on the ACo Trust Agreement as amended on XXXXXXXXXX and approved by the NEB on XXXXXXXXXX. If amendments to the ACo Trust Agreement are made after that time, the rulings provided may not apply unless the amendment is approved by the NEB and a supplemental ruling is issued.
These rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.
Yours truly,
XXXXXXXXXX
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
XXXXXXXXXX
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