13 March 2006 External T.I. 2005-0151691E5 - Pension corporation

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 the assignment of a commitment to make a contribution of capital to a financial institution would be considered to be a debt obligation for purposes of paragraph 149(1)(o.2)(iii)

Position: General comments given. Question of fact.

Reasons: A review of the pertinent assignment documents would be required before such a determination could be made.

			2005-015169
XXXXXXXXXX 		G. Moore
(613) 957-8982
March 13, 2006

Dear XXXXXXXXXX:

Re: Pension Corporations

This is in response to your letter of September 19, 2005, inquiring about pension corporations.

You have requested our comments in the following hypothetical situation: A corporation otherwise meets the requirements of paragraph 149(1)(o.2) of the Income Tax Act (the "Act"). The corporation subscribes for limited partnership units of a limited partnership. At the time of subscription, the corporation does not advance funds but rather commits to make contributions of capital up to a maximum amount when called upon to do so by the general partner. The corporation is in the business of making investments and does not carry on an active business. The general partner, on behalf of the limited partnership, arranges to borrow from a financial institution. The purpose of the borrowing is to further the investment goals of the limited partnership. In order to secure the borrowing, the general partner assigns the corporation's commitment to make a contribution of capital to a financial institution. You are asking if the assignment of the commitment by the general partner causes the corporation to cease to meet the conditions to be exempt under subparagraph 149(1)(o.2)(iii) of the Act. Specifically, you are asking whether, by virtue of the assignment, the corporation has issued a debt obligation and therefore fails to satisfy the condition contained in clause 149(1)(o.2)(iii)(B) of the Act.

Our Comments

The situation outlined in your letter appears to relate to a factual one, involving a specific taxpayer. It is not this Directorate's practice to comment on proposed transactions involving specific taxpayers other than in the form of an advanced income tax ruling. For more information about how to obtain a ruling, please refer to Information Circular 70-6R5, "Advanced Income Tax Rulings, dated May 17, 2002. This Information Circular and other CRA publications can be accessed on the internet at http://www.cra-arc.gc.ca. Should your situation involve a specific taxpayer and a completed transaction, you should submit all relevant facts and documentation to the appropriate Tax Services Office ("TSO") for their views. A list of TSOs is available on the "Contact Us" page of the CRA website. Although we cannot comment on your specific situation, we are prepared to provide the following general comments, which may be of assistance.

Paragraph 149(1)(o.2) of the Act exempts from tax under Part I, for a period, the income of certain corporations. To be considered such a corporation, two types of tests must be met. The first type of test is the ongoing ownership test pursuant to one of the two subparagraphs 149(1)(o.2)(iv) or (v) of the Act, depending on whether the corporation has share capital or not. The second type of test relates to the activities carried on by the corporation which would be covered by one of the subparagraphs 149(1)(o.2)(i) to (iii) of the Act.

According to subparagraph 149(1)(o.2)(iii) of the Act, all of the investments of a corporation have to be one of specific investments including investments as stipulated under the Pension Benefits Standards Act, 1985 or a similar law of a province such as Pension Benefits Act (Ontario). Further conditions are required under clauses (A) to (C) of this subparagraph and the condition under clause (B) is such that the corporation "had not issued debt obligations."

Firstly, in applying paragraph 149(1)(o.2), it should be noted that it is intended that an interest in a limited partnership be treated as an investment. Accordingly, we accept that the mere acquiring and holding of an interest in a limited partnership may be an investment.

With respect to clause (B) and whether an assignment of a commitment to make a capital contribution is a debt obligation, the term "debt obligation" is not defined in the Act. According to Creditor - Debtor Law in Canada, Dunlop 2nd Ed. 1995, there is no all-encompassing definition of "debt" and defining this term or the term "debt obligation" is not an easy task. While the text states that the meaning of the word "debt" is changing over time, the most commonly accepted meaning or use of the word "debt" is to describe an obligation to pay a sum certain or readily reducible to certainty. In Beament Estate v. M.N.R 4, the court noted that the term "debt" is not defined in the Act and thus takes its ordinary meaning which is a sum payable in respect of liquidated money demand, recoverable by action. At the 1984 Canadian Tax Foundation Conference, Question 12, the Canada Revenue Agency stated that, "It is a question of fact whether or not a particular arrangement creates a "debt obligation" and what the effects of certain contingencies may be. Generally speaking, a debt obligation is considered to arise whenever a binding liability is created and the principal amount of the liability can be quantified." In addition, the word "assignment" should be given its ordinary meaning since this term is not defined in the Act. In this regard, the dictionary definition of "assignment" is "the transfer of a claim, right, or property".

Accordingly, whether an assignment of a commitment to make a capital contribution is considered to be a "debt obligation", for purposes of clause 149(1)(o.2)(iii)(B) of the Act, is a question of fact that would require a review of the documentation relating to a particular debt. The particular terms of the assignment agreement that provide for the capital contribution commitment would need to be considered to determine whether the character of the payment at a subsequent time would constitute a "debt obligation" or some other form of indebtedness.

We trust that these comments will be of assistance.

Yours truly,

Roberta Albert, C.A.

for Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch