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: 1) Can a real estate corporation qualify under subparagraph 149(1)(o.2)(ii) where it does not hold other (non real estate) property?
Would the holding of limited partnership units jeopardize a corporation's ability to satisfy the requirements of 149(1)(o.2)(iii)?
Would a cash call obligation requiring the corporation to acquire additional equity in the investment constitute a debt obligation for purposes of 149(1)(o.2)(iii)?
Position: 1) Yes. 2) No. 3) No.
Reasons: 1) To satisfy subparagraph 149(1)(o.2)(ii), a corporation must restrict its activities to real estate related activities. We would not accept the proposal to fit other non real estate property in the real estate pension corporation. The proposed transactions were amended so that the non real estate property will be transferred to a different corporation.
The Department of Finance has stated in its Revised Explanatory Notes issued on June 16, 2000 (under proposed section 253.1) that, in applying 149(1)(o.2), it is intended that an interest in a limited partnership be treated as an investment. We accept that the interest in the limited partnership is an investment.
The cash call obligation, in this case, is not a debt for purposes of the Act.
XXXXXXXXXX 2000-005546
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. XXXXXXXXXX (the "Former Employer"), which maintained a pension plan for its employees known as the XXXXXXXXXX (the "Plan"). Benefits provided by such plan were funded through the XXXXXXXXXX (the "Fund"). The Plan was a defined benefit plan.
2. XXXXXXXXXX, the Former Employer was continued as XXXXXXXXXX (the "Employer")) effective XXXXXXXXXX.
3. The business formerly carried on by the Former Employer (XXXXXXXXXX) was XXXXXXXXXX entities (the "XXXXXXXXXX Entities") XXXXXXXXXX.
4. XXXXXXXXXX. The Fund is exempt from tax pursuant to paragraph 149(1)(o) of the Income Tax Act (the "Act").
5. XXXXXXXXXX. Pursuant to a trust and custodial agreement made as of the same date, XXXXXXXXXX ("Trustco") became the trustee of the Fund.
6. XXXXXXXXXX, each of the XXXXXXXXXX Entities established its own defined benefit pension plan effective XXXXXXXXXX (the "XXXXXXXXXX Plans"). The XXXXXXXXXX Plans have been filed with the XXXXXXXXXX and the Canada Customs and Revenue Agency. The registration numbers of the XXXXXXXXXX Plans are XXXXXXXXXX. Each of the XXXXXXXXXX Entities has established a trust fund for its XXXXXXXXXX Plan to fund the benefits provided by such XXXXXXXXXX Plan (the "XXXXXXXXXX Funds"). The trustee for each of the XXXXXXXXXX Funds is Trustco. Each of the XXXXXXXXXX Funds is exempt from tax pursuant to paragraph 149(1)(o) of the Act. It is anticipated that, at all relevant times for the purposes of the transactions described herein, the Plan and the XXXXXXXXXX Plans will be subject to the investment restrictions contained in the Pension Benefits Standards Act, 1985 (the "PBSA") as at XXXXXXXXXX.
7. XXXXXXXXXX the assets of the Fund will be divided and transferred to the XXXXXXXXXX Funds pursuant to the terms of a transfer agreement to be entered into between the Employer and each of the XXXXXXXXXX Entities and that, upon receipt of regulatory approval, the XXXXXXXXXX Plans will assume responsibility for the accrued pension benefits of the members and former members of the Plan. The value of the assets to be transferred to each of the XXXXXXXXXX Funds is to be calculated using the formula set out in the XXXXXXXXXX and the transfer of assets is subject to the consent of the XXXXXXXXXX.
8. Most of the assets of the Fund are invested in marketable securities. The Fund's other assets (the "Non-Marketable Assets") include a real estate portfolio and a mortgage portfolio. In addition, a small percentage of the Non-Marketable Assets of the Fund is invested in private equity and private debt investments, usually in conjunction with other institutional investors similar to the Plan (the "Private Equity Assets").
9. The real estate portfolio consists of a XXXXXXXXXX (the "Property Interest"), the shares of a number of corporations (each a "Real Property Holdco") and a number of bonds, the return on which is at least partially dependent on the income, revenue or cash flow from real property held by the issuer of such bonds (the "Participating Bonds"). The Property Interest constitutes capital property to the Fund and the Fund's activities in relation to the Property Interest consist of the holding of its interest therein for the purpose of earning rental income. Legal title to the Fund's interest in the Property Interest is held by XXXXXXXXXX as bare trustee for the Fund. The Fund has delegated the management of its interest in the property to XXXXXXXXXX. Each Real Property Holdco beneficially owns or co-owns real property in XXXXXXXXXX. In some cases, legal title to the real property or interest therein beneficially owned by Real Property Holdco is held by another corporation as bare trustee for Real Property Holdco.
10. XXXXXXXXXX.
11. The Private Equity Assets consist of interests in three principal categories of investment vehicles, investment corporations, unitized trusts and limited partnerships. In addition, the Private Equity Assets may include shares of public corporations where such shares are not freely tradable due to escrow requirements or contractual restrictions on re-sale. The vast majority of the limited partnerships are engaged in the business of investing and providing capital to active businesses. Several of the limited partnerships are engaged in the business of developing real estate and in some instances the real estate does not constitute capital property to the particular limited partnership. In connection with certain of its holdings of the Private Equity Assets, the Fund has an obligation to provide additional cash to the investment vehicle by way of further share subscription or partner capital contribution ("Cash Call Obligations"). Certain of the limited partnerships may have borrowed funds in connection with their activities (the "Limited Partnership Borrowings"). However, the Fund's liability in respect of any such borrowings is without direct recourse to the Fund and is limited to any liability it may have in respect thereof as a limited partner. The Fund has not guaranteed any Limited Partnership Borrowings. Certain of the Private Equity Assets are "foreign property" within the meaning of subsection 206(1) of the Act.
12. Among other things, the PBSA Regulations impose certain restrictions on investments that may be made by a plan, directly or indirectly, which include, subject to certain exceptions, a prohibition on a plan investing moneys equal to more than 10% of the book value of the plan's assets in any one person (subsection 9(1) of Schedule III of the PBSA Regulations) (the "Quantitative Restrictions").
Proposed Transactions
13. In order to facilitate the transfer of the Non-Marketable Assets to the XXXXXXXXXX Funds in the manner contemplated in 7 above, the following transactions are proposed.
(a) The Employer will cause Trustco, as trustee for the Fund, to incorporate three holding corporations (the "Realty Holdco", the "Mortgage Holdco" and the "Investment Holdco", collectively referred to as the "Holdcos") under the XXXXXXXXXX Trustco, as trustee for the Fund, will subscribe for one common share of each of the Holdcos and will hold each share in trust for the Fund. The articles of Realty Holdco will contain restrictions limiting its activities and investments in the manner referred to in subparagraph 149(1)(o.2)(ii) of the Act. The articles of each of the Mortgage Holdco and the Investment Holdco will contain restrictions limiting its activities and investments in the manner referred to in subparagraph 149(1)(o.2)(iii) of the Act. In the case of each of the Holdcos, the articles will restrict ownership of all shares and rights to acquire shares to those persons referred to in subparagraph 149(1)(o.2)(iv) of the Act.
(b) The Property Interest and the shares of the Real Property Holdcos will be transferred to Realty Holdco in return for shares of Realty Holdco, which will be held by Trustco, as trustee for the Fund.
(c) Realty Holdco will constitute a "real estate corporation" within the meaning of that term in section 1 of Schedule III to the PBSA Regulations. Realty Holdco will provide to the Plan and to any XXXXXXXXXX Plan to which are transferred shares representing more than 30% of the voting shares of Realty Holdco the undertaking contemplated by subsection 12(1) of Schedule III of the PBSA Regulations. Among other things, as a result of this undertaking, Realty Holdco will agree to restrict its investments (other than in real property or in securities of other "real estate corporations") to those authorized for the Plan or the XXXXXXXXXX Plan, as the case may be, and will agree not to invest in securities of any other real estate corporation carrying more than 30% of the voting rights with respect to such other corporation unless such other corporation provides a similar undertaking. Each Real Property Holdco the shares of which are transferred to Realty Holdco will provide such undertaking.
(d) The interest of the Fund in the mortgage portfolio and the Participating Bonds will be transferred to Mortgage Holdco in return for shares of Mortgage Holdco, which will be held by Trustco, as trustee for the Fund. Mortgage Holdco will constitute an "investment corporation" within the meaning of that term in section 1 of Schedule III to the PBSA Regulations.
(e) Any Private Equity Assets that may be held by the Fund under the PBSA Regulations will be transferred to Investment Holdco in return for shares of Investment Holdco, which will be held by Trustco, as trustee for the Fund.
(f) Investment Holdco will constitute an "investment corporation" within the meaning of that term in section 1 of Schedule III to the PBSA Regulations. Pursuant to the definition of the term "investment corporation" in the PBSA Regulations, Investment Holdco will be limited in its investments to those that are authorized for a plan under the PBSA Regulations. Investment Holdco will provide to the Plan and to any XXXXXXXXXX Plan to which are transferred shares representing more than 30% of the voting shares of Investment Holdco the undertaking contemplated by subsection 14(1) of Schedule III of the PBSA Regulations. Among other things, as a result of this undertaking, Investment Holdco will agree not to invest in securities of any other investment corporation carrying more than 30% of the voting rights with respect to such other corporation unless such other corporation provides a similar undertaking.
(g) In connection with the transfer of the Private Equity Assets to Investment Holdco, Investment Holdco will succeed to any rights and obligations of the Fund under shareholders', limited partnership or similar agreements relating to the transferred Private Equity Assets, including the Cash Call Obligations. The Fund will also transfer to Investment Holdco, in return for shares of Investment Holdco, sufficient cash to permit Investment Holdco to satisfy anticipated Cash Call Obligations.
(h) Investment Holdco will make the election contemplated by subsection 259(2) of the Act within the time referred to in subsection 259(3) applicable from the time at which any assets are acquired by Investment Holdco. Depending on the circumstances, it is possible that either or both Realty Holdco and Mortgage Holdco will at some point make such an election.
(i) As soon as practicable following receipt of the consent of the XXXXXXXXXX to the transfer of assets described in 7 above, the Employer will cause beneficial ownership of the shares of the Holdcos to be transferred to the XXXXXXXXXX Funds and Trustco will hold the shares in trust for the XXXXXXXXXX Funds. It is anticipated that the XXXXXXXXXX Entities will enter into an agreement providing for the management and governance of the Holdcos, XXXXXXXXXX.
14. It is anticipated that the transfer agreement referred to in 7 above will contemplate that the transfer of assets to the XXXXXXXXXX Funds may need to occur in more than one stage although a substantial (over XXXXXXXXXX % on a market value basis) portion of the assets likely will be transferred at one stage following the obtaining of regulatory approval. For example, the transfer of some of the Private Equity Assets to Investment Holdco may be delayed until any necessary consents of other investors in those assets have been obtained. This may in turn delay the transfer of the shares of Investment Holdco to the XXXXXXXXXX Funds. In addition, a reserve is expected to be held back within the Fund pending final determination of expenses and the net balance would be transferred at a future date. It is also possible that there could be a deferred receipt of proceeds of a non-transferrable asset or of an asset currently being sold and in that event the net proceeds would be transferred to the XXXXXXXXXX Funds subsequent to the main asset transfers.
15. The agreement pursuant to which the transfers described above will be effected is currently being settled and it is anticipated that the parties will wish the proposed transactions described herein to take effect on XXXXXXXXXX.
Purpose of the Proposed Transactions
16. The purpose of the proposed transactions is to facilitate the transfer in kind of the Non-Marketable Assets from the Fund to the XXXXXXXXXX Funds in accordance with their respective proportionate interests. Transferring the Non-Marketable Assets to the Holdcos rather than transferring such assets to each of the XXXXXXXXXX Funds to be held by them in co-ownership is considered preferable from an administrative perspective. It is anticipated that the Holdcos will serve as the vehicles for holding the assets transferred to them until such assets are disposed of, at which time the proceeds would be distributed to the shareholders of the Holdcos. XXXXXXXXXX.
8. To the best of your knowledge and the knowledge of the Employer, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Employer or of a person related to the Employer or any of the XXXXXXXXXX Plans;
(b) is being considered by a tax services office or taxation centre in connection with a previously-filed return of the Employer, a person related to the Employer or any of the XXXXXXXXXX Plans;
(c) is under objection by the Employer, a person related to the Employer or any of the XXXXXXXXXX Plans;
(d) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Employer, a person related to the Employer or any of the XXXXXXXXXX Plans.
Rulings Given
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, we rule as follows:
A. Provided that the shares of the Real Property Holdcos are investments that a pension plan is permitted to make under PBSA or a similar law of a province, the acquisition and holding of the Property Interest and the shares of the Real Property Holdcos by Realty Holdco will not result in Realty Holdco failing to satisfy the requirements of subparagraph 149(1)(o.2)(ii) of the Act.
B. The acquisition and holding of the limited partnership units included in the Private Equity Assets will not, in and by themselves, result in Investment Holdco being disqualified from satisfying the conditions in subparagraph 149(1)(o.2)(iii) of the Act.
C. The assumption of the Cash Call Obligations by Investment Holdco and the acquisition and holding of interests in limited partnerships that have or will have debt obligations will not, in and by themselves, result in Investment Holdco issuing debt obligations and being disqualified from satisfying the condition in clause 149(1)(o.2)(iii)(B) of the Act.
D. Provided that Realty Holdco meets the requirements to be a "real estate corporation" under the PBSA Regulations and is in compliance with the undertakings referred to in 13(c) above, Realty Holdco will be considered to have made no investments other than investments that a pension fund or plan is permitted to make for the purposes of paragraph 149(1)(o.2)(ii) of the Act.
E. Provided that Investment Holdco meets the requirements to be an "investment corporation" under the PBSA Regulations and is in compliance with the undertakings referred to in 13(f ) above, Investment Holdco will be considered to have made no investments other than investments that a pension fund or plan is permitted to make for the purposes of paragraph 149(1)(o.2)(iii) of the Act.
F. Subsection 147.3(3) of the Act will apply to the transfers of property from the Fund to the XXXXXXXXXX Funds described in 14 above.
The above rulings, which are based on the Act in its 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 70-6R3 dated December 30, 1996, and are binding on the Canada Customs and Revenue Agency XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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