2008 Ruling 2008-0279671R3 - Partnership Wind-up

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: To facilitate a subsection 98(3) wind-up, the partnership enters into a distribution agreement under which it will distribute to its partners an undivided interest in each of the assets previously held by the partnership. The agreement will also state that the partnership will transfer particular assets to the partners as consideration for their assumption of the partnership's "Deferred Revenue" liabilities. The fair market value of the particular assets will be equal in amount to the Deferred Revenue liabilities and they will elect under 20(24) in respect of this transfer.

Although paragraph 98(3)(f) will apply to deem the partnership to have disposed of the particular assets for proceeds equal to their cost amount to the partnership, can we rule that the amount of the fair market value of the particular assets that are transferred by the partnership, pursuant to the distribution agreement, can be used in determining the amount of the payment made by the partnership to the partners for the purposes of the application of paragraph 20(24)(a) of the Act?

Position: Yes.

Reasons: Our reading of the legislation.

XXXXXXXXXX 								2008-027967

XXXXXXXXXX , 2008

Dear XXXXXXXXXX :

Re: XXXXXXXXXX (the "Fund") (Account No. XXXXXXXXXX )

XXXXXXXXXX (the "Trust") (Account No. XXXXXXXXXX )

XXXXXXXXXX (the "Partnership") (Business No. XXXXXXXXXX )

XXXXXXXXXX ("GP") (Business No. XXXXXXXXXX )

(collectively the "Taxpayers")
Request for an Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX , in which you requested an advance income tax ruling on behalf of the Taxpayers. We also acknowledge the additional information provided to us in your numerous electronic mail transmissions and during our telephone conversations.

We understand that, to the best of your knowledge, and that of the taxpayers involved, none of the issues described herein is:

(i) in an earlier return of the Taxpayers or a related person;
(ii) being considered by a Tax Services Office or Taxation Centre in connection with a previously filed return of the Taxpayers or a related person;
(iii) the subject of any notice of objection;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal has not expired; or
(v) the subject of a previously issued ruling XXXXXXXXXX

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

DEFINITIONS

In this letter, unless otherwise expressly stated:

(a) "A Co" means XXXXXXXXXX ., a corporation XXXXXXXXXX

(b) "Acquisition Agreement" means the agreement entered into on XXXXXXXXXX , between the Predecessor Partnership and the Partnership pursuant to which the Partnership purchased all or substantially all of the assets of the Predecessor Partnership, in consideration for (a) the assumption by the Partnership of all or substantially all of the Predecessor Partnership's liabilities, including deferred revenue, (b) the issuance to the Predecessor Partnership of Partnership Units, (c) the Acquisition Promissory Note and (d) the Working Capital Note. The transfer was effected pursuant to an election under subsection 97(2) of the Act;

(c) "Acquisition Promissory Note" means the promissory note issued by the Partnership in favour of the Predecessor Partnership, as partial consideration under the Acquisition Agreement, in an amount equal to $XXXXXXXXXX ;

(d) "Act" means the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.), c. 1, as amended;

(e) "Canadian partnership" has the meaning assigned by subsection 102(1) of the Act;

(f) "Canco" means XXXXXXXXXX ., a corporation XXXXXXXXXX Prior to XXXXXXXXXX , all of its issued and outstanding shares were common shares, wholly-owned by the Partnership. Since XXXXXXXXXX , in addition to all of the issued and outstanding shares owned by the Partnership, XXXXXXXXXX Canco was incorporated in anticipation of the acquisition of the XXXXXXXXXX . The acquisition of XXXXXXXXXX took place on XXXXXXXXXX;

(g) "CRA" means the Canada Revenue Agency;

(h) "Deferred Revenue" means the amount of the Partnership's liabilities, at a particular point in time, that arose as a result of payments received in the course of its business for services to be rendered by the Partnership after the end of its taxation year. The amounts of these payments have been included in computing the Partnership's income for a taxation year pursuant to paragraph 12(1)(a) of the Act;

(i) "Fund" means XXXXXXXXXX which was, prior to XXXXXXXXXX , a "mutual fund trust" within the meaning of subsection 132(6) of the Act. Prior to XXXXXXXXXX , the Fund Units were widely held and publicly traded. Following a recent disposition by A Co of its remaining XXXXXXXXXX % interest in the Fund Units, A CO no longer held any interest in such units XXXXXXXXXX ;

(j) "Fund Units" means the trust units of the Fund;

(k) "GP" means XXXXXXXXXX ., a corporation XXXXXXXXXX GP acts as general partner of the Partnership, and is wholly-owned by the Trust;

(l) "GP Shares" means the shares of GP;

(m) "Holdco II" means a corporation XXXXXXXXXX The only issued shares were common shares and they are directly wholly owned by the Trust. The consideration given by the Trust for these shares was less than $XXXXXXXX . XXXXXXXXXX

(n) "Holdco II Shares" means the shares of Holdco II;

(o) "Investor Liquidity Agreement" means an agreement entered into on XXXXXXXXXX , between A Co, the Fund, the Trust, the Partnership and the GP whereby, among other things, A Co was entitled to effectively liquidate all or any portion of its Partnership Units and GP Shares for cash, or to exchange all or any portion of its Partnership Units and GP Units for Fund Units. The exchange mechanism provided for under the Investor Liquidity Agreement essentially required that the holder of the exchangeable Partnership Units covered by the agreement transfer one Partnership Unit together with one GP Share for each Fund Unit to be received by such holder on the exchange. The liquidation rights could be exercised by A Co at any time, at its discretion, so long as all of the following conditions were met: (a) the liquidation would not cause the Fund to breach the restrictions respecting non-resident ownership contained in the Fund Declaration of Trust, or otherwise cause the Fund to cease to be a "mutual fund trust" under the Act, (b) the Fund was legally entitled to issue the Fund Units in connection with the exercise of the liquidation rights, and (c) upon the exercise of the liquidation rights, the person receiving the Fund Units complied with all applicable securities laws;

(p) "Newco" means a corporation to be XXXXXXXXXX

(q) "Normal Growth Guidelines" means the normal growth guidelines issued by the Department of Finance on December 15, 2006, as amended from time to time;

(r) "Paragraph", unless otherwise stipulated, means a numbered paragraph in this letter;

(s) "Partnership Business" means the business of the Partnership, which consists in the XXXXXXXXXX business;

(t) "Partnership" means XXXXXXXXXX ;

(u) "Partnership Units" means the limited partnership units of the Partnership;

(v) "Predecessor Partnership" means XXXXXXXXXX

(w) XXXXXXXXXX

(x) XXXXXXXXXX

(y) "SIFT Rules" means the provisions of the Act relating to the income tax treatment of SIFT partnerships and their members and of SIFT Trusts and their unitholders;

(z) "SIFT Trust" means a SIFT trust as that expression is defined in subsection 122.1(1) of the Act;

(aa) "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;

(bb) "Trust" means XXXXXXXXXX , an unincorporated, open-ended trust established under the laws of the Province of XXXXXXXXXX ;

(cc) "Trust Notes" means the notes issued by the Trust, having a principal amount of approximately $XXXXXXXXXX . They mature on the XXXXXXXXXX anniversary of their date of issuance, are redeemable at any time at the option of the Trust prior to maturity and may be converted into notes of another series at the holder's request at any time. The Trust Notes were originally issued on the initial public offering of the Fund. XXXXXXXXXX ;

(dd) "Trust Units" means the trust units of the Trust;

(ee) "Unitholders" means the holders of Fund Units; and

(ff) "Working Capital Note" means the promissory note issued by the Partnership in favour of the Predecessor Partnership, as partial consideration under the Acquisition Agreement, in an amount equal to $XXXXXXXXXX .

FACTS

1. The Fund holds all the Trust Units and the Trust Notes.

2. The Fund would have been a SIFT Trust on October 31, 2006, had that definition been in force and applied to the Fund as of that date. The Fund has not exceeded normal growth as determined by reference to the Normal Growth Guidelines.

3. The Trust was established to acquire and hold Partnership Units and GP Shares.

4. GP is a taxable Canadian corporation and was formed on XXXXXXXXXX , to act as the general partner of the Partnership. The only issued and outstanding share capital of GP consists of a single class of voting common shares, which are all owned by the Trust.

5. The Partnership is a Canadian partnership, and a limited partnership formed under the laws of XXXXXXXXXX . All of the general partnership units issued by the Partnership are owned by GP. Prior to XXXXXXXXXX , the limited partnership units (i.e., the Partnership Units) issued by the Partnership were all owned by the Trust. Since XXXXXXXXXX (see Paragraphs 15 and 16), GP and Holdco II have owned all the Partnership Units.

6. The principal and head office of the Fund, the Trust, the Partnership, the GP and Pubco is located at XXXXXXXXXX is the relevant tax service office and their tax center is XXXXXXXXXX

7. On XXXXXXXXXX , the Fund made an initial public offering of Fund Units on the XXXXXXXXXX Stock Exchange, which resulted in the Fund indirectly (through the Trust) acquiring XXXXXXXXXX Partnership Units and XXXXXXXXXX GP Shares (out of a total of approximately XXXXXXXXXX Partnership Units and GP Shares outstanding after giving effect to the offering), representing a XXXXXXXXXX % interest in the Partnership. A Co retained the remaining XXXXXXXXXX % interest in the Partnership and the GP (approximately XXXXXXXXXX Partnership Units and GP Shares out of a total of approximately XXXXXXXXXX ). Pursuant to the terms of the Investor Liquidity Agreement, A Co's remaining approximately XXXXXXXXXX % interest in the Partnership and the GP could, at A Co's option, be exchanged at any time (subject to certain conditions) for Fund Units representing an approximate XXXXXXXXXX % interest in the Fund. XXXXXXXXXX

8. On XXXXXXXXXX A Co exercised its right under the Investor Liquidity Agreement and converted XXXXXXXXXX Partnership Units and XXXXXXXXXX GP Shares into XXXXXXXXXX Fund Units XXXXXXXXXX After giving effect to the foregoing, A Co held approximately XXXXXXXXXX Partnership Units and GP Shares, representing an approximate XXXXXXXXXX % interest in the Partnership and the GP. At this time, A Co did not directly hold any Fund Units, even though it was entitled, pursuant to and subject to the conditions of the Investor Liquidity Agreement, to exchange its interest in the Partnership and the GP for an approximately XXXXXXXXXX % interest in the Fund. These percentages of ownership remained unchanged until XXXXXXXXXX .

9. On XXXXXXXXXX , A Co exchanged an additional XXXXXXXXXX Partnership Units and GP Shares into XXXXXXXXXX Fund Units and transferred the XXXXXXXXXX Fund Units to a trustee for purposes of funding grants to employees under the Fund's initial long term incentive plan. After giving effect to the foregoing, A Co held approximately XXXXXXXXXX Partnership Units and GP Shares, representing an approximate XXXXXXXXXX % interest in the Partnership and the GP. At this time, A Co did not directly hold any Fund Units, even though it was entitled, pursuant to and subject to the conditions of the Investor Liquidity Agreement, to exchange its interest in the Partnership and the GP for an approximately XXXXXXXXXX % interest in the Fund. These percentages of ownership remained unchanged until XXXXXXXXXX

10. As a result of (i) a number of separate exchanges by A Co of Partnership Units and GP Shares for Fund Units which took place on XXXXXXXXXX, A Co no longer holds any interest in the Partnership, GP or the Fund.

11. XXXXXXXXXX

12. XXXXXXXXXX

13. XXXXXXXXXX

14. XXXXXXXXXX

15. The Trust transferred to Holdco II the Partnership Units and the GP Shares on a rollover basis under subsection 85(1) of the Act (and the equivalent provisions of applicable provincial legislation) in consideration for additional shares of Holdco II.

16. Holdco II transferred to GP all but one of its Partnership Units on a rollover basis under subsection 85(1) of the Act (and the equivalent provisions of applicable provincial legislation) in consideration for additional GP Shares.

17. XXXXXXXXXX

18. XXXXXXXXXX

19. XXXXXXXXXX

20. XXXXXXXXXX

PROPOSED TRANSACTIONS

21. The Partnership will incorporate Newco as a taxable Canadian corporation. Its only issued shares will be common shares issued to the Partnership.

22. The Partnership will transfer certain of its assets to Newco, in consideration for additional common shares of Newco, and Newco's assumption of the Partnership's bank liabilities. The shares of Canco owned by the Partnership and the Partnership's Deferred Revenue obligations will remain in the Partnership. The asset transfer will be done on a rollover basis, pursuant to and in accordance with subsection 85(2) of the Act. Newco and all the members of the Partnership will jointly elect, in prescribed form and within the time referred to in subsection 85(6) of the Act (and the equivalent provisions of applicable provincial legislation);

23. The Partnership and its only members, being GP and Holdco II, will enter into a "Distribution and Dissolution Agreement", whereby, on a particular day, the Partnership will cease to exist. As part of that agreement, beneficial ownership of all the Partnership's property will be distributed to GP and Holdco II on that same day, so that immediately after that time when the Partnership ceases to exist, each of GP and Holdco II will have, in each of the Partnership's properties, an undivided interest, or for civil law an undivided right that, when expressed as a percentage of all undivided interests or rights in the property, will be equal to the particular partner's undivided interest or right, when so expressed, in each other such property. The percentage used in the foregoing will be equal to GP's and Holdco II's respective interests in the Partnership. GP and Holdco II will jointly elect in respect of the property, in prescribed form and within the time referred to in subsection 96(4) of the Act, to have the rules of subsection 98(3) of the Act apply.

24. The Distribution and Dissolution Agreement will provide for the assumption by GP and Holdco II, pro-rata to their respective interest in the Partnership, of the Partnership's obligations, including the obligations associated with the amount of Deferred Revenue at the point in time when the Partnership's assets are so distributed. More specifically, the agreement will stipulate that as consideration for the assumption of the Partnership's Deferred Revenue obligations, the Partnership will transfer to each of GP and Holdco II an undivided interest in Newco shares owned by the Partnership having a fair market value equal to the amount of the Deferred Revenue (the amount of consideration given by the Partnership in this regard is referred to in this letter as the "Payment").

As stated earlier, each of GP's and Holdco II's undivided interest, or for civil law undivided right, in the assets noted above will be their respective percentages noted in Paragraph 23.

25. In connection with the distribution of the Newco shares, noted in Paragraph 24, the Partnership, GP and Holdco II will file a joint election under subsection 20(24) of the Act (and the equivalent provisions of any applicable provincial legislation) to enable the Partnership to deduct the amount of the Payment when computing its income for the year in which the Payment was made (Note that even with this deduction, the Partnership will still have net income, and not net losses, for income tax purposes in that particular year). The election is also intended to enable GP and Holdco II to recognize the Payment amount as income for the purposes of paragraph 12(1)(a) of the Act and to allow GP and Holdco II to claim an appropriate reserve under paragraph 20(1)(m) of the Act.

26. Shortly after the cessation of the Partnership, GP will be amalgamated with Holdco II (the resulting entity being referred to as "Amalco"), pursuant to and in accordance with subsection 87(1) of the Act. Shortly thereafter, Newco will be wound up into Amalco, pursuant to and in accordance with subsection 88(1) of the Act.

PURPOSE OF THE PROPOSED TRANSACTIONS

27. The purpose of the proposed transactions is to simplify the corporate structure of XXXXXXXXXX the Fund XXXXXXXXXX by unwinding the Partnership and distributing the Partnership Business into a corporation.

XXXXXXXXXX

RULINGS

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 rulings requested,

our rulings are as follows:

A. If the following conditions are met:

• the amount of the Deferred Revenue has been included in computing the Partnership's income for a taxation year under paragraph 12(1)(a) of the Act;
• as noted in Paragraph 25, each of the Partnership, GP and Holdco II jointly elect under subsection 20(24) of the Act, in the form and within the time referred to in subsection 20(25) of the Act; and
• the amount of the Payment is reasonable,

then the amount of the Partnership's Payment (stated in Paragraph 24 as being equal to the amount of Deferred Revenue) made to the GP and Holdco II under the Distribution and Dissolution Agreement, as consideration for the assumption by GP and Holdco II of the Partnership's obligations associated with its Deferred Revenue

(i) may be deducted in computing the income of the Partnership for its taxation year in which the Payment is made, pursuant to paragraph 20(24)(a) of the Act; and

(ii) pursuant to paragraph 20(24)(b) of the Act, will be deemed to be an amount described in paragraph 12(1)(a) of the Act for each of GP and Holdco II for their respective taxation year in which the Payment is received and to the extent of their proportionate share of the Payment.

B. To the extent that ruling A(i), above, applies to the Payment, then pursuant to paragraph 20(24)(a) of the Act, no amount will be deductible under paragraph 20(1)(m) or (m.1) of the Act in respect of the Deferred Revenue in computing the Partnership's income for its taxation year in which the Payment was made, or in any subsequent taxation year.

C. If, in the year of the Payment, the Partnership would have otherwise been entitled to claim a reserve under paragraph 20(1)(m) of the Act in respect of the Deferred Revenue, on the assumption that the Partnership had not made the Payment in that year and had not elected under subsection 20(24) of the Act (all as described in Paragraphs 24 and 25), then GP and Holdco II may each claim an amount as a reserve, pursuant to paragraph 20(1)(m) of the Act, in respect of their portion of the Payment received from the Partnership for assuming the Deferred Revenue obligations. The amount of this reserve would be deductible in computing GP and Holdco II's own amounts of income for the taxation year in which the Payment is received, to the extent that the reserve reflects a reasonable amount in respect of goods or services that it is reasonably anticipated would have to be delivered or rendered after the end of that year.

D. If the Partnership is a Canadian partnership at the time it ceases to exist, and GP and Holdco II jointly elect, all as described in Paragraph 23, then subsection 98(3) of the Act will apply to the distribution by the Partnership of its property to GP and Holdco II, also as described in Paragraph 23. This means, inter alia, that

(i) paragraph 98(3)(f) of the Act will deem the Partnership to have disposed of each of its properties for proceeds equal to the cost amount to the Partnership of such property immediately before its distribution,

(ii) paragraph 98(3)(a) of the Act will deem the proceeds of disposition for each of GP and Holdco II of their respective interests in the Partnership to be equal to the greater of (a) the adjusted cost base to each of GP and Holdco II of their respective interests in the Partnership immediately before the Partnership ceases to exist, and (b) the sum of the amount of any money received by GP and Holdco II, respectively, on the cessation of the Partnership's existence, and their respective percentage of the total of amounts each of which is the cost amount to the Partnership of each of its properties immediately before its distribution, and

(iii) the cost to each of GP and Holdco II of their respective undivided interests in each of the Partnership properties so distributed to each of them will be determined pursuant to paragraphs 98(3)(b) and (c) of the Act.

These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5, issued by the CRA on May 17, 2002, and are binding on the CRA provided the proposed transactions are entered into on or before XXXXXXXXXX . These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments to the Act which, if enacted, could have an effect on the rulings provided herein.

Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly that the CRA has agreed to or accepted the reasonableness or fair market value of any payments referred to in this letter, nor are we ruling or commenting on any of the completed transactions referred to in Paragraphs 1-20, or the possible future transactions referred to in the last sentence of Paragraph 27.

Yours truly,

XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch