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) Do the conditions, limitations, qualifications and comments set out in the original ruling continue to apply with respect to the amended Plan? (2) Pursuant to subsection 5(1) and paragraph 6(1)(a) of the Act, there is no amount included in the income of a participant on the redemption of the participant's notional units in the participant's account that are distributed by the Trustee as a return of a participant's capital contributions? (3) Pursuant to paragraph 6(1)(g) of the Act, amounts distributed to a participant on the redemption of notional units in the participant's employer contribution account are included in the participant's income in the year in which those notional units are redeemed?
Position: (1) Yes; (2) Yes; (3) Yes
Reasons: (1) The amended Plan continues to constitute an employee benefit plan as defined in subsection 248(1) of the Act. (2) Under the amended plan, no amount of the redemption of the participant's notional units in the participant's account will be included in income under subsection 5(1) or paragraph 6(1)(a) of the Act. The redemption of a participant's notional units in the participant's account is a return of the participant's capital contribution and is excluded from income by virtue of 6(1)(g)(ii). (3) Under the amended plan, the redemption of notional units in the participant's employer contribution account will be included in the participant's income pursuant to paragraph 6(1)(g) of the Act.
Re: Advance Income Tax Ruling Request
We are writing in response to your letter dated XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named taxpayer and the information provided in your emails sent XXXXXXXXXX and your telephone calls (XXXXXXXXXX).
We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in this ruling request:
(i) is in an earlier return of the taxpayer or a related person;
(ii) is 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) is under objection by the taxpayer or a related person;
(iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) is the subject of a Ruling previously issued by the Directorate, other than in the Original Ruling or in the Supplemental Ruling
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter, (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 definitions apply in respect of this ruling:
"Administrative Expenses" means all expenses incurred in earning the income of the Trust and costs related to the normal operation of the Trust, including, but not limited to, the collection and account for Trust contributions, Record Keeper fees, Trustee fees, reimbursements of expenses and liabilities incurred by the Trustee in connection with the activities of the Trust, and accounting and tax filing costs of the Trust.
"Declaration of Trust" means the declaration of trust entered into by the Trustee and Employer, dated XXXXXXXXXX.
"Effective Date" means a date to be determined by the Employer that is after the date the Employer receives a favourable advance income tax ruling.
"Employer" means XXXXXXXXXX, a limited partnership formed under the Limited Partnership Act (XXXXXXXXXX) who deals with the Canada Revenue Agency's ("CRA") XXXXXXXXXX Tax Services Office and files their returns with the XXXXXXXXXX Tax Centre.
"Employer Contributions" means contributions made by the Employer to the Trust under the Plan.
"Notional Unit" represents a proportionate interest of a Participant as a beneficiary of the Trust entitling the Participant to participate in the Trust in accordance with the terms of the Plan, and more specifically, to receive distributions from the Trust and proceeds in the event of termination or winding-up of the Trust. The purchase price of each Notional Unit is fixed at $XXXXXXXXXX, unless adjusted by the Trustee as a result of a subdivision, consolidation, amalgamation, combination, merger or other reorganization affecting the Trust that, in the opinion of the Trustee, in its discretion, warrants an adjustment to this purchase price.
"Original Ruling" refers to the Advance Income Tax Ruling issued by the Income Tax Rulings Directorate to the taxpayer dated XXXXXXXXXX, 2007 (2006-020646), as amended by the Supplemental Ruling dated XXXXXXXXXX, 2007 (2007-025118).
"Participants" mean eligible employees of Employer who have elected to participate and enrol in the Plan.
"Participant's Account" means an account established and maintained in the name of each Participant to record the Notional Units of the Participant purchased with contributions made by the Participant under the Plan.
"Participant's Employer Contribution Account" means an account established and maintained in the name of each Participant to record the Notional Units awarded to the Participant in connection with Employer Contributions.
"Partnership" means XXXXXXXXXX, a limited partnership formed under the Limited Partnership Act (XXXXXXXXXX).
"Plan" means the XXXXXXXXXX together with the Declaration of Trust, the terms of which govern the Participants' participation in the Plan and investment in the Trust. The Plan was formerly known as the XXXXXXXXXX.
"Record Keeper" means any administrator(s) or agent(s) appointed by the Employer from time to time to maintain a register related to the ownership, transfer and redemption of Units and other records, or undertake other administrative tasks relating to the operation of the Plan.
"Supplemental Ruling" means the Supplemental Ruling dated XXXXXXXXXX, 2007 (2007-025118).
"Trust" means the trust created under the Declaration of Trust and that invests in the Partnership as a limited partner. The Trust is not a unit trust as defined in subsection 108(2) of the Act.
"Trust Termination Event" means a transaction that may result in the sale or other monetization of all or substantially all of the assets of the Trust.
"Trustee" means the duly appointed trustee under the Declaration of Trust from time to time.
Unless otherwise noted, all references to currency are to Canadian dollars.
Our understanding of the facts, proposed amendment and purpose of the proposed amendment is as follows:
1. The general partners of the Partnership are XXXXXXXXXX and XXXXXXXXXX. The limited partners of the Partnership consist of:
2. Employer currently employs approximately XXXXXXXXXX employees. These employees are engaged by Employer to provide services to Employer in carrying on its business of XXXXXXXXXX.
3. The Partnership currently derives its income from the business of XXXXXXXXXX. It does not earn investment-type income.
4. Following receipt of the Original Ruling, Employer established the Plan and settled the Trust with an initial investment of $XXXXXXXXXX.
5. The Trust is administered by the Trustee or any person(s) to whom the Trustee delegates its administrative powers and duties.
6. The beneficiaries of the Trust are the Participants.
7. Upon enrolment in the Plan, Participants may specify a contribution amount to be payable annually in a lump sum or through regular payroll deductions, to purchase Notional Units under the Plan. Notional Units are allocated to the Participant's Account on the basis of one Notional Unit for each $XXXXXXXXXX contribution made by the Participant. Participants' contributions are made with after-tax dollars. The rate at which the contributions are made may be changed or discontinued by the Participant by giving notice of such change or discontinuance.
8. Employer may allow Participants to make additional lump sum contributions to purchase Notional Units from time to time. Employer specifies the manner in which such additional contributions may be made. The Employer may also, in its discretion, limit, reduce or suspend a Participant's right to make contributions under the Plan in certain circumstances and from time to time. Contributions by a Participant are currently limited to $XXXXXXXXXX in any one calendar year.
9. Employer makes Employer Contributions to the Trust of XXXXXXXXXX ($XXXXXXXXXX) for each employee who enrols in the Plan and becomes a Participant such that at least one Notional Unit is allocated to each Participant under the Plan. This Notional Unit is recorded in the Participant's Employer Contribution Account and identified as a Notional Unit awarded to the Participant under the Plan in connection with an Employer Contribution.
10. Employer, from time to time, in its discretion, may make additional Employer Contributions in respect of Participants resulting in awards of Notional Units to Participants recorded in the Participant's Employer Contribution Account on the basis of one Notional Unit for each XXXXXXXXXX dollars ($XXXXXXXXXX) Employer Contribution made in respect of that Participant. As of XXXXXXXXXX, the Employer has made $XXXXXXXXXX Employer Contributions in respect of Participants since the Plan's inception.
11. Pursuant to the terms of the Plan, no Participant shall have any right or entitlement to call for any distribution whatsoever from the Trust by the Trustee. Furthermore, nothing in the Plan obligates the Partnership to make distributions to the Trust.
12. A Record Keeper has been appointed to perform the administrative tasks needed to operate the Trust, including establishing and maintaining a separate account in the name of each Participant, recording in each such account the number of Notional Units standing to the credit of the Participant and distributions payable to the Participant, and delivering statements of account and tax reporting statements to each Participant.
13. Redemptions under the Plan are restricted and subject to the approval of the Trustee. The current terms and conditions pertaining to the redemption of a Participant's Notional Units are as follows:
(a) A Participant may terminate his or her participation in the Plan and request voluntary redemption of all, but not less than all, of his or her Notional Units in the event of financial hardship, on retirement or as otherwise permitted by the Trustee (as described in paragraph 14 below), at a fixed redemption price of $XXXXXXXXXX per Notional Unit. The voluntary redemption is requested by delivery of a redemption notice to the Trustee that will be subject to the approval and acceptance by the Trustee.
(b) If a Trust Termination Event occurs after a request for redemption has been made, the request for redemption will be revoked in respect of Notional Units for which the redemption price has not been paid.
(c) Mandatory redemption of all of a Participant's Notional Units and termination of participation in the Plan will occur upon death of the Participant, the cessation of the Participant's employment with the Employer (except as a result of retirement) or a Participant being legally adjudged incompetent or becoming bankrupt.
(d) If there is no Trust Termination Event in effect at the effective time of a mandatory redemption, the redemption price of the Notional Units on a mandatory redemption is $XXXXXXXXXX per Notional Unit. If, however, a Trust Termination Event is in effect at the time a mandatory redemption becomes effective, the redeeming Participant may instead receive a pro rata share of the Trust assets to be distributed on termination.
14. The Trustee may exercise its discretion to permit voluntary redemptions of all, but not less than all, of a Participant's Notional Units from time to time by sending out notice to each Participant of such a "redemption window" at least XXXXXXXXXX days in advance of the opening of the redemption window. The notice will advise the Participant that he or she must irrevocably elect in the form specified by the Trustee, on or before a date specified in the notice (the date shall be at least XXXXXXXXXX days before the opening of the redemption window), to either redeem all of the Participant's Notional Units (subject to paragraph 15 below) under the Plan during this redemption window or waive this right. The Participant will be advised that the failure to make such an election on or before the date specified in the notice will be treated for all purposes as an election made at the end of the day on the specified date to irrevocably waive any right to redeem during the redemption window.
15. All of the Notional Units of a Participant, whether purchased by the Participant or awarded to the Participant in connection with Employer Contributions are redeemed on any voluntary or mandatory redemption, subject to the approval of the Trustee, and the first Notional Unit awarded to the Participant as a result of an Employer Contribution will be the last Notional Unit of the Participant to be redeemed.
16. The Employer, from time to time, makes Employer Contributions to the Trust that are not in respect of any Participant and may be equal to the cost of Administrative Expenses of the Trust. No Notional Units are awarded or allocated to any Participant or any other person in respect of these Employer Contributions.
17. From time to time, Employer or the Partnership may make short-term loans to the Trust to facilitate the administration of the Trust.
18. Subject to payment of redemptions, liabilities and Administrative Expenses and provision for reserves, contributions received by the Trustee from Participants and/or Employer, as provided in paragraphs 7, 8, 9 and 10 above, are used by the Trustee to make capital contributions to the Partnership.
19. The Trust's capital contributions to the Partnership are generally made in response to capital calls to all or certain other limited partners of the Partnership.
20. The Trustee, on behalf of the Trust, is a party to the limited partnership agreement of the Partnership. The Trust is afforded the rights of a limited partner with respect to distributions from the Partnership related to equity contributions. Unlike the other limited partners, the Trust does not have any voting rights with respect to its interest in the Partnership or the right to lend money to the Partnership.
21. As a limited partner, the Trust has been allocated a Partnership interest, based on its capital contributions to the Partnership as a percentage of aggregate capital contributions to the Partnership by all partners of the Partnership. The Trust is entitled to share in distributions to limited partners of the Partnership on account of capital contributions pro rata based on its relative Partnership interest. Such distributions may arise, without limitation, by virtue of ongoing operations of the Partnership or any asset sale, monetization or like transaction in respect of the Partnership.
22. As a limited partner, the Trust is allocated taxable income and losses of the Partnership at the end of each fiscal year of the Partnership based on relative distributions received by it in such fiscal year relative to aggregate distributions received by all limited partners in such fiscal year on account of equity contributions.
23. If the Trust has allowable capital losses that exceed taxable capital gains in any taxation year, the excess will not be allocated to Participants but may be deducted by the Trust from taxable capital gains in future taxation years. Similarly, if the Trust has a non-capital loss in any taxation year, the loss is not allocated to Participants but may be deducted by the Trust from income and taxable capital gains in up to XXXXXXXXXX future taxation years.
24. If the Trust were to sell its Partnership interest, be it by virtue of a mandatory sale under the limited partnership agreement or under a put/call agreement between one or more limited partners and the Trust, the Trust would realize proceeds in respect of such sale that may equal, exceed or be less than the amount of capital contributions made by the Trust to the Partnership prior to such time.
25. The Trust will determine its taxable income for the year, including taxable capital gains and allowable capital losses and any net capital losses for prior years that the Trust is permitted to deduct, pursuant to the provisions of the Act.
26. Subject to the payment on account of redemptions, liabilities and expenses of the Trust and provision for reserves, if sufficient cash distributions are received by the Trust from the Partnership in a calendar year, such cash distributions are notionally allocated pro rata to Participants based on the number of Notional Units of the Participant on the date of the distribution from the Partnership relative to the number of Notional Units issued and outstanding at that time. Amounts notionally allocated to a Participant in a calendar year and any other cash distributions from the Partnership which the Trustee allocates to the Participant for that year are distributed to the Participant in that calendar year.
27. The Trustee intends to maximize the payments by the Trust to the Participants each year so as to reduce the income of the Trust for purposes of Part I of the Act to the maximum extent permitted by the Act.
28. The Trustee has the discretion to designate all or a portion of a cash distribution to Participants as a distribution of income or alternatively, a return of capital contributions.
29. Where an amount is paid from the Trust to a Participant in a taxation year and that distribution is deducted by the Trust in the computation of its income, the amount is designated as a distribution of income to the Participant. Where an amount distributed to a Participant is not deducted by the Trust in the computation of its income, the amount may, to the extent of the Participant's contributions to the Plan not previously returned, be designated by the Trustee as a return of capital contributions to the Participant for the year.
30. To the extent all amounts contributed by a Participant have been previously returned to the Participant as a return of capital contributions, any subsequent payments from the Trust will be designated as a distribution of income, regardless of the source of the amount to the Trust.
31. The value of the Trust's assets distributed to a Participant on the wind-up of the Trust will be treated first as a return of capital contributions, to the extent all amounts contributed by the Participant have not previously been returned to the Participant as a return of capital contribution, and second, as a distribution of income.
Proposed Plan Amendments
32. The Employer proposes to amend the Plan, effective on the Effective Date, so that the Trustee may exercise its discretion to permit voluntary redemptions by a Participant during a "redemption window" of a portion (but not all) of the Participant's Notional Units up to a maximum number of Notional Units specified in a notice sent out to each Participant at least XXXXXXXXXX days in advance of the opening of the redemption window, subject to the limitations described in paragraphs 33, 34, 35, 36, 37 and 38.
33. The notice sent by the Trustee will advise the Participant that, if the Participant wishes to redeem a portion of the Participant's Notional Units during the redemption window, he or she must irrevocably elect in the form specified by the Trustee, on or before a date specified in the notice (the date shall be at least XXXXXXXXXX days before the opening of the redemption window) to redeem the number of Notional Units elected by the Participant, subject to the limitations set out in the Plan and the notice. The Participant will be advised that the failure to make such an election on or before the date specified in the notice will be treated for all purposes as an election made at the end of the day on the specified date to irrevocably waive any right to redeem during the redemption window.
34. The redemption price of the Notional Units pursuant to a redemption election will be $XXXXXXXXXX per Notional Unit, unless the redemption price of a Notional Unit is adjusted as a result of a reorganization affecting the Trust that, in the opinion of the Trustee, warrants such adjustment.
35. Any redemption election made by a Participant will be subject to the acceptance and approval of the Trustee.
36. None of the Notional Units in the Participant's Employer Contribution Account as at the effective date of the redemption can be redeemed pursuant to a redemption election unless and until all, but not less than all, of the outstanding Notional Units in the Participant's Account as at that date have been redeemed.
37. The first Notional Unit awarded to the Participant as a result of an Employer Contribution will continue to be recorded in the Participant's Employer Contribution Account and will not be redeemed in a redemption window pursuant to any redemption election.
38. The Participant will continue to be a Participant in the Plan following the redemption, except with respect to the redeemed Notional Units.
Purpose of the Proposed Amendments
39. The purpose of the Plan amendments is to permit a Participant to elect to redeem a portion of the Participant's Notional Units during a redemption window that may be opened by the Trustee from time to time, without ceasing to be a Participant in the Plan.
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed amendments to the Plan and the purpose of the proposed amendments to the Plan and the Proposed Amendments are completed as described above, we rule as follows:
A. The above proposed amendments will not, in and of themselves, cause the rulings given in the Original Ruling or the Supplemental Ruling to cease to be binding on the CRA.
The above 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 Income Tax Information Circular 70-6R5, "Advance Income Tax Rulings", dated May 17, 2002, and is binding on the CRA provided that the proposed amendments are completed by XXXXXXXXXX.
The fixed redemption price is a question of fact and nothing in this letter should be construed as implying the CRA's acceptance of any method for the determination of this value for purposes of the Plan.
Nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any of the tax consequences relating to the facts and proposed amendments described above other than those specifically described in the ruling.
This letter is based solely on the facts and proposed amendments described above. The documentation submitted with your request does not form part of the facts and proposed amendments and any reference thereto are provided solely for the convenience of the reader.
Deferred Income Plans Section II
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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