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: Whether a MIC will be considered to be carrying on the business of a limited partnership for the purpose of paragraph 130.1(6)(b) by acquiring and holding a XXXXXXXXXX% limited partnership interest.
Position: No, based on the facts provided and section 253.1.
Reasons: Pursuant to section 253.1, for the purpose of paragraph 130.1(6)(b), a MIC that holds an interest in a partnership would not be considered to be carrying on the business of the limited partnership solely by acquiring and holding that interest, as long as the MIC's liability as a member of the partnership remains limited. However, it is a question of fact whether the MIC meets the requirements of subsection 130.1(6).
XXXXXXXXXX
2013-048791
XXXXXXXXXX, 2013
Dear XXXXXXXXXX:
Re: Advance Income Tax Rulings Request
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the above named taxpayer. We also acknowledge the information provided in subsequent emails and during our various telephone conversations in connection with your request (XXXXXXXXXX).
This letter is based solely on the Facts and Proposed Transactions described below. Any documentation submitted in respect of 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.
We understand that, to the best of your knowledge and that of the taxpayer involved, none of the issues involved in the ruling request:
a) is in an earlier return of the taxpayer or a related person;
b) 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;
c) is under objection by the taxpayer or a related person;
d) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; or
e) is the subject of a ruling previously issued to the taxpayer by the Directorate.
Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985, 5th Supplement, c.1, as amended, (the "Act") and all terms used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.
Our understanding of the relevant definitions, the Facts, Proposed Transactions and the Purpose of the Proposed Transactions is as follows:
DEFINITIONS
In this letter the following terms or expressions have the meanings specified:
"Asset Purchase Agreement" means the proposed Subsection 97(2) Asset Purchase Agreement between Opco and the LP, as described in 25 below.
"Baseline Price" is defined in the Partnership Agreement and essentially refers to the total of the acquisition cost, financing cost, cost of improvements, development expenses, operating expenses, sales and marketing expenses incurred by the LP with respect to a real property plus a reasonable allocation of general expenses which are not otherwise related to the ownership and development of the real property.
"BCA" means the Business Corporations Act (XXXXXXXXXX).
"Borrower" means XXXXXXXXXX.
"Child1" means XXXXXXXXXX.
"Child2" means XXXXXXXXXX.
"Child3" means XXXXXXXXXX.
"Corporation A" means XXXXXXXXXX.
"CRA" means the Canada Revenue Agency.
"Family Trust" means the XXXXXXXXXX.
"GP Co" means the "taxable Canadian corporation", to be incorporated and named "XXXXXXXXXX" under the BCA, as described in 18 below.
"Holdco" means XXXXXXXXXX.
"Individual1" means XXXXXXXXXX.
"Individual2" means XXXXXXXXXX.
"Individual3" means XXXXXXXXXX.
"Individual4" means XXXXXXXXXX.
"Individual5" means XXXXXXXXXX.
"Individual6" means XXXXXXXXXX.
"LP" means XXXXXXXXXX, a limited partnership to be established under the laws of the Province of XXXXXXXXXX, as described in 20 below.
"ManagerCo" means XXXXXXXXXX.
"Management Agreement" means the proposed management agreement between the LP and ManagerCo whereby ManagerCo agrees to provide management services to the LP for a fee, as more particularly described in 23 below.
"MIC" means a "mortgage investment corporation" as defined in subsection 130.1(6).
"Mr. B" means XXXXXXXXXX.
"Opco" means XXXXXXXXXX.
"Parent1" means XXXXXXXXXX.
"Parent2" means XXXXXXXXXX.
"Partnership Agreement" means the proposed limited partnership agreement between GP Co and Corporation A in respect of the LP, as more particularly described in 21 below.
"Property" means the real property located in the Province of XXXXXXXXXX at the municipal address of XXXXXXXXXX.
FACTS
1. Opco is a corporation continued pursuant to the laws of the Province of XXXXXXXXXX. Opco is extra-provincially registered to do business in XXXXXXXXXX. It is a "taxable Canadian corporation" within the meaning of subsection 89(1).
2. Opco currently qualifies as a MIC under subsection 130.1(6) and is deemed to be a "public corporation" under subsection 130.1(5).
3. The directors and officers of Opco are as follows:
a. Parent1 -XXXXXXXXXX;
b. Child1 -XXXXXXXXXX;
c. Child2 -XXXXXXXXXX;
d. Individual1 -XXXXXXXXXX;
e. Individual2 -XXXXXXXXXX, and
f. Individual5 -XXXXXXXXXX.
4. Parent1 is the father of each of Child1, Child2, and Child3. As such, Parent1, Child1, Child2, and Child3 are all related persons within the meaning of subsection 251(2). Parent2 is the mother of each of Child1, Child2, and Child3. As such, Parent2, Child1, Child2, and Child3 are all "related persons" within the meaning of subsection 251(2). Parent2 and Parent1 were married at one time but have since been divorced. Accordingly, Parent1 and Parent2 are not related persons within the meaning of subsection 251(2). Child1, Child2, and Child3 are all over the age of 18 years.
5. Opco currently has four classes of shares outstanding: Class A voting shares, Class B non-voting shares, Class D non-voting shares and Class F non-voting shares. The Class A voting shares in Opco are presently held by the following individuals:
a. Child1 -XXXXXXXXXX Class A voting shares;
b. Child2 -XXXXXXXXXX Class A voting shares;
c. Individual2 -XXXXXXXXXX Class A voting shares; and
d. Individual3 - XXXXXXXXXX Class A voting shares.
6. Individual2 and Individual3 are not related to Parent1, Child1, Child2, and Child3 within the meaning of subsection 251(2).
7. As at XXXXXXXXXX, there were XXXXXXXXXX Class B non-voting shares, XXXXXXXXXX Class D non-voting shares, and XXXXXXXXXX Class F non-voting shares issued and outstanding in Opco. The Class B, Class D, and Class F non-voting shares are widely held by the above directors/officers/shareholders of Opco and the public.
8. The number of Class B and Class D non-voting shares in Opco owned by Parent1, Child1, Child2 and Child3 are as follows:
a. Parent1 -XXXXXXXXXX Class B non-voting shares and XXXXXXXXXX Class D non-voting shares;
b. Child1 -XXXXXXXXXX Class B non-voting shares;
c. Child2 -XXXXXXXXXX Class B non-voting shares;
d. Child3 (jointly with his spouse) -XXXXXXXXXX Class B non-voting shares;
e. Child1, Child2, Child3 and Parent2, as joint owners -XXXXXXXXXX Class B non-voting shares.
No Class F non-voting shares are owned by Parent1, Child1, Child2 or Child3.
9. Individuals related to Parent1, Child1, Child2 and/or Child3 are owners of Class B and Class F non-voting shares in Opco (see Appendix). Their holdings represent XXXXXXXXXX% of total Class B non-voting shares and XXXXXXXXXX% of total Class F non-voting shares outstanding, respectively.
10. Other than as specifically set out in 5, 6, 8, and 9 above, none of the other shareholders in Opco are related to Parent1, Child1, Child2, or Child3 within the meaning of subsection 251(2).
11. ManagerCo is a corporation incorporated pursuant to the laws of the Province of XXXXXXXXXX and is extra-provincially registered to do business in XXXXXXXXXX. It is a "taxable Canadian corporation" and a "private corporation" within the meaning of subsection 89(1). Parent1 is the sole director of ManagerCo, and the officers are Parent1 (XXXXXXXXXX), Individual 5 (XXXXXXXXXX), Individual2 (XXXXXXXXXX), Child1 (XXXXXXXXXX), Child2 (XXXXXXXXXX), Individual6 (XXXXXXXXXX), and Individual4 (XXXXXXXXXX).
12. ManagerCo and Opco have entered into a management services agreement dated XXXXXXXXXX, under which ManagerCo administers Opco's business affairs on a day-to-day basis, provides a business office for and ongoing advice to Opco, raises investment capital for Opco, and, as may be required from time to time, provides Opco with real estate, mortgage and financing services.
13. ManagerCo is a wholly-owned subsidiary of Holdco.
14. Holdco is a corporation incorporated pursuant to the laws of Canada and is extra-provincially registered to do business in XXXXXXXXXX. It is a "taxable Canadian corporation" and a "private corporation" within the meaning of subsection 89(1). Parent1 is the sole director of Holdco and the officers of Holdco are Parent1 (XXXXXXXXXX), Individual2 (XXXXXXXXXX) and Individual4 (XXXXXXXXXX).
15. The shareholders of Holdco are Parent1 and the Family Trust. The trustees of the Family Trust are Parent1 and Individual2. The beneficiaries of the Family Trust are Child1, Child2, and Child3, and the children of Child1, Child2, and Child3. The settlor of the Family Trust is Parent2. The Family Trust was established on XXXXXXXXXX.
16. Corporation A is a corporation incorporated pursuant to the laws of the Province of XXXXXXXXXX. It is a "taxable Canadian corporation" and a "private corporation" within the meaning of subsection 89(1). It is engaged in the XXXXXXXXXX business. The sole shareholder of Corporation A is Mr. B. Since Mr. B is Parent1's XXXXXXXXXX, Mr. B is related to Parent1 within the meaning of subsection 251(2).
17. In XXXXXXXXXX, Opco made arm's length loans to the Borrower in the ordinary course of its business. As security for these loans, Opco took a security interest over the Property (which at that time was owned by the Borrower). When the Borrower defaulted on the loans made by Opco, Opco foreclosed on its mortgage. In XXXXXXXXXX, Opco became the registered owner of the Property. The Property has been listed for sale by Opco for over XXXXXXXXXX years.
PROPOSED TRANSACTIONS
18. Mr. B will incorporate GP Co in the Province of XXXXXXXXXX. GP Co will be extra-provincially registered in XXXXXXXXXX, and in other provinces as required. The Articles of Incorporation for GP Co will specifically prevent Opco from holding shares in GP Co.
19. The shares of GP Co will at all times remain owned solely by Mr. B. Mr. B will be the sole director and officer of GP Co.
20. The LP will be established as a limited partnership under the laws of the Province of XXXXXXXXXX, in accordance with the terms of the Partnership Agreement. The business of the LP will be the management and development of real property in Canada. The general partner of the LP will be GP Co. The initial limited partner of the LP will be Corporation A. Each of GP Co and Corporation A will make an initial contribution of $XXXXXXXXXX to the LP in exchange for one unit each in the LP.
21. Pursuant to the terms of the Partnership Agreement:
a) GP Co will have exclusive authority to direct and manage the affairs of the LP, while the limited partners will not have any right to participate in the management of the LP.
b) GP Co will be solely responsible for the management and control of the LP and will conduct the affairs of LP in such a manner that the liability of the limited partner will be limited.
c) Net income or net loss is allocated XXXXXXXXXX% to the limited partners and XXXXXXXXXX% to GP Co.
d) GP Co will receive a payment of $XXXXXXXXXX plus XXXXXXXXXX on any sale of the LP's real property. If the sale price exceeds $XXXXXXXXXX, GP Co will receive an additional amount equal to XXXXXXXXXX% to XXXXXXXXXX% of the excess of the sale price over the Baseline Price.
22. In accordance with the Partnership Agreement and subject to 23 below, GP Co will manage and control the business of the LP. Corporation A, as the limited partner in the LP, will refrain from taking any part in the management or control of the business of the LP.
23. The LP will contract with ManagerCo to provide management services to the LP, including (but not limited to) all services required to assist the LP in managing and developing its real property. ManagerCo will be paid a management fee equal to XXXXXXXXXX% per year of the sum of the total loans borrowed by the LP and the total capital contributions by the partners of the LP.
24. Opco will transfer the Property to the LP in consideration for XXXXXXXXXX partnership units of the LP. Opco and the LP will jointly elect, in prescribed form and within the time referred to in subsection 96(4) to have subsection 97(2) apply to the transfer of the Property. The agreed amount will be equal to the lesser of: (i) the fair market value of the Property; and (ii) the cost amount to Opco of the Property at the time of disposition. The agreed amount will not exceed the fair market value of the Property at the time of disposition, nor will it be less than the fair market value of the non-unit consideration issued by the LP to Opco on the transaction.
25. The transaction set out in 24 above will be completed pursuant to the Asset Purchase Agreement. Under the Asset Purchase Agreement, Opco is required to concurrently execute a counterpart to the Partnership Agreement, whereby it agrees to be bound by the Partnership Agreement as a limited partner thereto, to the same extent as if it had been an original signatory to the agreement.
26. Once the LP has acquired the Property, it will manage and develop the Property.
27. Under the terms of the Partnership Agreement, the LP will be entitled to acquire additional properties for management and development either from Opco or from other third parties.
28. The Partnership Agreement will specifically restrict the LP from acquiring any property that is listed in paragraph 130.1(6)(c).
29. Opco may advance funds to the LP from time to time for working capital and development. All such advances will be on arm's length commercial terms and conditions. The LP may also obtain financing from other arm's length parties.
PURPOSE OF THE PROPOSED TRANSACTIONS
The purpose of the Proposed Transactions is to permit Opco to divest itself of any real property that requires management and development to realize its inherent value.
RULING GIVEN
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, the Proposed Transactions, and Purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, we confirm that:
Provided that the requirements of subsection 130.1(6) are otherwise met, section 253.1 will apply such that the acquisition of the limited partnership interest in the LP by Opco as described in 24 above will not, in and of itself, cause us to consider that Opco is carrying on the business of the limited partnership for the purposes of paragraph 130.1(6)(b).
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 the Information Circular 70-6R5, Advance Income Tax Rulings, dated May 17, 2002, and is binding on the CRA provided that the Proposed Transactions are completed by XXXXXXXXXX.
CAVEATS
Except as expressly stated, this letter does not imply acceptance, approval or confirmation of any other income tax implications of the Facts or Proposed Transaction described herein. For greater certainty, the CRA has not considered, reviewed, agreed to or ruled on:
a) the determination of the fair market value or cost of any property or service, or the reasonableness of any particular amount;
b) the determination of arm's length between any of the parties referred to herein;
c) the application of subsection 97(2) in respect of the transaction described in 24 above;
d) whether Opco will otherwise qualify as a MIC within the meaning of subsection 130.1(6) and is otherwise complying with all other provisions of section 130.1;
e) whether the LP will, at any particular time, be a "SIFT partnership" within the meaning of subsection 197(1) and;
f) any tax consequences relating to the Facts or Proposed Transaction described herein other than those specifically described in the ruling given above.
Yours truly,
XXXXXXXXXX
Section Manager
for Division Director
Financial Industries and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
Appendix
Class B and Class F non-voting shares in Opco held by related individuals as of XXXXXXXXXX
Class B non-voting shares:
XXXXXXXXXX.
Class F non-voting shares:
XXXXXXXXXX.
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© Her Majesty the Queen in Right of Canada, 2013
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