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: Whether a corporation's status as a MIC would be jeopardized if it acquires a XXXXXXXXXX % limited partnership interest.
Position: No, based on the facts presented and section 253.1.
Reasons: In this case, it is our view that section 253.1 will apply so that the MIC would not be considered to carry on the business of the partnership for purposes of paragraph 130.1(6)(b) notwithstanding that the MIC would be granted certain governance rights pursuant to the terms of the partnership agreement.
XXXXXXXXXX 2004-010882
XXXXXXXXXX, 2005
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling Request
XXXXXXXXXX
This is in reply to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the additional information provided in subsequent correspondence.
You advise that to the best of your knowledge and that of the taxpayer referred to above, none of the issues involved in the ruling request:
i. is in an earlier return of the taxpayer or a related person;
ii. is being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayer or a related person;
iii. is under objection by the taxpayer or a related person;
iv. is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; and
v. is the subject of a ruling previously issued to the taxpayer by this Directorate.
Unless otherwise stated, all references to a statute are to the provisions of the Income Tax Act, R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the relevant definitions, facts, proposed transactions and their purposes is set out below.
DEFINITIONS
a) "ACO" means XXXXXXXXXX,
b) "BCO" means XXXXXXXXXX,
c) "Board" means the General Partner's board of directors,
d) "CCO" means XXXXXXXXXX,
e) "CRA" means Canada Revenue Agency,
f) "DCO" means XXXXXXXXXX,
g) "General Partner" means XXXXXXXXXX,
h) "Holdco XXXXXXXXXX" means XXXXXXXXXX,
i) XXXXXXXXXX,
j) "LP" means XXXXXXXXXX,
k) "MIC" means a mortgage investment corporation as defined in subsection 130.1(6),
l) XXXXXXXXXX and
m) "Partnership Agreement" means the limited partnership agreement dated XXXXXXXXXX and amended and restated as of XXXXXXXXXX.
FACTS
1) ACO is a Canadian resident corporation formed under the laws of Canada. It is a "taxable Canadian corporation" XXXXXXXXXX within the meaning of subsection 89(1). It files its taxation returns at the XXXXXXXXXX Taxation Centre and its tax services office is the XXXXXXXXXX TSO. ACO's fiscal and taxation year-end is XXXXXXXXXX.
2) ACO's authorized capital consists of an unlimited number of common shares, XXXXXXXXXX of which are issued and outstanding as at XXXXXXXXXX.
3) You advise that ACO qualifies as a MIC and that it restricts its activities and ownership of property so that it continually qualifies as a MIC.
4) ACO owns XXXXXXXXXX% of the issued and outstanding shares of Holdco XXXXXXXXXX. They are Canadian resident corporations formed under the laws of Canada and are taxable Canadian corporations.
5) ACO, Holdco XXXXXXXXXX maintain their head office at XXXXXXXXXX.
6) Holdco XXXXXXXXXX carries on no activities and owns no assets other than a XXXXXXXXXX% limited partnership interest in the LP. XXXXXXXXXX.
7) The LP was formed under the XXXXXXXXXX by the Partnership Agreement. All remaining limited and general partnership interests in the LP currently are owned by affiliates of BCO.
8) BCO, through its affiliated entities, controls the LP. In particular, the General Partner is an indirectly owned subsidiary of BCO. BCO also owns a XXXXXXXXXX% limited partnership interest in the LP through an indirectly owned subsidiary.
9) The LP, directly or indirectly through subsidiary corporations and limited partnerships, carries on a number of active businesses that, if carried on directly by ACO, would prevent ACO, from qualifying as a MIC. In particular, the LP, directly or indirectly through its subsidiary corporations and limited partnerships in which it is a member, carries on the business of XXXXXXXXXX in respect of real property situated in Canada. XXXXXXXXXX.
10) The LP entered into a XXXXXXXXXX agreement with ACO dated as of XXXXXXXXXX. Under this agreement, the LP agrees to provide XXXXXXXXXX to ACO in consideration for fees that were negotiated on an arm's length basis and which are comparable to fees paid by other arm's length users of the LP's XXXXXXXXXX and pursuant to which ACO agrees to provide financing for XXXXXXXXXX by the LP. Accordingly, by virtue of this agreement, ACO has contracted to be provided with XXXXXXXXXX; however, ACO, itself, does not provide such services to other parties.
11) XXXXXXXXXX.
12) Pursuant to the Partnership Agreement, Holdco XXXXXXXXXX has the right to appoint XXXXXXXXXX of the XXXXXXXXXX members of the Board. The Board is responsible for creating XXXXXXXXXX committees: XXXXXXXXXX. These committees consist of a majority of members designated by BCO and a minority of members designated by Holdco XXXXXXXXXX. Pursuant to the Partnership Agreement, Holdco XXXXXXXXXX also has certain limited negative control rights, entitling Holdco XXXXXXXXXX to veto the following transactions:
a) the consolidation, reorganization or merger of the LP with any other person involving all or substantially all of the property, assets and undertaking of the LP;
b) the dissolution of the LP or sale, exchange or other disposition of all or substantially all of the property, assets and undertaking of the LP; and
c) public announcements made by the LP referring to ACO or any of its affiliates.
13) Except as is specifically described in 12 above, Holdco XXXXXXXXXX and ACO have no involvement in the management and/or control of the LP.
14) ACO and BCO deal at arm's length for the purposes of the Act.
PROPOSED TRANSACTIONS
15) Holdco XXXXXXXXXX will be dissolved pursuant to the Canada Business Corporations Act.
16) On this dissolution, Holdco XXXXXXXXXX will distribute its XXXXXXXXXX% limited partnership interest in the LP to ACO. ACO will, consequently, directly possess the governance rights described in 12 above by virtue of holding the limited partnership interest in the LP.
17) No employees of the LP or its affiliates own limited partnership interests in the LP. XXXXXXXXXX.
PURPOSE OF PROPOSED TRANSACTIONS
18) The purpose of the proposed transactions is to simplify ACO's corporate structure and to eliminate corporate level tax on Holdco XXXXXXXXXX's proportionate share of the income allocated by the LP.
RULING GIVEN
Provided the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided further that the proposed transactions are carried out as described above, we confirm that:
Provided the requirements of subsection 130.1(6) are otherwise met, section 253.1 will apply such that the acquisition of the XXXXXXXXXX% limited partnership interest in the LP by ACO as described in 16 above will not, in and of itself, cause us to consider that ACO is carrying on the business or activity of the limited partnership for the purposes of paragraph 130.1(6)(b).
The above ruling is given subject to the limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002 and is binding on the CRA provided that the proposed transaction is carried out by XXXXXXXXXX. This ruling is based on the Act in its present form and does not take into account the effect of any proposed amendments.
OPINION
It is our opinion that provided the requirements of subsection 130.1(6) are otherwise met, section 253.1, if amended as proposed in the draft legislation released by the Department of Finance on February 27, 2004, will apply such that the acquisition of the XXXXXXXXXX% limited partnership interest in the LP by ACO as described in 16 above will not, in and of itself, cause us to consider that ACO is carrying on the business or activity of the limited partnership for the purposes of paragraph 130.1(6)(b).
Nothing in this letter should be construed as implying that the CRA is confirming that ACO will otherwise qualify as a MIC within the meaning of subsection 130.1(6) and is otherwise complying with all other provisions of section 130.1.
Yours truly,
XXXXXXXXXX
Manager
Financial Institutions Team
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch
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