2007 Ruling 2006-0206461R3 - Employee Benefit Plan - Partnership interest

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: (A) Is a particular plan an employee benefit plan for purposes of 248(1) of the Income Tax Act? (B) Is a particular plan a salary deferral arrangement? (C) Have participants of the plan received an employment benefit by virtue of their interest holdings in the trust pursuant to paragraph 6(1)(a) of the Income Tax Act? (D) Are reasonable admin expenses incurred by the plan deductible by the trust? (E) Will the provisions of 104(6)(a.1) apply to the trust with respect to amounts paid to employees? (F) Will employer contributions be deductible by the employer pursuant to subsection 32.1? (G) Will distributions from the plan be subject to 6(1)(g)?

Position: (A) Yes (B) No (C) No (D) Yes, subject to section 67 (E) Yes (F) Yes (G) Yes

Reasons: (A) wording of the definition of an EBP (B) wording of the definition of a SDA (C) paragraph 6(1)(a) benefits exclude benefits under an EBP (D) The legislation provides for deduction of reasonable administrative expenses within the trust provided the expenses were incurred to earn income under paragraph 18(1)(a) of the Act (E) wording of the legislation (F) plan is an EBP, therefore subsection 32.1(1), 32.1(2) and 32.1(3) of the Act will apply to the employer (G) wording of paragraph 6(1)(g)

PLEASE SEE SUPPLEMENTAL RULING NO. 2007-0251181R3 FOR CLARIFICATION OF PARAGRAPH 17.

XXXXXXXXXX , 2007 2006-020646

Dear XXXXXXXXXX :

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the above-named taxpayer. We also acknowledge the revised ruling request and plan information of XXXXXXXXXX and information provided during your subsequent submissions of XXXXXXXXXX , in addition to our various telephone conversations (XXXXXXXXXX ) and (XXXXXXXXXX ).

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request is:

(i) in an earlier return of the taxpayer or a related person,
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person,
(iii) under objection by the taxpayer or a related person,
(iv) before the courts, or
(v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (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.

The income tax rulings, as provided, are based solely on the facts and proposed transactions described below and do not depend on any other information made available to the CRA, whether such information was provided by way of additional documentation submitted with the ruling request or otherwise. Any reference in this letter to such other information is made solely for the convenience of the reader.

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

DEFINITIONS

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

(a) "Administrative Expenses" means all expenses incurred in earning the income of the Trust and costs related to the normal operation of the Trust, including, but not limited to, the collection and accounting for Trust contributions, Record Keeper fees, Trustee fees, reimbursements of expenses and liabilities incurred by the Trustee in connection with the activities of the Trust, and accounting and tax filing costs of the Trust.

(b) "Declaration of Trust" means the trust declaration entered into by the Trustee and the Employer.

(c) "Effective Date" means a date to be determined by the Employer, subject to the receipt of a favourable Advance Income Tax Ruling.

(d) "Employer" means XXXXXXXXXX a limited partnership formed under the Limited Partnership Act (XXXXXXXXXX ) and located at:

XXXXXXXXXX

(e) "Employer Contributions" means cash contributions made by the Employer to the Trust under the Plan.

(f) "Notional Unit" represents a proportionate interest of a Participant as a beneficiary of the Trust entitling the Participant to participate in the Trust in accordance with the terms of the Plan, and more specifically, to receive distributions from the Trust and proceeds in the event of termination or winding-up of the Trust. The Plan will fix the purchase price of each Notional Unit at $XXXXXXXXXX , unless adjusted by the Trustee as a result of a subdivision, consolidation, amalgamation, combination, merger or other reorganization affecting the Trust that, in the opinion of the Trustee, in its discretion, warrants an adjustment to this purchase price.

(g) "Participant(s)" means an eligible employee of the Employer who elects to participate and enrol in the Plan.

(h) "Participant's Account" means an account established and maintained in the name of each Participant to record the Notional Units of the Participant purchased with contributions made by the Participant under the Plan.

(i) "Participant's Employer Contribution Account" means an account established and maintained in the name of each Participant to record the Notional Units awarded to the Participant in connection with Employer Contributions.

(j) "Partnership" means XXXXXXXXXX a limited partnership formed under the Limited Partnership Act (XXXXXXXXXX ).

(k) "Plan" means the XXXXXXXXXX employee benefit plan.

(l) "Record Keeper" means any administrator(s) or agent(s) appointed by the Employer or the Trustee from time to time to maintain a register related to the ownership, transfer and redemption of the Participant's Notional Units and other records, or undertake other administrative tasks relating to the operation of the Plan.

(m) "Trust" means the trust governed by the Plan and created under the Declaration of Trust that will invest in the Partnership as a limited partner. The Trust will not be a unit trust as defined in subsection 108(2) of the Act.

(n) "Trust Termination Event" means a transaction that may result in the sale or other monetization of all or substantially all of the assets of the Trust.

(o) "Trustee" means the duly appointed trustee under the Declaration of Trust from time to time.

FACTS

1. The general partner of the Employer is XXXXXXXXXX ., a taxable Canadian corporation, and the current limited partners consist of:

XXXXXXXXXX

2. Both the Employer and its general partner deal with the Canada Revenue Agency's XXXXXXXXXX Tax Services Office and file their returns with the XXXXXXXXXX Tax Centre.

3. The general partners of the Partnership are XXXXXXXXXX ., a taxable Canadian corporation, and XXXXXXXXXX . The limited partners of the Partnership currently consist of:

XXXXXXXXXX

4. The Employer currently employs approximately XXXXXXXXXX employees. These employees are engaged by the Employer to provide services to it in carrying on the business of XXXXXXXXXX .

5. The Partnership derives its income from the business of XXXXXXXXXX . It does not earn investment-type income.

PROPOSED TRANSACTIONS

6. The Employer proposes to establish the Plan and, subject to receipt of a favourable advance income tax ruling, the Employer will settle the Trust with an initial investment of $XXXXXXXXXX .

7. The Trust will be administered by the Trustee or any person(s) to whom the Trustee has delegated its administrative powers and duties.

8. A new wholly owned subsidiary of XXXXXXXXXX . will be the first Trustee of the Trust pursuant to the terms of the Declaration of Trust.

9. The beneficiaries of the Trust will be the Participants.

10. Upon enrolment in the Plan, Participants will specify a contribution amount to be payable annually in a lump sum payment, or through regular payroll deductions, to purchase Notional Units under the Plan. Notional Units will be allocated to the Participant's Account on the basis of one Notional Unit for each $XXXXXXXXXX contribution made by the Participant. Participants' contributions will be made with after tax dollars and the rate at which the contributions are made may be changed or discontinued by the Participant by giving notice of such change or discontinuance.

11. The Employer may allow Participants to make additional lump sum contributions under the Plan from time to time and will specify the manner in which such additional contributions may be made. The Employer may also, in its discretion, limit, reduce or suspend a Participant's right to make contributions under the Plan in certain circumstances and from time to time. It is proposed that contributions by a Participant will be limited to $XXXXXXXXXX in any one calendar year.

12. The Effective Date will be the first date on which Participants will be entitled to make contributions under the Plan.

13. The Employer will make Employer Contributions to the Trust of XXXXXXXXXX for each employee who has enrolled in the Plan and becomes a Participant such that one Notional Unit will be allocated to the Participant under the Plan. This Notional Unit will be recorded in the Participant's Employer Contribution Account and identified as a Notional Unit awarded to the Participant under the Plan in connection with an Employer Contribution.

14. The Employer may, in its discretion, make additional Employer Contributions in respect of a Participant and Notional Units will be awarded to the Participant and recorded in the Participant's Employer Contribution Account on the basis of one Notional Unit for each XXXXXXXXXX Employer Contribution made in respect of that Participant.

15. Pursuant to the terms of the Plan, no Participant shall have any right or entitlement to call for any distribution whatsoever, from the Trust by the Trustee. Furthermore, nothing in the Plan obligates the Partnership to make distributions to the Trust.

16. One or more Record Keepers may be appointed to perform the administrative tasks needed to operate the Plan and the Trust, including establishing and maintaining the Participant's Account and the Participant's Employer Contribution Account in the name of each Participant, recording in each such account the number of Notional Units standing to the credit of the Participant and distributions payable to the Participant, and delivering statements of account and tax reporting information to each Participant.

17. Redemptions under the Plan will be restricted and subject to the approval of the Trustee. The terms and conditions pertaining to the redemption of a Participant's Notional Units are as follows:

• A Participant may terminate his or her participation in the Plan and request redemption of all, but not less than all, of his or her Notional Units in the event of financial hardship, on retirement or as otherwise permitted by the Trustee (as described in 18 below), at a fixed redemption price of $XXXXXXXXXX per Notional Unit. The voluntary redemption will be requested by delivery of a redemption notice to the Trustee that will be subject to the approval and acceptance by the Trustee.
• If a Trust Termination Event occurs after a request for redemption has been made, the request for redemption will be revoked in respect of Notional Units for which the redemption price has not been paid.
• Mandatory Participant's Notional Units and termination of participation in the Plan will occur upon death redemption of all of a Participant, the cessation of the Participant's employment with the Employer (except as a result of retirement) or a Participant being legally adjudged incompetent or becoming bankrupt.
• If there is no Trust Termination Event in effect at the effective time of a mandatory redemption, the redemption price of the Notional Units on a mandatory redemption is $XXXXXXXXXX per Notional Unit. However, if a Trust Termination Event is in effect at the time a mandatory redemption becomes effective, the redeeming Participant may instead receive a pro rata share of the Trust assets to be distributed on termination.

18. The Trustee may exercise its discretion to permit voluntary redemptions of all, but not less than all, of a Participant's Notional Units from time to time by sending out notice to each Participant of such a "redemption window" at least XXXXXXXXXX days in advance of the opening of the redemption window. The notice will advise the Participant that he or she must irrevocably elect in the form specified by the Trustee, on or before a date specified in the notice (the date shall be at least XXXXXXXXXX days before the opening of the redemption window), to either redeem all of the Participant's Notional Units (subject to 19 below) under the Plan during this redemption window or waive this right. The Participant will be advised that the failure to make the such an election on or before the date specified in the notice shall be treated for all purposes as an election made at the end of the day on the specified date to irrevocably waive any right to redeem during the redemption window.

19. All of the Notional Units of a Participant, whether purchased by the Participant or awarded to the Participant in connection with Employer Contributions will be redeemed on any voluntary or mandatory redemption, subject to the approval of the Trustee, and the first Notional Unit awarded to the Participant as a result of an Employer Contribution will be the last Notional Unit of the Participant to be redeemed.

20. The Employer will, from time to time, make Employer Contributions to the Trust that will not be in respect of any Participant and may be equal to the cost of Administrative Expenses of the Trust. No Notional Units will be awarded or allocated to any Participant or any other person in respect of these Employer Contributions.

21. From time to time, the Employer or the Partnership may make short-term loans to the Trust to facilitate the administration of the Trust.

22. Subject to payment on account of redemptions, liabilities and expenses of the Trust and provision for reserves, contributions received by the Trustee from Participants and/or from the Employer as provided in 13 and 14 above, will be used by the Trustee to make capital contributions to the Partnership.

23. The Trust's capital contributions to the Partnership will generally be made in response to capital calls made to all or certain other limited partners of the Partnership.

24. The Trustee, on behalf of the Trust, will become a party to the limited partnership agreement of the Partnership and the Trust will be afforded the rights of a limited partner with respect to distributions from the Partnership related to equity contributions. Unlike the other limited partners, the Trust will not be afforded any voting rights with respect to its interest in the Partnership or the right to lend money to the Partnership.

25. As a limited partner, the Trust will be allocated a Partnership interest, which will be based on its capital contributions to the Partnership as a percentage of aggregate capital contributions to the Partnership by all partners of the Partnership. The Trust will be entitled to share in distributions to limited partners of the Partnership on account of capital contributions pro rata based on its relative Partnership interest. Such distributions may arise, without limitation, by virtue of ongoing operations of the Partnership or any asset sale, monetization or like transaction in respect of the Partnership.

26. As a limited partner, the Trust will be allocated taxable income and losses of the Partnership at the end of each fiscal year of the Partnership based on relative distributions received by it in such fiscal year relative to aggregate distributions received by all limited partners in such fiscal year on account of equity contributions.

27. If the Trust has allowable capital losses that exceed taxable capital gains in any taxation year, the excess will not be allocated to Participants but may be deducted by the Trust from taxable capital gains in future taxation years. Similarly, if the Trust has a non-capital loss in any taxation year, the loss will not be allocated to Participants but may be deducted by the Trust from income and taxable capital gains in up to XXXXXXXXXX future taxation years.

28. If the Trust were to sell its Partnership interest, be it by virtue of mandatory sale under the partnership agreement between the limited partners or under a put/call agreement between one or more limited partners and the Trust, the Trust would realize proceeds in respect of such sale that may equal, exceed or be less than the amount of capital contributions made by the Trust to the Partnership prior to such time.

29. The Trust will determine its taxable income for the year, including taxable capital gains and allowable capital losses and any net capital losses for prior years that the Trust is permitted to deduct, pursuant to the provisions of the Act.

30. Subject to payment on account of redemptions, liabilities and expenses of the Trust and provision for reserves, if sufficient cash distributions are received by the Trust from the Partnership in a calendar year, such cash distributions will be notionally allocated pro rata to Participants based on the total number of Notional Units of the Participant on the date of the distribution from the Partnership relative to the number of Notional Units issued and outstanding at that time. The amount notionally allocated to a Participant in a calendar year and any other cash distributions from the Partnership which the Trustee allocates to the Participant, will be distributed to the Participant in that calendar year.

31. The Trustee intends to maximize the payments by the Trust to the Participants each year so as to reduce the income of the Trust for purposes of Part I of the Act to the maximum extent permitted by the Act.

32. The Trustee will have the discretion to designate all or a portion of a cash distribution to Participants as a distribution of income or alternatively, a return of capital contribution.

33. Where an amount is paid from the Trust to a Participant in a taxation year and that distribution is deducted by the Trust in the computation of its income, the amount will be designated as a distribution of income to the Participant. Where an amount distributed to a Participant is not deducted by the Trust in the computation of its income, the amount may, to the extent of the Participant's contributions to the Plan not previously returned, be designated by the Trustee as a return of capital contribution to the Participant for the year.

34. To the extent all amounts contributed by a Participant have been previously returned to the Participant as a return of capital contribution, any subsequent payments from the Trust will be designated as a distribution of income, regardless of the source of the amount to the Trust.

35. The value of the Trust's assets distributed to a Participant on the wind-up of the Trust will be treated first as a return of capital contribution, to the extent all amounts contributed by the Participant have not been previously returned to the Participant as a return of capital contribution, and second, as a distribution of income.

PURPOSE OF THE PROPOSED TRANSACTIONS

36. The purpose of the Plan is to permit employees of the Employer to acquire an indirect equity interest in the Partnership through their proportionate investment in the Trust.

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 further that the proposed transactions are carried out as described above, we rule as follows:

A. The Plan will constitute an employee benefit plan as defined in subsection 248(1) of the Act.

B. The Plan will not constitute a salary deferral arrangement as that term is defined in subsection 248(1) of the Act.

C. No amount will be included in the income of a Participant pursuant to subsection 5(1) or paragraph 6(1)(a) of the Act solely as a consequence of the Participant's participation in the Plan or the investment by the Trust in the Partnership.

D. Subject to paragraph 18(1)(a) and section 67 of the Act, the Trust may deduct the Administrative Expenses in computing the income of the Trust for a taxation year under section 9 of the Act, to the extent these expenses were not otherwise deducted by the Employer under section 9 of the Act.

E. The Trust may, in accordance with paragraph 104(6)(a.1) of the Act, deduct in computing its income for a taxation year such part of the amount that would, but for subsection 104(6) of the Act, be its income for the year as is paid to a Participant.

F. Employer Contributions will be deductible to Employer in a year to the extent provided in subsections 32.1(1), (2) and (3) of the Act.

G. Distributions by the Trust to a Participant that are included in income pursuant to paragraph 6(1)(g) of the Act, will be included in such Participant's income in the year in which the distribution is received.

The above advance income tax rulings, which are based on the Act and Regulations in their present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX .

COMMENTS

The fixed redemption price is a question of fact and nothing in this letter should be construed as implying the CRA's acceptance of any method for the determination of this value for purposes of the Plan.

Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any of the tax consequences relating to the facts and proposed transactions described above other than those specifically described in the rulings.

Yours truly,

Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Policy and Planning Branch