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: Will the acquisition of limited partnership units of a limited partnership that owns only leased real property result in the corporation ceasing to satisfy subparagraph 149(1)(o.2)(ii) of the Act?
Position: No.
Reasons: Based on the Revised Explanatory Notes issued on June 16, 2000 by the Department of Finance, we have taken the position that the acquisition or holding of interests in a limited partnership that invests in real property will not, in and by itself, result in the corporation not satisfying the requirements of 149(1)(o.2).
XXXXXXXXXX 2001-007094
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company") (XXXXXXXXXX)
This is in reply to your letters 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 "Parent") is a pension fund governed by the XXXXXXXXXX and is a "registered pension plan", as defined in subsection 248(1) of the Income Tax Act (the "Act").
2. The Company is a corporation governed by the Business Corporations Act (XXXXXXXXXX). The Company was incorporated on XXXXXXXXXX. At all times since its incorporation, all shares in the capital stock of the Company and all rights to acquire shares in the capital stock of the Company have been beneficially owned by the Parent. XXXXXXXXXX.
The Company's address is XXXXXXXXXX. The Company files its federal income tax returns at the XXXXXXXXXX Taxation Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.
3. The Company is exempt from tax under subparagraph 149(1)(o.2)(ii) of the Act.
4. Each of XXXXXXXXXX ("Company A") and XXXXXXXXXX ("Company B") is a taxable Canadian corporation that deals at arm's length with the Company for purposes of the Act. Company A is related to Company B for purposes of the Act. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act.
5. Company A beneficially owns certain real property located at XXXXXXXXXX (the "Property"). Company B is the registered owner of the Property, and holds title as nominee for Company A.
6. The Property is leased to a single tenant (the "Tenant").
7. The Property is encumbered by a first mortgage (the "First Mortgage") held by XXXXXXXXXX (the "Lender") and a second mortgage (the "Second Mortgage") held by the Tenant. Each of the Lender and the Tenant deals at arm's length with the Parent and Company A for purposes of the Act.
8. Under the terms of the existing lease, the Tenant has an option (the "Option") to purchase the Property.
Proposed Transactions
9. Company A and the Company will form a limited partnership under the laws of XXXXXXXXXX (the "Limited Partnership"). The Company will be a limited partner and Company A will be the general partner. The Limited Partnership will be a "Canadian partnership" for purposes of the Act.
10. The Limited Partnership's capital structure will include Class A General Partnership Units, Class B General Partnership Units, and Class A Limited Partnership Units. The holders of the Class B General Partnership Units will be entitled to a fixed cash distribution and allocation of an amount of income equal to a fixed percentage of the original issue price of the Class B General Partnership Units. The holders of the Class A General Partnership Units and the Class A Limited Partnership Units (together, "Class A Units") will be entitled to distributions as determined by the general partner and will be allocated the remaining income of the Limited Partnership on a pro rata basis. The liability of holders of Class A Limited Partnership Units will be limited in accordance with the provisions of the Limited Partnerships Act (XXXXXXXXXX). Upon any dissolution of the Partnership, before any distribution to the holders of Class A Units, the holders of Class B General Partnership Units will be entitled to receive a fixed amount from the Partnership equal to the original issue price of the Class B General Partnership Units.
11. Each of Company A and the Company will contribute cash to the Limited Partnership in exchange for Class A General Partnership Units and Class A Limited Partnership Units, respectively. The Company's Class A Limited Partnership Units of the Limited Partnership will constitute "foreign property" for purposes of Part XI of the Act.
12. The Tenant will provide Company A with notice that it will acquire the Property under the terms of the Option.
13. Prior to the Tenant's acquisition of the Property under the Option, the Limited Partnership will purchase the Tenant's interest in the Option from the Tenant for a cash purchase price equal to the fair market value of the Option at the time of such purchase. Accordingly, the Limited Partnership will be obligated to purchase the Property from Company A in accordance with the terms of the Option.
14. A third party with whom Company A deals at arm's length for purposes of the Act (and which has not yet been identified) will make a loan (the "Third Party Loan") to Company A in an amount sufficient to permit Company A to extinguish the First Mortgage and the Second Mortgage on the Property. Company A will use the borrowed funds to repay all amounts owing under the First Mortgage and Second Mortgage respectively.
15. The Limited Partnership will purchase the Property from Company A pursuant to and in accordance with the terms of the Option. The purchase price will be satisfied (a) by the assumption of a portion of Company A's indebtedness under the Third Party Loan, (b) by the issuance of additional Class A General Partnership Units and (c) by the issuance of Class B General Partnership Units. Following this issuance, Company A will own XXXXXXXXXX% of the Class B General Partnership Units and XXXXXXXXXX% of the Class A General Partnership Units (representing XXXXXXXXXX% of all Class A Units), and the Company will own XXXXXXXXXX% of the Class A Limited Partnership Units (representing XXXXXXXXXX% of all Class A Units). Pursuant to subsection 97(2) of the Act, the Limited Partnership, Company A and the Company will jointly elect in accordance with subsection 96(3) of the Act, in prescribed form and within the time referred to in subsection 96(4) of the Act, to have the disposition of the Property by Company A to the Partnership being completed on a tax deferred basis. You have not requested an advance income tax ruling in respect of the application of subsection 97(2) of the Act.
16. The Limited Partnership will acquire a promissory note from Company A having a principal amount of $XXXXXXXXXX (the "Note"). Under the Note, Company A will pay an annual interest equal to XXXXXXXXXX% of the principal amount of the Note and the principal will be due on the XXXXXXXXXX anniversary of the Note. Company A will use the amount received under the Note to help finance its business operations.
17. Under the Pension Benefits Act (XXXXXXXXXX), a pension plan is permitted to invest in the Class A Limited Partnership Units of the Limited Partnership.
18. In its capacity as general partner, Company A will engage XXXXXXXXXX ("Relatedco"), an affiliate of Company A, on a long term basis to manage the Property.
Purpose of the Proposed Transactions
19. The Company and Company A have determined that it would be mutually advantageous to enter into an arrangement in respect of the Property under which the Company would acquire an indirect XXXXXXXXXX% interest in the Property, Company A would retain an indirect XXXXXXXXXX% interest, and Relatedco would be engaged to manage the Property.
20. To the best of your knowledge and the knowledge of the Company, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Company or of a person related to the Company;
(b) is being considered by a tax services office or tax centre in connection with a previously-filed return of the Company or of a person related to the Company;
(c) is under objection by the Company or by a person related to the Company;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings Directorate to the Company.
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 carried out as described above, we rule as follows:
A. The acquisition of the Class A Limited Partnership Units by the Company, as described in 11 above, will not result in the Company ceasing to be exempt from tax pursuant to subparagraph 149(1)(o.2)(ii) of the Act.
The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.
As noted in 15 above, you have not requested an advance income tax ruling in respect of the application of subsection 97(2) of the Act to the transfer of property to the Limited Partnership by Company A. We have not ruled on the application of subsection 97(2) of the Act and the above ruling should not be construed as providing any comfort in respect of its application to the transfer of property to the Limited Partnership by Company A. In fact, it would be a question of fact as to whether the Note described in 16 above would constitute proceeds of disposition received by Company A for purposes of subsection 97(2) of the Act.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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