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.
Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: Discussion of certain tax consequences under Reg. 5102(1), and sections 96, 143.2, 146 and 146.3 where an RRSP or RRIF trust purchases units of one of two classes of units of a small business investment limited partnership ("SBILP") with a combination of cash, full-recourse promissory notes and post-dated cheques.
PositionS:
1. Two classes of units, each class having different attributes will not satisfy the definition of a SBILP.
2. Title may not pass in law and may result in contravention of paragraph (i) of subsection 5102(1) of the Regulations.
3. If title does pass, the cash and full-recourse promissory notes would form part of the cost of the partnership units for purposes of the "at-risk" rule in section 96 of the Act. For the post-dated cheques, either 96(2.2)(c) will reduce the "at-risk" amount until the post-dated cheque is cashed or 143.2(7) will apply to deem the amount of the post-dated cheque to be a limited-recourse amount and subsection 143.2(6) will apply.
4. The use of the promissory notes receivable from the RRSP/RRIF by the SBILP as security for the acquisition of new investments is not relevant to the determination as to whether the SBILP satisfies the definition in subsection 5102(1)(h).
5. If the consideration for the partnership units paid by the RRSP/RRIF trust exceeds the FMV of the units, there is an income inclusion to the annuitant pursuant to 146(9)(b)/146.3(4)(b).
Reasons:
1. Contravenes the requirement that all units be identical under 5102(1)(d).
2. In this case the full-recourse promissory notes could constitute "deposits".
3. Post-dated cheques are either "amounts owing" to the SBILP under 96(2.2)(c) or "limited recourse amounts" which reduce the cost of the unit to the holder under 143.2(7) and 143.2(6).
4. The promissory notes receivable held the SBILP (payable by the RRSP/RRIF) constitute an asset of the SBILP and therefore could not possibly be "borrowed money" (a liability of the SBILP, a "promise to repay").
5. 146(9)(b)/146.3(4)(b) requirements.
May 11, 2000
PENTICTON TSO HEADQUARTERS
Income Tax Rulings
Attention: T.L. Csonka Directorate
G. Kauppinen
(613) 957-8971
1999-000723
Regulation 5102
This is in reply to your facsimile dated September 22, 1999 which was forwarded to this directorate for reply. You have posed several questions regarding the small business investment limited partnership ("SBILP") definition in subsection 5102(1) of the Income Tax Regulations (the "Regulations").
Regulation 5102 requires, among other things, that in order that a partnership be a small business limited partnership at any time, "at all times after it was formed and before that time...
(d) the interests of the limited partners were described by reference to units of the partnership that were identical in all respects...
(h) it has not borrowed money except for the purpose of earning income from its investments and the amount of any such borrowings at any time did not exceed 20 per cent of the partnership capital at that time...
(i) it has not accepted deposits."
You describe a SBILP with two classes of limited partnership units, the units of each class being identical in all respects by class but the attributes of one class being different from the other. In our view the condition in paragraph 5102(1)(d) of the Regulations is not satisfied under these circumstances. All units of a SBILP must be identical in all respects.
In addition, you ask about the application of paragraph 5102(1)(h) of the Regulations and the "at-risk rules" for limited partners in section 96 of the Income Tax Act (the "Act") in the following situation. A trust governed by a registered retirement savings plan ("RRSP") or a trust governed by a registered retirement income fund ("RRIF") purchases a unit of a SBILP for 40% cash and the balance with one or more full-recourse promissory notes and post-dated cheques. The SBILP then pledges the promissory notes as security for the purchase of "small business securities". The purchase of "small business securities" as defined in subsection 5100(2) of the Regulations is an activity permitted to SBILPs by subparagraph 5102(1)(f)(i) of the Regulations.
The first issue to be addressed is whether title to the SBILP unit passes to the RRSP or RRIF in this scenario.
If title does not pass, the RRSP or RRIF has not acquired an interest in a partnership. Consequently, paragraph 96(2.2)(a) of the definition of "at-risk amount" in the Income Tax Act ("Act") is simply not relevant. However, the cash and promissory notes may constitute "deposits" to the limited partnership in contravention of the definition of a SBILP in paragraph 5102(1)(i) of the Regulations.
If title to the units does pass to the RRSP or RRIF, the cash and full-recourse promissory note(s) would form part of the cost of an interest in a limited partnership for the purpose of the "at-risk rules" contained in section 96 of the Act. With respect to the post-dated cheques, either paragraph 96(2.2)(c) of the Act will apply to reduce the RRSP or RRIF's at-risk amount until the post-dated cheque is cashed, or alternatively, subsection 143.2(7) of the Act will apply to deem the amount of the post-dated cheque to be a limited-recourse amount and subsection 143.2(6) of the Act will apply. To the extent this amount is repaid by the RRSP or RRIF, the provisions of subsection 143.2(10) of the Act will apply. Note that where the RRSP or RRIF trust is not taxable (which is generally the case) neither of these consequences is relevant.
If the SBILP pledges the promissory notes payable to it by the RRSP or RRIF (the "trust notes" receivable) as security to purchase new investments from a third party, it is not the quantum of trust notes that is relevant for the 20% test in paragraph 5102(1)(h) of the Regulations. The trust notes held by the SBILP constitute an asset to it and therefore could not possibly be considered to be "borrowed money", which would be a liability of the SBILP (a "promise to re-pay").
Note that paragraph 146(9)(b) (for an RRSP trust) or 146.3(4)(b) (for a RRIF trust) could result in an income inclusion to the annuitant for the year the SBILP unit is purchased if the value of the consideration paid by such a trust exceeds the value of the SBILP units acquired by the trust.
We trust the foregoing is of assistance. If there are further questions, please contact Gord Kauppinen at (613) 957-8971.
P. Spice
for Director
Financial Industries Division
Income Tax Rulings Directorate
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