Interpretation of 10% limit in PBSA Regulations, Sched. III, s. 9(1) (“10% Rule”) (pp. 15:4-6)
The purpose of the 10 percent rule was also considered in R v Christophe, et al. [fn 8: 2009 ONCJ 586 at para 138]. The court stated the purpose as follows:
...[T]he provision targets the overall amount held in any one place, such that there not be any new advances which would result in holdings beyond the quantitative limits. …
An analysis of the legislative intent behind subparagraph 149(1)(o.2)(iii) and the plain wording of the provisions demonstrates that the 10 percent rule for the purposes of the Act should be interpreted to apply at the pension plan level and not at the investment corporation level. Such an interpretation is also consistent with well-established rules of statutory interpretation.
Interpretation of 30% limit in PBSA Regulations, Sched. III, s.11 (“30% Rule”) (p. 15:8)
...Note that the 30 percent rule applies only to securities to which more than 30 percent of the voting rights are attached. It does not prevent a pension plan from holding securities to which more than 30 percent of the value of the corporation are attached. ...
Thin cap and SIFT extension proposals (pp.15:8-17)
In June 2016, the government of Canada released a consultation document…[which] indicated that the government was contemplating two tax proposals to "address tax fairness and efficiency issues associated with pension plan control of Canadian business entities"
1) extending the thin capitalization rules to corporations in which tax-exempt entities invest and
2) extending the specified investment flowthrough (SIFT) rules to apply to partnerships and trusts in which tax-exempt entities invest. ...
...If the thin capitalization extension proposal is implemented, it will apply when the tax-exempt entity holds more than 25% of the votes or value of the corporation... . In these cases, the interest deductions claimed by the operating corporation will be reduced to the extent that the debt-to-equity ratio exceeds 1.5 to 1. This will affect both the tax-exempt investment corporation and the taxable investors in the operating corporation. …
...The consultation document asks whether the SIFT Rules should apply to pension controlled trusts and partnerships, but there is no indication of what is meant by the term "pension controlled"….
...The consultation document…seems to suggest that the SIFT extension proposal could apply at an ownership level of 50 percent or lower. It is not clear whether such a test would be applied on the basis of holdings by a single plan in the trust or partnership (the "single plan specified limit test") or the aggregate holdings of all plans in the trust or partnership (the "aggregate holding specified limit test").
...Subjecting Holdings LP to entity-level taxation will not only adversely affect pension plans that invest in Holdings LP, but would also adversely affect the taxable infrastructure developer. ...
Requirement in s. 149(1)(o.2)(iii)(A) for an “investment” (pp. 15:11-10)
...A common issue that arises with respect to infrastructure investments is whether a limited partnership interest is an "investment" for the purposes of clauses 149(1)(o.2)(iii)(A) and (C). …
...[T]he technical notes to section 253.1 implicitly contemplate that a partnership interest would be an investment for the purposes of paragraph 149 (1)(o.2) and it would be illogical if this conclusion did not apply to the investment tests in subparagraph 149(1)(o.2)(iii). The foregoing is consistent with the CRA's position, based on the technical notes to section 253.1, that a limited partnership interest can be an investment for the purposes of subparagraph 149(1)(o.2)(iii). [fn 25: …2000-0055463, 2005-0151691E5 and 2005-0126841R3.]
Requirement in s. 149(1)(o.2)(iii)(C) for income to be derived from an “investment” (pp. 15:12-13)
...[C]lause 149(1)(o.2)(iii)(C) requires that the investment corporation derive at least 98 percent of its income from its investments or from dispositions of its investments. ….
...[T]he courts have taken the view that "derived" refers to source or origin. [fn 28: …Gilhooly v. M.N.R., [1945] CTC 203 (EC), Westar Mining Ltd. v. R., 92 DTC 6358 (FCA), M.N.R. v. Hollinger, [1963] CTC 51 (SCC), M.N.R. v. Bessemer Trust Co., [1972] CTC, 473 (FCTD) and Kemp v. M.N.R., [1947] CTC 343(Ex. Ct.). See also…9636045] It is clear that the income allocated to an investment corporation by a limited partnership only arises (in other words, has its origin or source) as a result of the investment corporation's investment in the limited partnership. ...
Requirement in s. 149(1)(o.2)(iii)(B) not to issue debt securities (pp. 15:14-16)
...[U]nder Canadian provincial partnership law it is generally considered that partnerships cannot contract independently of their partners, and that when an agent of the partnership (for example, a general partner of a limited partnership) enters into a contract on the partnership's behalf, all of the partners have incurred the obligations which flow from the contract. [fn 31: See, for example, Molson Brewery BC Ltd. v Canada, 2001 CanLii 22132(FCTD) and Klein v. The Queen, 2001 DTC 443, at paragraph 22…] …
...The issuance of debt should be viewed as part of the "business" or "activity" of the partnership that would, as a result of section 253.1, not be considered to be carried on by the investment corporation. ...
This position was also supported by…Consolidated Mogul…:…
...Obviously, the financing function of a mining company is an integral part of its business. …
Additional certainty with respect to the issues discussed above can be achieved by having the investment corporation acquire units of a unit trust which then acquires the interest in the limited partnership. …
...On the basis of trust law principles alone,…an issuance of a debt obligation (or a note, bond, debenture or similar obligation) by the trustee of a unit trust to a third party would not be considered to be the issuance of a debt obligation (or a note, bond, debenture or similar obligation) by the beneficiary of the trust. …
Consistent with the general scheme for the taxation of trusts and their beneficiaries, the CRA has issued a technical interpretation that states that when an investment corporation is a beneficiary of a trust, the investment corporation is not considered to be the issuer of debt obligations issued by the trust. [fn 39: 2006-0195451R3…]
Use of lease structure to address proportionate activity or real estate activity tests (pp. 15:19-23)
Pension plan investments in real estate are not generally made through an investment corporation but rather through a real estate corporation as described in subparagraph 149(1)(o.2)(ii). …
The CRA's position is that the real estate corporation should limit its proportion of activities with respect to the real estate property to its proportion of co-ownership of the property. This might increase the administrative burden with respect to the real estate property in some cases, since both the real estate corporation and the taxable corporation would need to be involved in every lease and other activity related to the property. Pension plans looking to co-invest in real estate property may want to avoid these issues by using a structure…[where] the real estate corporation would hold a co-ownership interest in the real estate property with the third party taxable corporation. The parties would then lease the real estate property to a leasing corporation which would be responsible for leasing the property to various tenants. …
Another common issue arises where a real estate corporation acquires a real estate property on which a hotel or similar business operates. In these cases, there may be a concern that the real estate corporation is performing activities in relation to the property that are not those activities listed in clause 149(1)(o.2)(ii)(A). …
[Based on] IT-73R6…[i]n the context of clause 149(1)(o.2)(ii)(A), it could thus be argued that a real estate corporation that acquires a property on which a hotel or similar business is being operated is providing services in relation to that property and is not be holding, maintaining, improving, leasing or managing the property. Additionally, to the extent that the real estate corporation borrowed funds to acquire the particular property, those funds arguably would not have been borrowed for the purpose of earning income from real property. Thus, in such situations, the real estate corporation would risk losing its tax-exempt status under subparagraph 149(1)(o.2)(ii).
One potential solution to this problem is for the real estate corporation to acquire the land and building on which the hotel or similar business operates (possibly as a co-investment with a third party taxable entity), while another taxable corporation held by the pension plan operates the business (see figure 6). The real estate corporation could lease the land and building to the corporation that operates the hotel or other business.
Application of PPT to a Canadian pension fund co-investing in Europe through e.g. a Luxco (pp. 15:32-35)
A pension plan seeking to invest in Europe…will invest in a limited partnership that in turn invests in a Luxembourg corporation ("Luxco"). The Luxco will then invest in EU Co. If EU Co has other shareholders, then generally Luxco will need to acquire at least 10 percent of the capital of EU Co in order to take advantage of the "participation exemption"… .
...[P]ension funds and certain investment vehicles could potentially lose their treaty benefits under the LOB rule or PPT rule if they invest through an entity that is a resident of a third country--for example, when a Canadian pension plan uses a holding company resident in a third country to make an investment outside Canada or makes an investment in a private equity fund that makes use of such holding companies (as depicted in the common investment structure described in figure 9). ...
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