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 MFT still meet the conditions of 132(6)(b) after having guaranteed the borrowings of a sub-partnership of a master limited partnership of which the MFT is the XXXXXXXXXX % limited partner?
Position: Yes.
Reasons: Consistent with other rulings (2008-0273501R3, 2004-0097111R3), the level of integration of the MFT's investing activities in the sub-partnership, albeit indirectly, is sufficiently high for considering that the provision of the guarantee is not an undertaking by itself and also the MFT is not in the business of providing guarantees.
XXXXXXXXXX
2010-038608
XXXXXXXXXX , 2011
Dear XXXXXXXXXX
Re: Advance Income Tax Ruling
XXXXXXXXXX (the Taxpayer as defined below)
(XXXXXXXXXX)
This is in reply to your revised letter received on XXXXXXXXXX (XXXXXXXXXX), requesting an advance income tax ruling on behalf of the above named Taxpayer. We also acknowledge the information you provided during telephone conversations (XXXXXXXXXX) and your submission of XXXXXXXXXX .
We understand that, to the best of your knowledge and that of the Taxpayer, none of the issues considered in this advance income tax 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 if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a ruling previously considered by the Directorate in respect of the Taxpayer or a related person.
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.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), 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 and taxpayers referred to throughout this document will have the following meanings:
XXXXXXXXXX
"Class A LP Unit" means an interest of a limited partner in Master LP which has been designated as a Class A limited partnership unit of Master LP.
"Class B LP Unit" means an interest of a limited partner in Master LP which has been designated as a Class B limited partnership unit of Master LP and is exchangeable for Fund Units on XXXXXXXXXX pursuant to the Exchange Agreement.
"Declaration of Trust" means the declaration of trust made as of XXXXXXXXXX pursuant to which the Taxpayer was established, XXXXXXXXXX .
"Exchange Agreement" means the exchange agreement between, inter alia, the Taxpayer, Master LP GP, Master LP, LP Corp, and XXXXXXXXXX dated XXXXXXXXXX providing for the exchange of the Class B LP Units into Fund Units.
"Fund Units" means the units of the Taxpayer but does not include Special Voting Units.
"Guarantee" means the guarantee to be given by the Taxpayer on the Sub-Partnership Borrowings under the various Loan Agreements.
"Loan Agreements" mean the loan agreements between the Sub-Partnership and the various third party lenders.
"LP Corp" means XXXXXXXXXX .
"Master LP" means XXXXXXXXXX , a limited partnership formed under the laws of the Province of XXXXXXXXXX and governed by the Master LP Agreement.
"Master LP Agreement" means the amended and restated limited partnership agreement of the partners executed on XXXXXXXXXX , between the Taxpayer and LP Corp as the limited partners and Master LP GP as the general partner.
"Master LP GP" means XXXXXXXXXX , a corporation incorporated under the laws of Canada, the sole purpose of which is to act as the general partner of Master LP.
"Properties" means the income-producing real estate properties held by the Sub-Partnership or any new income-producing real estate properties to be acquired by the Sub-Partnership.
"Special Voting Unit" means a unit of the Taxpayer that is designated as a Special Voting Unit of the Taxpayer, is issued only in connection with the issuance of a Class B LP Unit, and is entitled to one vote per unit at all meetings of the holders of the Fund Units or in respect of any written resolution of the holders of the Fund Units.
"Sub-Partnership" means XXXXXXXXXX , a limited partnership formed under the laws of the Province of XXXXXXXXXX , and of which the Master LP is the limited partner.
"Sub-Partnership Borrowings" means the long-term borrowing by the Sub-Partnership from third party lenders consisting of financial institutions and guaranteed by the Properties of the Sub-Partnership.
"Sub-Partnership GP" means the corporation incorporated under the Canada Business Corporation Act, the sole purpose of which is to act as general partner of the Sub-Partnership.
"Taxpayer" means XXXXXXXXXX , an unincorporated, open-ended, limited purpose trust formed under the laws of the Province of XXXXXXXXXX as further described in paragraph 1.
Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1. The Taxpayer is an unincorporated, open-ended trust established on XXXXXXXXXX pursuant to the Declaration of Trust for the principal purpose of investing its funds in units of the Master LP and shares of the Master LP GP. The Taxpayer is governed by the laws of the Province of XXXXXXXXXX .
2. The Fund Units are listed on the XXXXXXXXXX Stock Exchange under the symbol "XXXXXXXXXX".
3. The Taxpayer's taxation year ends on XXXXXXXXXX . The Taxpayer currently qualifies as a "unit trust" pursuant to paragraph 108(2)(a) and as a "mutual fund trust" pursuant to subsection 132(6). The Taxpayer 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.
4. The head office and registered office of the Taxpayer is located at XXXXXXXXXX .
5. Master LP is a limited partnership formed under the laws of the Province of XXXXXXXXXX and governed by the Master LP Agreement. Master LP has two classes of limited partnership interests, Class A LP Units and Class B LP Units.
6. The Taxpayer is a limited partner of Master LP and holds Class A LP Units representing XXXXXXXXXX % of the outstanding units of Master LP. The Class A LP Units are entitled to the residual distributions and dissolution proceeds after the Class B LP Units.
7. LP Corp is the other limited partner of Master LP and holds Class B LP Units representing the remaining XXXXXXXXXX % of the outstanding units of Master LP. The Class B LP Units are entitled to distributions (from the cash on hand and not required for use in connection with the Master LP's business) and dissolution proceeds equal to the distributions made on a corresponding number of Fund Units. Holders of Class B LP Units also hold Special Voting Units. LP Corp may not transfer any Class B LP Unit other than: (i) pursuant to an exchange for Fund Units under the Exchange Agreement; (ii) by way of a pledge of the Class B LP Units in favour of a lender as security for a loan made to LP Corp; or (iii) to an affiliate of LP Corp that is a taxable Canadian corporation.
8. The distribution to be made on the Fund Units is determined as a percentage of the net income of the Taxpayer and its subsidiaries (as such term is defined under the Securities Act (XXXXXXXXXX)) subject to certain adjustments.
9. Master LP GP is the general partner of Master LP and holds XXXXXXXXXX % general partnership interest in Master LP. All of the outstanding shares of Master LP GP are owned by the Taxpayer.
10. Master LP GP has exclusive authority to manage the business and affairs of Master LP, to make all decisions regarding the business of Master LP and to bind Master LP. The Master LP Agreement does not permit any limited partner to exercise any management or control over the partnership described in that partnership agreement.
11. The Sub-Partnership is a limited partnership established under the laws of the Province of XXXXXXXXXX to acquire, own and operate the Properties. In connection with its business, the Sub-Partnership can own, operate and lease the Properties, borrow money, make investments and hold other direct or indirect rights and engage in activities properly ancillary and incidental thereto. The Properties are all located in Canada and are subject to encumbrances owed to Canadian financial institutions. The Sub-Partnership has its taxation year ending on XXXXXXXXXX .
12. Master LP is the sole limited partner of the Sub-Partnership and holds all of the outstanding shares of Sub-Partnership GP which is the general partner of the Sub-Partnership.
13. The sole purpose of Master LP is to hold interests in its sub-partnerships, including the Sub-Partnership, in the general partners of its sub-partnerships, including the Sub-Partnership GP, and in the shares of a management company, the sole purpose of which is to manage the Properties. Master LP will not conduct any other activities.
14. The Taxpayer has an indirect economic interest in the Properties by virtue of its XXXXXXXXXX % ownership of the shares of Master LP GP, the sole general partner of Master LP, and its XXXXXXXXXX % ownership in the units of Master LP which, in turn, is the sole limited partner of the Sub-Partnership. The Taxpayer will not be directly involved in the business of the Sub-Partnership.
15. The Sub-Partnership Borrowings were incurred to finance acquisitions of rental properties held by the Sub-Partnership or for working capital purposes.
16. The Taxpayer has not previously given a guarantee of another person's indebtedness and is not in the business of providing guarantees.
PROPOSED TRANSACTIONS
17. To facilitate the Sub-Partnership Borrowings related to the financing of the Properties at favourable interest rate and terms, Sub-Partnership's lenders will apply for XXXXXXXXXX insurance. As part of the conditions required by XXXXXXXXXX in respect of such insurance, the Taxpayer is required to guarantee the XXXXXXXXXX -insured Sub-Partnership Borrowings on the Properties that are currently beneficially owned or which will be acquired in the future by the Sub-Partnership.
18. In accordance with the XXXXXXXXXX requirement, the Taxpayer will provide Guarantees on the XXXXXXXXXX -insured Sub-Partnership Borrowings.
19. The Taxpayer will receive no consideration for providing Guarantees in respect of the XXXXXXXXXX -insured Sub-Partnership Borrowings nor will any benefit be received by, or any form of compensation (including reciprocal guarantees) be paid or payable to, the Taxpayer or its unit holders in respect of the Guarantees.
20. XXXXXXXXXX -insured Sub-Partnership Borrowings will be incurred to either (i) finance acquisitions of new Properties by the Sub-Partnership, or (ii) refinance existing Sub-Partnership Borrowings that were incurred for the purposes of (i). Such refinancing of the existing Sub-Partnership Borrowings would be made by incurring new debt and paying down the existing Sub-Partnership Borrowings before or at maturity.
21. Master LP will not provide any guarantee for the Sub-Partnership Borrowings on which a Guarantee will be provided by the Taxpayer.
22. The Taxpayer will not guarantee any of the obligations of Master LP, Master LP will not guarantee any of the obligations of the Taxpayer and the Sub-Partnership will not guarantee any of the obligations of the Taxpayer.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the proposed transactions is to obtain XXXXXXXXXX insurance on the Sub-Partnership Borrowings because XXXXXXXXXX -insured Sub-Partnership Borrowings typically bear a lower rate of interest and qualify for a higher loan-to-value ratio compared to non-insured mortgages.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided further that 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 Guarantees to be provided by the Taxpayer as described above, will not, in and by themselves, disqualify the Taxpayer 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 Master LP or the Sub-Partnership operates as principal, as opposed to agent on behalf of the Taxpayer, with respect to their respective business activities;
(b) whether the Taxpayer qualifies as a unit trust within the meaning of paragraph 108(2)(a), a mutual fund trust within the meaning of subsection 132(6), or a real estate investment trust within the meaning of subsection 122.1(1); 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 income tax ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 Advance Income Tax Rulings, dated May 17, 2002, and is binding on the Canada Revenue Agency with respect to Guarantees entered into within six months of the date of this letter.
XXXXXXXXXX
For Director
Business and Partnerships Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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