2005 Ruling 2003-0011341R3 - Arrangement to satisfy SEC

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.

Principal Issues: The proposed arrangement is designed to satisfy SEC independence requirements of a partnership to a client in a situation where a retired partner entitled to a retiring allowance from the partnership will become an officer or director of a public company which is a client of the partnership. The issue is whether the proposed arrangement is viewed as "transparent," such that the tax consequences that would otherwise apply remain unchanged.

Position: The proposed arrangement is viewed as transparent.

Reasons: The terms of the arrangement as written do not result in the partnership parting with all the elements of ownership of the assets that will be used to fund the retirement benefits to the retired partner.

XXXXXXXXXX 2003-001134

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the partners of XXXXXXXXXX (the "Partnership"). We acknowledge our subsequent correspondence and related telephone conversations.

To the best of your knowledge and that of the Partnership, none of the issues involved in this rulings request is:

(a) in an earlier return of the Partnership or a related person;

(b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Partnership or a related person;

(c) under objection by the Partnership or a related person;

(d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or

(e) the subject of a ruling previously issued by the Directorate.

Our understanding of the facts, the proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

In this letter, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof;

(b) "CRA" means the Canada Revenue Agency;

(c) "Partnership" means XXXXXXXXXX;

(d) "Partnership Agreement" means the partnership agreement of the Partnership;

(e) "Retired Partner" means XXXXXXXXXX, a retired partner of the Partnership, and a reference herein thereto includes, where the Retired Partner is not alive, the Retired Partner's beneficiaries last named under the Retirement Allowance provisions of the Partnership Agreement or, if none is named, the Retired Partner's estate;

(f) "Retirement Allowance" means the annual amount payable by the Partnership to a retired partner of the Partnership where the vesting requirements under the Partnership Agreement have been met;

(g) "SEC" means the United States Securities and Exchange Commission;

(h) "Separate Agreement" means the separate agreement described in 10 below;

(i) "Trust" means the irrevocable trust to be established by the Partnership to fund its anticipated retirement benefit obligations to the Retired Partner; and

(j) "Trustees" means the trustees of the Trust, all of whom are partners of the Partnership.

Facts

The Partnership is a XXXXXXXXXX limited liability partnership under the laws of XXXXXXXXXX. Its principal activity is carrying on business in Canada.

The partners of the Partnership are residents of Canada XXXXXXXXXX.

The Partnership Agreement, which has been amended on a number of occasions since the Partnership was founded, provides for payment of Retirement Allowances. Retirement Allowances paid to retired partners of the Partnership are allocated to such partners out of the Partnership's income in accordance with subsection 96(1.1) of the Act.

On occasion, retired partners of the Partnership are asked to become officers or directors of public companies. In recent years, the SEC has questioned the independence of XXXXXXXXXX firm in situations where a retired partner becomes an officer or director of a public company which is a client of the firm and the retired partner is entitled to a Retirement Allowance from the firm. The SEC rules provide that the independence of the XXXXXXXXXX firm will not be impaired if certain steps are taken to ensure the individual's separation from the firm. The retired partner must not (i) influence the firm's operations or financial policies, (ii) have a capital balance in the firm, or (iii) have a financial arrangement with the firm, other than one providing for regular payment of a fixed dollar amount pursuant to a fully funded retirement plan, rabbi trust or similar vehicle.

Although Canadian securities authorities have not yet questioned the independence of XXXXXXXXXX firms in similar circumstances, the issue arises when a Canadian public company is or is about to become an SEC registrant.

The Retired Partner is a member of the board of directors of a company which is an audit client of the Partnership and which will become an SEC registrant in the near future. The Partnership has been advised that the proposed transactions will satisfy the SEC requirements described above. The proposed transactions do not require the approval of the SEC.

Proposed Transactions

The Partnership will determine the present value of its retirement benefit obligations to the Retired Partner based on the calculations of independent actuaries, and will pay the amount determined to the Trustees to be administered in accordance with the terms of the Trust. Neither the Partnership nor any other person may contribute any other assets to the Trust.

The terms of the Trust can be amended (except to make it revocable) with the consent of the Trustees, the Partnership and the Retired Partner.

In a separate agreement with the Partnership ("Separate Agreement"), the Retired Partner will agree to the terms of the Trust.

Subject to 13 below, the Partnership will continue to be obligated under the Partnership Agreement to pay Retirement Allowances to the Retired Partner.

Under the terms of the Trust, if in a year the Partnership pays all or a portion of a Retirement Allowance to the Retired Partner as provided for in the Partnership Agreement, the Trustees will make a matching distribution to the Partnership.

If the Partnership fails, in whole or in part, to allocate and pay a Retirement Allowance in a year to the Retired Partner, a distribution will be made to the Retired Partner by the Trustees in an amount equal to the difference between the amount of the Retirement Allowance that the Partnership was obliged to pay pursuant to the Partnership Agreement and the amount actually paid by the Partnership as a Retirement Allowance. The Retired Partner will be obliged to accept such a distribution in satisfaction of the Partnership's obligation to pay the Retirement Allowance.

The Retired Partner will not have an interest in or to the Trust assets and may only receive a distribution from the Trustees as set out in this paragraph. The Retired Partner may not assign, alienate, pledge, encumber, charge, surrender or give as security any benefit payable under the Trust.

The Trust will not terminate until all required payments to the Retired Partner have been made. In the event there are any assets remaining at that time, such assets will be distributed to the Partnership.

The Retired Partner will waive his rights to receive payments under the Partnership Agreement in the event that the assets held by the Trustees are exhausted. The waiver will be binding on his beneficiaries and estate. The Trustees will advise the Partnership if the assets have been exhausted.

In the event of the insolvency or bankruptcy of the Partnership, the Trustees will pay or transfer the assets then held to the Partnership. If an allegation is made that the Partnership is insolvent or bankrupt, the Trustees will determine the status of the Partnership and discontinue distributions pending such determination.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to demonstrate the appropriate independence of the Partnership from one of its audit clients in circumstances where the client is to become an SEC registrant and the Retired Partner has become an officer or director of such client. The proposed transactions will allow the Partnership to set aside an amount in respect of its anticipated financial obligations to the Retired Partner in respect of his retirement benefit entitlements under the Partnership Agreement.

Ruling

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, and based on our conclusion that a trust has not been created at law, our ruling is as follows:

A. The proposed transactions, in and by themselves, will not alter the tax consequences that would otherwise apply to the Partnership and the Retired Partner under the Partnership Agreement. For greater certainty, the amount paid by the Partnership to the Trustees will not be deducible in computing the income of the Partnership and will not be included in computing the income of the Retired Partner pursuant to subsection 96(1.1) of the Act.

The above ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act.

This ruling is given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the CRA provided that the proposed transactions are completed before XXXXXXXXXX.

Comments

Nothing in this ruling should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those described in the ruling given.

The determination of whether the arrangement creates a trust is a matter of private law. While, we have concluded that the wording in the proposed trust indenture would not create a trust, to the extent that a trust were found to be created, paragraph (k) of the definition of disposition in 248(1) of the Act would apply. Accordingly, subsection 248(25.2) would apply to deem the Trustees to deal with the Trust property as agent for the Partnership.

Yours truly,

XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch