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 the Fund lose its status as MFT if it guarantees the lease obligation of a limited partnership in which it holds an indirect interest? In this case, the partners of the limited partnership are a Trust that is wholly owned by the Fund, limited partners whose partnership interests are exchangeable for units of the Fund and a general partner which is wholly owned by the Trust.
Position: No.
Reasons: consistent with other rulings
XXXXXXXXXX 2008-027350
Attention: XXXXXXXXXX
XXXXXXXXXX , 2008
Dear XXXXXXXXXX :
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling in respect of the above-noted taxpayer. We also acknowledge your subsequent communications with us in respect of this ruling.
To the best of your knowledge and that of your client, none of the issues involved in the ruling request is:
- in an earlier return of your client or a related person,
- being considered by a tax services office or taxation center in connection with a previously filed tax return of your client or a related person,
- under objection by your client or a related person,
- before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or
- the subject of a ruling previously considered by the Directorate in respect of your client or a related person.
You provided us with draft copies of the Purchase Agreement and Lease Agreement. This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader. Except as otherwise noted, 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"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated. The following terms have the meanings specified:
"Anti-Dilution Provision" means that the exchange right of the holders of Exchangeable LP Units, currently XXXXXXXXXX . and one or more of its direct and wholly-owned subsidiaries, to exchange any of their Exchangeable LP Units into Units will be adjusted in a manner approved by the trustees of the Fund in the event of a consolidation, amalgamation, arrangement, merger or other form of business combination of the Fund with or into any other entity that results in a reclassification of the outstanding Units at that time;
"Business" means the XXXXXXXXXX ;
"Class A LP Unit" means an interest of a limited partner in LP which has been designated as an LP Class A Unit of LP and is further described in paragraph 10;
"Class B LP Unit" means an interest of a limited partner in LP which has been designated as an LP Class B Unit of LP and is further described in paragraph 10;
"Class C LP Unit" means an interest of a limited partner in LP which has been designated as an LP Class C Unit of LP and is further described in paragraph 10;
"Exchangeable LP Units" means XXXXXXXXXX and once the XXXXXXXXXX have ceased to be subordinated, XXXXXXXXXX ;
"Fund" means XXXXXXXXXX , an unincorporated, open-ended, limited purpose trust formed under the laws of the Province of XXXXXXXXXX as further described in
paragraph 1;
"GP" means XXXXXXXXXX ., a corporation incorporated under the laws of Canada acting as the general partner of LP;
"Guarantee" means the guarantee by the Fund of LP's obligations under the Lease Agreement taking the form of an intervention thereunder as described in paragraphs 21 and 22;
"Lease Agreement" means the Lease Agreement between Purchaser and LP;
"LP" means XXXXXXXXXX , a limited partnership that is governed by the LP Agreement;
"LP Agreement" means the limited partnership agreement made as of XXXXXXXXXX between XXXXXXXXXX ., as the initial limited partner, and GP, governed by the laws of the Province of XXXXXXXXXX , pursuant to which LP was established, as amended and restated on XXXXXXXXXX , as the same may be amended, supplemented or restated from time to time;
"LP Units" means, collectively, the Class A LP Units, the Class B LP Units and the Class C LP Units;
"Property" means the land known and designated as lot XXXXXXXXXX , all servitudes, rights and interests appurtenant thereto and all the buildings, structures, facilities, utilities, installations and other improvements now or hereafter located on the land referred to in this definition and all fixtures attached thereto used, directly or indirectly, by LP as part of the Business;
"Purchase Agreement" means the agreement of purchase and sale between the Purchaser and LP;
"Purchaser" means XXXXXXXXXX , who will hold title to the Property as a nominee for a "Canadian partnership" as defined in subsection 102(1) whose partners are not exempt from tax under the Act and the Purchaser, the Canadian partnership and its partners are not related to the Fund;
"Series 1 Trust Notes" means the series 1 notes of the Trust issued under the trust note indenture;
"Special Voting Unit" means a unit of the Fund that is designated as a Special Voting Unit of the Fund that is issued in connection with the issuance of the Class B LP Units and the Class C LP Units, with the terms and conditions described in paragraph 3;
"Trust" means XXXXXXXXXX , an unincorporated trust established pursuant to a declaration of trust under the laws of the Province of XXXXXXXXXX ; and
"Units" means the units of the Fund but does not include Special Voting Units.
The relevant Tax Services Office for the Fund is the XXXXXXXXXX Tax Services Office and the relevant Tax Centre is the XXXXXXXXXX Centre. The registered offices and head offices of the Fund, the Trust, LP, GP and all subsidiaries of GP are all located at XXXXXXXXXX .
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. The Fund is an unincorporated, open-ended, limited purpose trust created pursuant to the Fund's declaration of trust made as of XXXXXXXXXX , pursuant to which the Fund was established, as amended and restated on XXXXXXXXXX , as the same may be amended, supplemented or restated from time to time, and is governed by the laws of the Province of XXXXXXXXXX . All XXXXXXXXXX trustees of the Fund are resident of Canada for purposes of the Act and as a result, the Fund is resident in Canada.
2. An unlimited number of Units and an unlimited number of Special Voting Units may be issued pursuant to the Fund's declaration of trust. Each Unit is transferable and represents an equal, undivided right to and interest in any distributions from the Fund, whether of net earnings, net realized capital gains other than net realized capital gains distributed to redeeming unitholders, or other amounts, and in the net assets of the Fund in the event of termination or winding-up of the Fund. The units of the Fund are redeemable at any time on demand by the holders thereof upon delivery to the Fund of a duly completed and properly executed notice requesting redemption in a form reasonably acceptable to the trustees of the Fund together with any certificates representing units to be redeemed and written instructions as to the number of units to be redeemed.
3. The Special Voting Units are not entitled to any right to nor interest in any distribution from the Fund whether of net earnings, net realized capital gains or other amounts, or in the net assets of the Fund in the event of a termination or winding up of the Fund. The Special Voting Units are issued in series and will only be issued in connection with or in relation to Exchangeable LP units or other securities that are exchangeable for Units, in each case for the sole purpose of providing voting rights at the Fund level to the holders of such securities. Special Voting Units are issued in conjunction with, and are not transferable separately from, the Exchangeable LP units or other exchangeable securities to which they relate. Conversely, when an Exchangeable LP Unit is transferred to another entity, the corresponding Special Voting Unit which relates to it will be automatically transferred to that other entity. Each Special Voting Unit entitles the holder thereof to a number of votes at any meeting of voting unitholders equal to the number of units which may be obtained upon the exchange of the Exchangeable LP Unit or other exchangeable security to which the Special Voting Unit relates. Currently, the only exchangeable securities issued by the LP are the Exchangeable LP Units and they are exchangeable on a XXXXXXXXXX . Upon the exchange of the Exchangeable LP Unit or other exchangeable security for a Unit, the Special Voting Unit attached to such security will be immediately cancelled without any further action of the trustees of the Fund or the former holder of such Special Voting Unit, and the former holder of such Special Voting Unit will cease to have rights with respect that Special Voting Unit.
4. The Fund's taxation year ends on XXXXXXXXXX . The Fund currently qualifies as a "unit trust" pursuant to paragraph 108(2)(a) and as a "mutual fund trust" pursuant to subsection 132(6). The Fund was not established primarily for the benefit of persons who are not resident of Canada and has not been maintained primarily for the benefit of persons who are not residents of Canada.
5. The Units are listed on the XXXXXXXXXX Stock Exchange under the symbol "XXXXXXXXXX ".
6. The Fund owns all the issued units and Series 1 Trust Notes of the Trust and such holdings represents all of the Fund's assets. The Fund is not carrying on a business in respect of the units and Series 1 Trust Notes of the Trust or of the operations of the LP or any of its affiliates nor is it engaged in the business of lending money or guaranteeing financial obligations.
7. The Trust is an unincorporated, open-ended and limited purpose trust created pursuant to the Trust's declaration of trust and is governed by the laws of the Province of XXXXXXXXXX . The majority of the trustees of the Trust are resident in Canada such that the Trust is resident in Canada. The Trust's assets consist of all of the common shares of GP and the XXXXXXXXXX of the issued Class A LP Units, which represents XXXXXXXXXX % of the outstanding LP Units and XXXXXXXXXX % of the outstanding Class A LP Units.
8. LP is a limited partnership established under the laws of the Province of XXXXXXXXXX to acquire, own and operate the Business. In connection with the Business, LP can own, operate and lease assets and property, borrow money, make investments and hold other direct or indirect rights and engage in activities properly ancillary and incidental thereto. The fiscal period of the LP is XXXXXXXXXX .
9. LP is entitled to issue an unlimited number of Class A LP Units, Class B LP Units and Class C LP Units.
10. Class A LP Units will be held by the Trust and will receive first priority on any distribution out of the LP as noted in paragraphs 13 to 15 below. Class B LP Units are exchangeable for Units at any time after the closing of the initial public offering, which took place on XXXXXXXXXX subject to the Anti-Dilution Provision. Class C LP Units will also be exchangeable for Units after the XXXXXXXXXX subject to the Anti-Dilution Provision. XXXXXXXXXX . Class A LP Units are not exchangeable for Units.
11. The XXXXXXXXXX Class B LP Units and XXXXXXXXXX Class C Units issued by LP are all held, directly or indirectly, by XXXXXXXXXX . and represent XXXXXXXXXX % of the outstanding LP Units.
12. The board of directors of GP has considerable discretion over the amount of cash distributions to be made by LP. Subject to the subordination arrangements with respect to the Class C LP Units, it is expected that LP will make monthly cash distributions of its available cash so that distributions to XXXXXXXXXX ., the holder of the Exchangeable LP Units, will be equal to the distributions to be made to unitholders of the Fund.
Available cash of LP for distribution will be derived from the operation of the Business and will consist generally of all available cash on hand at the end of the month after satisfaction of:
XXXXXXXXXX
13. As long as the Class C LP Units remain subordinated, cash distributions on the LP Units will be made in the following priority:
XXXXXXXXXX
14. In addition to the monthly distribution described in paragraph 13, at the end of each fiscal quarter of LP, including the fiscal quarter ending on the fiscal year end, additional distributions may be made in the following order of priority:
XXXXXXXXXX
15. After the Class C LP Units cease to be subordinated, cash available to make distributions will be paid monthly, XXXXXXXXXX .
16. The board of directors of GP is composed of XXXXXXXXXX directors, who are all resident of Canada. GP holds a XXXXXXXXXX % interest in LP. All of the outstanding shares of GP are owned by the Trust.
17. GP has exclusive authority to manage the business and affairs of LP, to make all decisions regarding the business of LP and to bind LP. The LP Agreement does not permit any limited partner to exercise any management or control over the partnership described in that partnership agreement.
18. Holders of LP Units are entitled to receive notice of, to attend and to vote at, all meetings of the partners of LP except meetings of a specified class of partnership units. Each LP Unit entitles the holder thereof to one vote. Additionally, the holders of Exchangeable LP Units have Special Voting Units that entitle the holder thereof to receive notice of, attend and to vote at all meetings of voting unitholders. The number of votes attaching to the Special Voting Units issued in connection with the Class B LP Units and Class C LP Units that are no longer subject to subordination is equal to the number of Units that would be obtained upon the exchange of such units.
Proposed Transactions
19. The Purchaser and LP are entering into a sale-leaseback transaction.
20. As a first step to this sale-leaseback transaction, pursuant to the Purchase Agreement, the Purchaser agrees to purchase and the LP hereby agrees to sell the Property, subject to certain adjustments, for a purchase price of $XXXXXXXXXX . The proceeds of disposition to be received by LP from the Purchaser will not exceed the fair market value of the Property at the time of the closing of the sale-leaseback transaction.
21. As a second step to this transaction and as a condition to the closing of the Purchase Agreement, LP shall deliver to the Purchaser the Lease Agreement, which shall be executed by LP, the Purchaser and the Fund, as guarantor. Under the Lease Agreement, LP will lease the Property back from the Purchaser. The Fund, as guarantor, intervenes in the Lease Agreement and, in consideration for the Purchaser having agreed to enter into the Lease Agreement with LP, the Fund, through its intervention in the Lease Agreement, binds and obliges itself solidarily with LP for the full performance by LP of all of its obligations under the Lease Agreement and makes LP's obligations its personal affair in the same manner and to the same extent as if it was the lessee under the Lease Agreement.
22. The Fund will receive no consideration for being a guarantor under the Lease Agreement nor will any benefit be received by, or any form of compensation (including reciprocal guarantees) paid or payable to, the Fund or its unitholders in respect of the Guarantee.
23. The annual rent under the Lease Agreement shall be paid as set forth therein, and the LP acknowledges its obligation to execute the Lease Agreement at closing of the acquisition of the Property and to provide the representations and warranties and covenants provided for by it therein. The Lease Agreement is for an initial term of XXXXXXXXXX years, subject to renewals.
Purpose of the Proposed Transactions
24. LP is entering into the sale-leaseback transaction as seller and tenant\leasee in order to obtain additional financing by means of selling the Property. LP will use the funding resulting from the disposition of the Property to finance the growth of the Business, internally or through acquisitions, and its day-to-day business operations as well as to repay the hypothec currently encumbering the Property. These funds will allow LP to invest into business activities and properties providing yields higher than those it could have earned by continuing to hold the Property.
25. The Guarantee provided by the Fund will enable LP to receive additional funding from the disposition of the Property when compared with the amount of funding it would have otherwise received absent the Guarantee. This favourable result is caused by the fact that, under its standard financial and credit rating analysis, the Purchaser will agree to receive a lower yield on its investment because of the Fund's better financial and credit ratings (as the Fund is a publicly traded entity).
Ruling Given
Provided that the preceding statements constitute complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, the proposed transactions are completed in the manner described above and there are no other transactions that may be relevant to the ruling given, our ruling is as follows:
The Guarantee to be provided by the Fund, will not, in and by itself, disqualify the Fund from meeting the requirements of paragraph 132(6)(b).
Nothing in this advance income tax ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:
a) whether the LP operates as principal, as opposed to agent on behalf of the Fund, with respect to its respective business activities,
b) whether the Fund qualifies as a mutual fund trust for purposes of the Act, or
c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the ruling given above.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions are completed within six months of the date of this letter. This ruling is based on the law as it currently reads and does not take into account any proposed amendments to the Act.
XXXXXXXXXX
Section Manager
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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