23 November 2000 External T.I. 2000-0054915 - Partnership Funding Sales Commissions

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: Whether ATR 62 is still applicable.

Position: No.

Reasons: Legislative amendments, including sections 18.1, 143.2 and 40(3.1)

XXXXXXXXXX
									2000-005491
Attention:  XXXXXXXXXX 						B.G. Dodd
									957-8953
November 23, 2000

Dear Sirs:

Re: Use of Limited Partnerships to Fund Mutual Fund Selling Commissions

We are writing in reply to your letter dated November 6, 2000 in which you enquire whether the Canada Customs and Revenue Agency ("CCRA") continues to accept the type of arrangement described in our published ruling ATR 62 dealing with the use of limited partnerships to fund mutual fund selling commissions.

ATR 62 dealt with a limited partnership which was organized to fund the cost of selling commissions paid to brokers who sell mutual fund units under arrangements where the investor acquiring the units does not pay any fee to purchase units but may be subject to a redemption fee when these same units are sold. In return for paying this cost, the partnership was entitled to future revenues. As set out in ATR 62, it was concluded that in such circumstances it was appropriate to use a three year straight line amortization as a general practice for the purposes of the Income Tax Act (the "Act"). More specifically, it was determined that, beginning July 1, 1995, amortization of selling commission expenses at the rate of 33 1/3% for the year that the expense was incurred and for each of the next two years would be acceptable.

ATR 62 is now essentially obsolete as there have been a number of legislative initiatives in recent years that could have a bearing on the tax implications in these arrangements as well as others. In particular, the type of arrangement described in ATR 62 will now generally be subject to section 18.1 of the Act (commonly referred to as the matchable expenditure rules) which operates to restrict deductibility of the expense by prorating the deduction over the economic life of the right to receive the future revenues. The proration is subject to a number of provisions, including a minimum of five years (regardless of the actual economic life of the right to receive the future revenues) and where the life of the right is indeterminate, the proration will be over twenty years.

There are several exceptions, one of which may be applicable where an amount in excess of 80% of the future revenues is included in income in the year in which the matchable expenditure is made. Please note that the provisions of section 18.1 of the Act, which are generally applicable after November 17, 1996, are quite comprehensive and are not limited to arrangements described in ATR 62.

In addition, section 143.2 of the Act was introduced, generally effective after November 1994, which, in general terms, will reduce, for tax purposes, the amount of an expenditure that is, or is the cost of, a taxpayer's tax shelter investment, or the amount of an expenditure of a taxpayer, an interest in which is a tax shelter investment, by any related limited-recourse debt and by the amount of a taxpayer's at-risk adjustment. Assuming an interest in a limited partnership such as that described in ATR 62 would now be a tax shelter investment subject to section 143.2 of the Act, if a limited partner's interest in the partnership were financed with limited-recourse debt, his/her cost of the interest would be reduced by the amount of such debt as would the amount of the expenditure of the partnership on the sales commissions. Borrowings by the limited partnership may also reduce the amount of its sales commission expense. As a result of the reduction to the amount of the sales commission expense which may be deducted in computing the partnership's income, there would be a reduction in the early years' losses which would otherwise typically be flowed out to the partners. The amount of the expense may be restored where the limited recourse debt is repaid. (Section 18.1 of the Act would further reduce the amount of sales commission expense which the partnership could deduct each year as a result of the proration requirements.)

Subsections 40(3.1) to (3.2) were introduced, generally effective after February 21, 1994, which, in general terms, provide that a limited partner (and certain other partners) will realize a gain where at the end of the partnership's fiscal period such partner's adjusted cost base is negative. This situation could arise, for example, in a year in which losses are allocated to a limited partner who receives cash distributions in excess of the amount invested. Such gain must be included in computing the partner's income for the year.

The measures noted above are intended generally to eliminate the tax advantages which had been available through the use of tax shelters. For example, in connection with section 143.2 of the Act, in its December 14, 1995 press release, the Department of Finance referred to "the Government's commitment, announced on December 1, 1994, to improve the fairness of the tax system by preventing abuses through aggressive tax shelter promotions". Whether a particular arrangement would be subject to these or other provisions of the Act can only be determined based on a complete review of the related facts, including agreements and other documentation. It is not the policy of the CCRA to assist in developing tax planning techniques and accordingly we are not in a position to offer you any suggestions in structuring a financing vehicle for your business.

However, should you develop a proposed arrangement which you are seriously contemplating, you may wish to consider requesting an advance income tax ruling. There is a fee for this service (currently $100 per hour for the first ten hours and $155 for each additional hour, plus GST) and the procedures to be followed are set out in Information Circular 70-6R3.

Should you develop a proposed arrangement which is a tax shelter, the provisions of section 237.1 of the Act should be considered. Among other things, these provisions: require the promoter to apply for an identification number; prohibit the sale, issuance or acceptance of consideration by the principal or agent before an identification number has been issued; and provide for the denial of deductions by investors where certain information, including the identification number is not provided. The issuance of an identification number is an administrative matter and does not constitute acceptance, approval or confirmation of the deductibility of any amounts. The prescribed form for this is T5001. This form and the above noted circular are available from your local tax services office or from our web site (www.ccra-adrc.gc.ca).

The foregoing is a very brief, general description of some of the provisions of the Act which might be relevant. For more detail, the specific provisions of the Act should be consulted. We hope this will be of assistance to you.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch