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: Will a subsidiary entity of an income trust also be a SIFT entity?
Position: Provided the subsidiary entity is an excluded subsidiary entity, it will not be a SIFT entity. Otherwise, it is a question of fact.
XXXXXXXXXX 2007-026159
Annemarie Humenuk
Attention: XXXXXXXXXX
October 27, 2008
Dear XXXXXXXXXX :
Re: Application of the SIFT rules to a Trust on Limited Partnership Structure
This is in reply to your letter of December 3, 2007 in which ask for our views on whether a limited partnership, the units of which are not traded on any stock exchange or other public market, would be considered to be a SIFT partnership in the situation where certain of the units of the limited partnership held by various investors are exchangeable into units of a publicly traded mutual fund trust and all of the other units of the limited partnership are owned by that publicly traded mutual fund trust. Although there is no public market on which the exchangeable units of the limited partnership can be sold, the exchangeable units of the partnership are exchangeable for units of the mutual fund trust and the holders of the exchangeable units are entitled to receive the same distributions from the partnership on a per unit basis as the unitholders of the mutual fund trust are entitled to receive from the mutual fund trust. The mutual fund trust may or may not hold investments other than its investment in the limited partnership.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act"). It is a question of fact as to whether a particular trust or partnership is a SIFT trust or SIFT partnership as defined in subsection 122.1(1) and 197(1) respectively for a particular taxation year. Should your situation involve a specific partnership and the current or prior taxation years, you should submit all relevant facts and documentation to the appropriate Tax Services Office for their views. If you have a proposed transaction involving a potential SIFT partnership, we would be prepared to review the terms and conditions relating the partnership and the mutual fund trust that holds a significant interest in the partnership in connection with a request for an advance income tax ruling in order to provide a definite opinion on the tax consequences that you wish us to confirm. Although you recognize that there are various arguments under which a limited partnership of the type described in your letter might be considered to be a SIFT partnership, you are of the view that such a limited partnership should not be a SIFT partnership on the basis that the units of the mutual fund trust should not be viewed as an investment in the limited partnership.
A partnership that is a Canadian resident partnership as defined in subsection 248(1) will be a SIFT partnership for a particular taxation year, if:
investments in the partnership are listed or traded on a stock exchange or other public market (as the terms "investment" and public market" are defined in subsection 122.1(1));
the partnership holds one or more non-portfolio properties; and
subsection 197(8) does not apply to the particular taxation year to exempt the partnership from the application of the SIFT rules for the particular year.
For the purpose of this letter, we assume that:
the partnership holds one or more non-portfolio properties as defined in subsection 122.1(1);
the provisions of subsection 197(8) do not apply to the partnership for a particular taxation year either because the partnership would not have been a SIFT partnership on October 31, 2006 had the definition of SIFT partnership been in force at that time, the partnership has exceeded its normal growth as determined by reference to the normal growth guidelines set out in the Department of Finance Press Release of December 15, 2006, or the taxation year is after 2010; and
the mutual fund trust that owns all the units of the limited partnership other than the exchangeable units issued by the partnership is a SIFT trust determined without reference to subsection 122.1(2).
Thus, our response will focus on whether any of the investments in the partnership are listed or traded on a stock exchange or other public market and in particular, whether the units of the mutual fund trust are considered to be an investment in the partnership for the purposes of these provisions.
You have suggested that while the return on the exchangeable units of the partnership may replicate the return on the units of the mutual fund trust, the reverse is not true. We respectfully disagree. The term "replicate" must be read in the context of the whole expression, "may reasonably be considered to replicate..." and as such does not require that the rights associated with one particular type of unit be identical to the rights associated with those units that the particular type of unit is considered to replicate. In the case of the situation you describe, it is quite possible that the rights associated with the mutual fund trust units may reasonably be considered to replicate the rights associated with either the units of the partnership held by the mutual fund trust or the exchangeable units held by the other investors. Thus, depending on the specific terms and conditions of the units of both the limited partnership and of the mutual fund trust, it is possible that the units of the mutual fund trust could be considered to be an investment in the limited partnership.
Under the draft legislation released by the Department of Finance on July 14, 2008, it is proposed to amend the definition of a SIFT partnership to exclude an entity that meets the definition of an "excluded subsidiary entity". In order to be considered an excluded subsidiary entity for a particular taxation year, none of the subsidiary entity's equity can be listed or traded on a stock exchange or other public market during that particular taxation year and all the equity of the subsidiary entity must be held by one or more entities that are either
(i) a real estate investment trust,
(ii) a taxable Canadian corporation,
(iii) a SIFT trust determined without reference to subsection 122.1(2),
(iv) a SIFT partnership determined without reference to subsection 197(8), or
(v) an excluded subsidiary entity.
Thus, depending on who owns the exchangeable units of the limited partnership during the particular taxation year, the limited partnership may qualify as an excluded subsidiary entity with the result that it will not be a SIFT partnership for that year.
This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.
We trust our comments will be of assistance.
Robin Maley
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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