7 July 2007 Income Tax Severed Letter 2006-0201052R3 - Return of capital under proposed 84(4.1)

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.

SUMMARY: Return of capital under proposed 84(4.1)—ITA-84(4.1)—Advance income tax ruling—Amendments to advance income tax ruling, issued in 2006, relating to whether an additional exchange of interests in a partnership for units of a trust followed by a distribution of those units qualifies under subsec. 84(4.1).

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 an additional exchange of interests in a partnership for units of a trust followed by a distribution of those units qualifies under 84(4.1).

POSITION: Yes, the rationale in the initial letter applied to the distribution of the proceeds of disposition of the second exchange.

XXXXXXXXXX 2006-020105

XXXXXXXXXX, 2007

Dear XXXXXXXXXX

Re: Advance Income Tax Ruling

XXXXXXXXXX. (XXXXXXXXXX TSO; XXXXXXXXXX Taxation Centre; Business No. XXXXXXXXXX)

This is in reply to your emails dated XXXXXXXXXX in which you requested amendments to the Advance Income Tax Ruling letter issued to the above-referenced taxpayer on XXXXXXXXXX, 2006 (document # 2006-020105 [], the “Ruling”).

The exchange described in paragraph 10 a. of the Ruling was performed on XXXXXXXXXX and all the Fund Units received on that exchange were distributed as described in paragraph 10 b. of the Ruling on XXXXXXXXXX . On that same day, XXXXXXXXXX LP Units have been exchanged for Fund Units.

Following our review of your request, the Ruling is revised as follows:
• 1) In the Definitions section, the following definition is added: “Other Agreement” means the Investor Liquidity Agreement entered into between ACo, Other Fund, Other Trust, Other Partnership and Other GP whereby, among other things, ACo is entitled to effectively liquidate all or any portion of its Other LP Units and the Other GP Shares;
• 2) In the Definitions section, the following definition is added: “Other Capital Reduction” means the reduction of the Paid-up Capital of each of the Classes of Shares by the Other Reduction Amount;
• 3) In the Definitions section, the following definition is added: “Other Fund” means XXXXXXXXXX, an open-ended trust established under the laws of the Province of XXXXXXXXXX;
• 4) In the Definitions section, the following definition is added: “Other Fund Units” means trust units of the Other Fund;
• 5) In the Definitions section, the following definition is added: “Other GP” means XXXXXXXXXX, a corporation incorporated under the CanadaBusiness Corporations Actand acting as general partner of the Other Partnership;
• 6) In the Definitions section, the following definition is added: “Other GP Shares” means the shares of Other GP;
• 7) In the Definitions section, the following definition is added: “Other LP Units” means the limited partnership units of the Other Partnership;
• 8) In the Definitions section, the following definition is added: “Other Partnership” means XXXXXXXXXX, a limited partnership established under the laws of XXXXXXXXXX;
• 9) In the Definitions section, the following definition is added: “Other Reduction Amount” means the fair market value of the LP Units and Other LP Units exchanged by ACo as described in paragraphs d. and e. of paragraph 10 of the Proposed Transactions as amended by this letter (which aggregate fair market value will be between $XXXXXXXXXX and $XXXXXXXXXX);
• 10) In the Definitions section, the following definition is added: “Other Trust” means XXXXXXXXXX, an open-ended trust established under the laws of the Province of XXXXXXXXXX;
• 11) In the Definitions section, the figure “$XXXXXXXXXX” in the definition of “Reduction Amount” is replaced by “$XXXXXXXXXX”;
• 12) Paragraph 2 ii., the following words are added: “and of Other GP”;
• 10) Paragraph 2 iii. is replaced by: “interests in the Partnership, in the Other Partnership, in the Fund and in the Other Fund”;
• 13) Paragraph 4, the following words are added: “The Other Fund is a Mutual Fund Trust. The Other Fund completed an initial public offering of Other Units on XXXXXXXXXX. The Other Fund holds units and notes of Other Trust”.
• 14) Paragraph 5, the following words are added: “The Other Trust was established to acquire and hold Other LP Units. Following the initial public offering by the Other Fund, the Other Trust acquired XXXXXXXXXX% of the Other LP Units.”
• 15) Paragraph 8: both occurrences of the name XXXXXXXXXX
• 16) The following paragraph is added after paragraph 8: “8a. ACo, Other Fund, Other Trust, Other Partnership and Other GP have entered into the Other Agreement. Under the terms of the Other Agreement, ACo or any entity controlled by it has the right to effectively liquidate all or any portion of its Other LP Units and the Other GP Shares. The liquidation rights may be exercised by ACo at any time, at its discretion, so long as all of the following conditions have been met: (a) the liquidation would not cause the Other Fund to breach the restrictions respecting non-resident ownership contained in the Other Fund declaration of trust or otherwise cause the Other Fund to cease to be a Mutual Fund Trust, (b) the Other Fund is legally entitled to issue the Other Fund Units in connection with the exercise of the liquidation rights, and (c) upon the exercise of the liquidation rights, the person receiving the Other Fund Units complies with all applicable securities laws”.
• 17) The following paragraphs are added after paragraph 10.c.:

  d. make a separate and independent second one-time exchange of LP Units for Fund Units at a date that is subsequent to the exchange described in paragraph a. above. The second exchange will be made pursuant to a resolution of the board of directors of ACo that will be adopted separate from the resolution authorizing the first exchange and adopted at a date that is subsequent to the exchange described in paragraph a. above. Fund Units received on this second exchange will be represented with a distinct unit certificate, separate from the unit certificate evidencing the Fund Units received on the exchange described in paragraph a.;

  e. make a one-time separate and independent exchange of Other LP Units for Other Fund Units;

  f. proceed with the Other Capital Reduction by way of a distribution as of the date of the Other Capital Reduction of some of the Fund Units received on the separate and independent exchange described in paragraph d. and all or substantially all the Other Fund Units received on the separate and independent exchange described in paragraph e. above to Shareholders of record; and

  g. distribute to the Agent on the date of the Other Capital Reduction (i) fractional interests in Fund Units described in paragraph f. and Other Fund Units to which a registered Shareholder is entitled; (ii) Fund Units described in paragraph f. and Other Fund Units to which Non-Qualified U.S. Shareholders are entitled and (iii) Fund Units described in paragraph f. and Other Fund Units to which registered Shareholders of small interests of less than a minimum number of shares of a Class of Shares are entitled. The Agent will sell the aggregate of such Fund Units and Other Fund Units and distribute an amount of cash in Canadian dollars to such Shareholders equivalent to their pro rata portion of the net proceeds after expenses to which they would otherwise be entitled.

• 18) The two lines preceding the section title “Purposes of the Proposed Transactions” are replaced with the following: The Paid-up Capital of each of the Classes of Shares exceeds the total of the Reduction Amount and of the Other Reduction Amount in respect of that Class of Shares.
• 19) In the section Purposes of the Proposed Transactions, the words “Fund Units” are replaced by the words “Fund Units and Other Fund Units”.
• 20) In Ruling A, the words “Fund Units” are replaced by the words “Fund Units and Other Fund Units” and the words “Capital Reduction” are replaced by the words “Capital Reduction and Other Capital Reduction”.
• 21) In the Opinion section, the words “Capital Reduction” are replaced by the words “Capital Reduction and Other Capital Reduction” and the words “by the amount of” are replaced by the words “by the amount received by the taxpayer on account of”.
• 22) In the Comments section, paragraph (ii) a. is replaced by the following: the tax consequences of any Paid-up Capital reduction other than the Paid-up Capital reductions described in the Proposed Transactions in respect of the separate and independent one-time exchanges of LP Units and Other LP Units having an aggregate value equal to the total of the Reduction Amount and of the Other Reduction Amount; and
• 23) In the Comments section, the words “LP Units” in paragraph (ii) b. are replaced by the words “LP Units and Other LP Units” and the words “GP Shares in that same paragraph are replaced by the words “GP Shares and Other GP Shares”.

Notwithstanding the above-mentioned changes, we confirm that the rulings given in the Ruling, as amended above, will continue to be binding on the Canada Revenue Agency in the manner described therein.

The opinion and the ruling in the Ruling as modified in this letter are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002. Ruling A is binding on the CRA provided that the Proposed Transactions as amended by this letter are completed within six months of the date of this letter.

Yours truly,

for Division Director

Reorganizations and Resources Division

Income Tax Rulings Directorate

Legislative Policy and Regulatory Affairs Branch