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: (1) Whether subsection 115.2(2) will apply to the partners of Foreign LP that are not resident in Canada such that the services provided to Foreign LP by the Manager as described under the Proposed Transactions will not, in and by themselves, cause such partners to be carrying on business in Canada for the purposes of subsection 115(1) and Part XIV?
Position: Yes
Reasons: The services provided by Manager to Foreign LP would satisfy the requirements of subsection 115.2(2) of the Act.
XXXXXXXXXX 2007-022475
XXXXXXXXXX, 2007
Dear XXXXXXXXXX:
RE: Advance Income Tax Ruling on behalf of XXXXXXXXXX
This is in response to your XXXXXXXXXX request for an advance income tax ruling on behalf of the above taxpayers. We acknowledge receipt of the additional information provided to us in the XXXXXXXXXX e-mails.
To the best of your knowledge and that of the taxpayers involved, none of the issues involved with this request:
(i) is involved in an earlier return of the taxpayers or a related person;
(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayers or a related person;
(iii) is under objection; or
(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.
Unless otherwise stated, all references herein to a statute are the Income Tax Act R.S.C.1985 (5th Supplement), c.1, as amended, (the "Act") to the date of this advance income tax ruling and all terms and conditions used herein that are defined in the Act have the meaning given in such definitions unless otherwise indicated.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
DEFINITIONS
(a) "affiliated" has the meaning assigned by section 251.1;
(b) "Canadian LP" means the limited partnership to be formed under the laws of a province in Canada, all of the partners of which will be residents of Canada for the purposes of the Act or partnerships that are Canadian partnerships;
(c) "Canadian partnership" has the meaning assigned by subsection 102(1);
(d) "Canadian service provider" has the meaning assigned by subsection 115.2 (1);
(e) "Canco" means the XXXXXXXXXX;
(f) "designated entity" has the meaning assigned by paragraph 115.2(3)(b);
(g) "Foreign LP" means the limited partnership to be formed under the laws of the State of XXXXXXXXXX or a province of Canada, the limited partners of which generally will not be residents of Canada for the purposes of the Act or partnerships that are Canadian partnerships;
(h) "Foreign LP Agreement" means the written partnership agreement to be entered into in respect of Foreign LP;
(i) "GP" means a corporation to be incorporated under the laws of a province of Canada;
(j) "Investments" has the meaning set out in Paragraph 13;
(k) "LPs" means collectively Canadian LP and Foreign LP;
(l) "Management Agreement" means the management agreement to be entered into between the Manager and the GP pursuant to which the Manager will provide its services to Foreign LP as described in Paragraph 15;
(m) "Manager" means XXXXXXXXXX;
(n) "Mezzanine Debt" generally refers to privately placed debt of private companies that is typically subordinated to bank and institutional indebtedness and bears fixed or floating interest at a rate above traditional commercial lending rates, typically with a portion of the interest being paid currently and a portion being deferred;
(o) "Paragraph" refers to a numbered paragraph in this ruling letter;
(p) "Principals" means certain individuals employed by Canco and engaged in the activities of the Manager that have experience and expertise in investing in Mezzanine Debt and related securities;
(q) "Proposed Transactions" means the transactions described in Paragraphs 7 to 23;
(r) "Qualified Investment" has the meaning assigned in subsection 115.2 (1); and
(s) "taxable Canadian Corporation" has the meaning set out in subsection 248(1).
FACTS
1. The Manager is an indirect wholly owned subsidiary of Canco and is a taxable Canadian corporation.
2. The Manager provides, amongst other things, investment advisory and management services to a private Mezzanine Debt investment fund established in XXXXXXXXXX by the Manager and Canco. The Manager has invested approximately
$XXXXXXXXXX of capital on behalf of Canco and unrelated investors. Investments have been made in companies across a broad range of industries in North America, XXXXXXXXXX.
3. Canco provides the services of the Principals, and other services, to the Manager. Canco is a taxable Canadian corporation.
4. At all relevant times, the Manager will carry on business in Canada for the purposes of the Act.
5. The Manager believes that the current business and economic environment creates an attractive opportunity in which to invest in Mezzanine Debt, and that there is a demand for Mezzanine Debt capital from Canadian businesses that is not being adequately addressed by other capital providers. The Manager is currently in the process of soliciting commitments from arm's length XXXXXXXXXX investors resident in Canada for the purposes of forming Canadian LP, and will solicit commitments from arm's length non-resident investors for the purposes of forming Foreign LP, to invest in Mezzanine Debt and related securities. It is targeting $XXXXXXXXXX of commitments from such investors for the Canadian LP and $XXXXXXXXXX for the Foreign LP.
6. In the course of this process, the Manager has also received significant interest from non-resident investors who are attracted by the Manager's track record of strong investment returns and the opportunities to invest presented by the Canadian market place.
PROPOSED TRANSACTIONS
7. GP will be incorporated under the Canada Business Corporations Act or the laws of a province of Canada. GP will be an indirect wholly-owned subsidiary of Canco.
8. Canadian LP will be formed as a limited partnership under the laws of a province of Canada and Foreign LP will be formed under the law of the State of XXXXXXXXXX, or of a province of Canada. GP will be the general partner of each of Canadian LP and Foreign LP. For purposes of forming the partnerships, the initial limited partner of each partnership will be Canco or an affiliate, with a nominal subscription to the partnership.
9. Canadian LP will accept subscriptions for limited partnership interests from Canadian resident investors, XXXXXXXXXX. The Principals will also subscribe directly or indirectly for limited partnership interests in Canadian LP.
10. Foreign LP will accept subscriptions for limited partnership interests from persons that are not resident in Canada for the purposes of the Act and partnerships that are not Canadian partnerships. None of the limited partners who subscribe for interests in Foreign LP pursuant to this process will be related to, or affiliated with, any of Canco, the GP or the Manager. The interests in Foreign LP will only be marketed to non-resident investors and subscriptions for partnership interests in Foreign LP will be accepted during one or more periods ending at a particular date (the "closing"). In the event that additional subscriptions for interests in Foreign LP are accepted after the first closing, such additional subscriptions will be accepted no later than XXXXXXXXXX months following such first closing.
11. Under the terms of the Foreign LP, the subscription obligations of the limited partners may be called over a period for most purposes limited to XXXXXXXXXX years, referred to as the "investment period", to fund the acquisition by Foreign LP of investments on the advice of the Manager.
12. In general terms, under the Foreign LP Agreement, the limited partners will be entitled to receive a return of their invested capital and an XXXXXXXXXX% "preferred return", after which the profits of the partnership will be shared as to XXXXXXXXXX% by the limited partners and as to XXXXXXXXXX% by GP. The GP will be taxable in Canada on its share of the profits of Foreign LP.
13. The LPs will invest primarily in Mezzanine Debt, generally acquired on original issue, and related securities of persons resident in Canada and the United States (the "Investments"). The LPs will agree to commit capital for the purpose of making the Investments on a side-by-side basis. The Foreign LP Agreement will provide that its Investments will be restricted to Mezzanine Debt and other investments that are Qualified Investments. The functional currency of the LPs will be Canadian dollars and the LPs may enter into foreign exchange contracts to hedge exposure to foreign currency.
14. Pursuant to the terms of the Foreign LP Agreement, the GP will have authority to manage the operations and affairs of the Foreign LP and to make all decisions of Foreign LP. Foreign LP will limit its Investments to Qualified Investments.
15. The GP will enter into the Management Agreement with the Manager, pursuant to which the GP will delegate all its functions with respect to Foreign LP, including approving Investments and approving dispositions. As a result, the GP will have no active role in the making, monitoring and disposing of Investments, the receipt of investment capital from or distribution of returns to the limited partners, reporting to the limited partners or any other matters.
16. Foreign LP will pay a fee for the services provided by the Manager pursuant to the Management Agreement which fee will be based on the capital committed to or, following the investment period, invested by Foreign LP. The Manager may also provide services to companies in which Foreign LP has invested, and may receive fees from such companies in respect of such services or in respect of the investment itself. Where the Manager receives such fees, the management fee payable by Foreign LP will be reduced. The Manager will be taxable in Canada on its fee income.
17. From and after the initial closing of subscriptions to Foreign LP, the total fair market value at all relevant times of investments in Foreign LP that are beneficially owned by persons or partnerships (other than a designated entity in respect of the Manager) that are affiliated with the Manager will not exceed XXXXXXXXXX% of the fair market value of all investments in Foreign LP.
18. An advisory committee will be established to act as a consultative body to the Manager, to review any material conflicts of interest involving Canco and its affiliates and the LPs and to consider the variation of investment objectives and investment restrictions of the LPs. It also may provide input on certain other matters as requested by the Manager. The advisory committee will generally be comprised of XXXXXXXXXX persons selected from among the limited partners of the LPs and may include representatives of investors in Foreign LP.
19. The Manager's process for approval of investments will include an evaluation by an investment committee that will be comprised of certain of the Principals.
20. An additional committee comprised of up to XXXXXXXXXX existing and/or former senior executives of Canco selected by the Manager will be available to provide advice and counsel to the Manager at its request concerning investment strategy and general due diligence.
21. Canco will continue to provide the services of the Principals, and other services, to the Manager to assist the Manager in performing its obligations under the Management Agreement.
22. It is intended that, where possible, investments by Foreign LP in Mezzanine Debt of issuers resident in Canada will be made on terms that qualify for the interest withholding exemption in subparagraph 212(1)(b)(vii).
23. Under the Management Agreement, the GP will reserve the right to terminate the Manager and appoint a replacement manager.
PURPOSE OF PROPOSED TRANSACTIONS
24. The Manager's principal activity is acting as an investment manager in connection with the investing of funds by Canco and arm's length investors, and it is seeking to establish Canadian LP and Foreign LP in the course of that business. The purpose of having the investors invest through the LPs is to simplify the investment process and other dealings with third parties and to conform to internationally recognized arrangements for investing in Mezzanine Debt and related securities. The purpose of having the non-residents invest in the Investments through a separate partnership is to enable Canadian LP to qualify as a Canadian partnership.
RULING GIVEN
Provided that:
(a) The preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and the purpose of the proposed transactions;
(b) The proposed transactions are completed in the manner described above; and
(c) There are no other transactions which may be relevant to the ruling requested, our ruling is as follows:
A. Subsection 115.2(2) will apply to the partners of Foreign LP that are not resident in Canada such that the services provided to Foreign LP by the Manager as described above under the Proposed Transactions will not, in and by themselves, cause such partners to be carrying on business in Canada for the purposes of subsection 115(1) and Part XIV.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 and is binding on the CRA as long as there is a closing at which the Foreign LP accepts subscription agreements from investors before XXXXXXXXXX.
The ruling given is based solely on the facts, proposed transactions and purposes of the proposed transactions described above. Facts and proposed transactions that form part of any agreements, and that are not described above, do not form part of the facts and proposed transactions on which this advance income tax ruling is based. Except as expressly stated, this advance income tax ruling does not imply acceptance, approval or confirmation of any other income tax implications of the facts or proposed transactions described above.
This ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act which, if enacted, could have an effect on the ruling provided herein.
Yours truly,
XXXXXXXXXX
For Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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