2017 Ruling 2017-0687061R3 - Whether re-designation of LPUs is a disposition.

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: The Partnership will issue a new series of limited partnership units (“LPUs”) under an option provided for in the current partnership agreement. The question is whether the re-designation of LPUs that are held by existing partners would result in a disposition of those LPUs by the current partners.

Position: No.

Reasons: The rights that would be attached to the new LPUs are similar to the rights of the existing LPUs and as such the changes thereto would be within the parameters set out in previous rulings wherein it was confirmed that there would be no disposition of partnership units on the reclassifications of such units.

XXXXXXXXXX							2017-068706

XXXXXXXXXX, 2017

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

We are writing in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayer (the “Taxpayer”). We also acknowledge the information provided in various emails and telephone conversations.

To the best of your knowledge and that of the Taxpayer, none of the issues involved in the ruling request is:

i. in a previously filed tax return of any of the Taxpayer or a related person;

ii. being considered by a tax services office or a tax centre in connection with a previously filed tax return of any of the Taxpayer or a related person;

iii. under objection by the Taxpayer or a related person;

iv. the subject of a current or completed court process involving the Taxpayer or a related person; or

v. the subject of a ruling request previously considered by the Directorate.

Unless specified otherwise, all statutory references herein are to provisions or parts of the Income Tax Act (Canada), R.S.C. 1985 (5th Supp.) c. 1, as amended to the date hereof (the “Act”) and all references to monetary amounts are in Canadian dollars unless otherwise specified.

DEFINITIONS:

“CBCA” means the Canada Business Corporations Act, R.S.C. 1985, as amended;

“Class A Units” means Units which are classified as being Class A Units of the Partnership;

“Class F Units” means Units which are classified as being Class F Units of the Partnership;

“Class S Units” means Units which are classified as being Class S Units of the Partnership;

“Class T Units” means Units which are classified as being Class T Units of the Partnership;

“Class LT Units” means Units which are classified as being Class LT Units of the Partnership;

“Class MT Units” means Units which are classified as being Class MT Units of the Partnership;

“CRA” means the Canada Revenue Agency;

“Existing Units” means the issues that are currently issued and outstanding, being Class A Units, Class F Units, Class S Units, and Class T Units;

“General Partner” means XXXXXXXXXX, a Canadian resident;

“Initial Limited Partner” means XXXXXXXXXX, a Canadian resident;

XXXXXXXXXX

“Limited Partner” means a person that is a limited partner of the Partnership through subscription or transfer of Units;

“Manager” means XXXXXXXXXX, a Canadian resident;

“Limited Partnership Agreement” means the limited partnership agreement dated XXXXXXXXXX made between the General Partner, XXXXXXXXXX and the Limited Partners;

“Manager” means XXXXXXXXXX, a Canadian resident;

“NAV” means net asset value;

“New Class Units” means Class LT and Class MT units collectively;

“Paragraph” refers to a paragraph in this letter;

“Partnership” refers to the Taxpayer, a Canadian partnership as defined in subsection 102(1) of the Act;

“Proposed Transactions” means the transactions described in Paragraphs 17 through 20;

“Redemption Date” means, in respect of a Unit, the last business day of each month, and such other date(s) as the General Partner may designate, and any class or classes of Units may have fewer or more Redemption Dates in a year than other class(es);

“Re-designation” has the meaning assigned by Paragraph 18;

“Related Persons” has the meaning assigned by subsection 251(2);

“Subscription Date” means the first business day of each month and such other date(s) as the General Partner may designate;

“Unit” means a limited partnership interest in the Partnership entitling the holder of such interest to the rights provided in the XXXXXXXXXX;

“Valuation Date” means the last business day of each month, the business day immediately preceding each Subscription Date, each Redemption Date, and such other date(s) as the General Partner may designate.

FACTS:

1. The Partnership was formed under the laws of the Province of XXXXXXXXXX and became a limited partnership by filing a Declaration of Limited Partnership under the XXXXXXXXXX on XXXXXXXXXX.

2. The Partnership is governed by the Limited Partnership Agreement, made between the General Partner, the Initial Limited Partner and the Limited Partners. The General Partner holds XXXXXXXXXX% interest in the Partnership.

3. The General Partner was incorporated under the CBCA on XXXXXXXXXX. The General Partner is generally responsible for the management and control of the business and affairs of the Partnership in accordance with the terms of the Limited Partnership Agreement. The General Partner has the power and authority to execute and deliver any instrument, deed, agreement, or document necessary for or incidental to carrying out the activities of the Partnership for and on behalf of and in the name of the Partnership.

4. Investors become Limited Partners of the Partnership by subscribing for or acquiring Units. All Limited Partners are resident in Canada. Most of the Limited Partners are subject to Part I tax under the Act with exempt Limited Partners collectively holding approximately XXXXXXXXXX% of the interest in the Partnership. At the last Valuation Date on XXXXXXXXXX, none of the Limited Partners, either alone or as a group of related persons, were in a position to exercise control over matters on which Limited Partners were entitled to vote.

5. The General Partner has appointed the Manager to direct the affairs of the Partnership and to provide day-to-day management services to the Partnership, management of the Partnership’s portfolio on a discretionary basis and distribution of the Units of the Partnership.

6. The Partnership’s investment objective is to achieve preservation and growth of capital through superior securities selection. In selecting investments for the Partnership, the Manager will primarily focus on the securities of companies which the Manager believes to be inefficiently priced based on any number of factors. The Manager engages in making investments for the Partnership across various industries, geographies and size of companies. At the last Valuation Date, on XXXXXXXXXX, the total NAV of the Partnership was $XXXXXXXXXX.

7. Units are distributed by offering memorandum to investors resident in XXXXXXXXXX pursuant to available prospectus exemptions under the securities laws of those jurisdictions.

8. The Units are offered on a continuous basis but are restricted to persons who have the capacity and competence to enter into and be bound by the Limited Partnership Agreement.

9. Two classes of Units, issuable in series, are currently being offered:

(a) Class A Units are available to all investors who meet the minimum investment criteria. Investors in Class A Units are subject to a management fee of XXXXXXXXXX% of their NAV. Investors may redeem their Units monthly with a XXXXXXXXXX notice period (or shorter, at the Manager’s discretion). Investors in Class A Units are subject to a redemption fee of XXXXXXXXXX% of the NAV of the Units redeemed, if the Units are redeemed within XXXXXXXXXX of purchase.

(b) Class T Units are generally available only to RRSP-eligible investment funds managed by the Manager and are not subject to any management fee.

10. The Partnership has outstanding but no longer offers for sale two other classes, Class F and Class S Units. The terms of these Units are the same as Class A.

11. The Limited Partnership Agreement allows the General Partner to create new classes of Units to be issued by the Partnership. Any new classes of Units may be offered in different currencies, may have different management fees from other classes, may be subject to different profit allocation sharing with the General Partner and may have different redemption or other features from other classes.

12. The Manager is entitled to receive management fees from the Partnership in amounts and intervals as agreed upon by the General Partner and the Manager, which are subject to change provided such fees are fully disclosed to the purchaser of the Units affected at the time of purchase. Fees charged by the Manager may be greater in respect of one class and or series of Units than for another class or series of Units. The General Partner must give the Limited Partners not less than XXXXXXXXXX notice of any proposed change to the method of calculation of such fees.

13. The General Partner allocates income and losses for tax purposes in a manner that accounts for Units which are purchased or redeemed throughout a fiscal year, the class and/or series of such Units, the fees payable by the Partnership, distributions made by the Partnership, the timing of receipt of income or realization of gains or losses, among other factors deemed relevant by the General Partner.

14. In general, the allocation of income and losses is based on the proportionate NAV of the Units held by a particular Limited Partner, which is determined at various Valuation Dates. Some classes of Units provide that the General Partner may be entitled to an additional XXXXXXXXXX% distribution based on a formula in the Limited Partnership Agreement that provides for a minimum return for the Units. For all Units, the minimum return rate XXXXXXXXXX is currently set at XXXXXXXXXX%.

15. Pursuant to the terms of the Limited Partnership Agreement, the General Partner may from time to time convert or re-designate one or more Units of any one class or series as being Units of another class or series.

16. Units may only be transferred with the consent of the Manager and will generally not be permitted. The transfer or resale of Units will also be subject to restrictions under the applicable securities legislation.

PROPOSED TRANSACTIONS

17. It is proposed that two new classes of Units will be offered to all existing and prospective Limited Partners:

(a) Class LT Units will be available to all investors who meet the minimum investment criteria. Investors in Class LT Units will be subject to a management fee of XXXXXXXXXX% on their NAV. Investors may redeem their units monthly with a XXXXXXXXXX notice period (or shorter, at the Manager’s discretion).

(b) Class MT Units will be available to all investors who meet the minimum investment criteria. Investors in Class MT Units will be subject to a management fee of XXXXXXXXXX% on their NAV. Investors may redeem their units monthly with a XXXXXXXXXX notice period (or shorter, at the Manager’s discretion).

All other terms of the Class LT and Class MT units will be identical to the terms of the Class A Units as described in Paragraphs 9, 18 and 19.

18. The Partnership will provide current Class A, Class F and Class S Limited Partners with the option to re-designate all or a portion of their current Class A, Class F or Class S Units for Class LT and/or Class MT Units (the “Re-designation”).

19. There will be no cost to the Class A, Class F or Class S Limited Partners with respect to the Re-designation. The Class A, Class F and Class S Limited Partners will also not receive any proceeds of disposition as a result of the Re-designation, and the Class A, Class F or Class S Units will not be cancelled subsequent to the Re-designation.

20. If a Limited Partner chooses to re-designate their Units, the total NAV of their Class A, Class F or Class S Units will be equal to the total NAV of the New Class Units re-designated on the effective date.

ADDITIONAL INFORMATION

21. There will be no transfer of economic value as a result of either the issuance of New Class Units or the Re-designation of the Existing Units into New Class Units.

22. The issuance of New Class Units will not result in the cessation of the Partnership by virtue of the XXXXXXXXXX or by operation of partnership law.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to provide current Class A, Class F and Class S Limited Partners and prospective Limited Partners with the opportunity to benefit from a long-term oriented class, which will aim to provide investors with fewer uncertainties regarding the return on their investment. Furthermore, longer notice periods will provide longer-term capital which will allow the Partnership to build stronger positions in high-conviction investment opportunities and maximize returns in periods of market turmoil.

RULINGS PROVIDED

Provided that

(a) the preceding statements constitute a complete and accurate disclosure of all of the relevant Facts, Proposed Transactions, Additional Information, 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, we rule that:

A. The creation of New Class Units for offer to existing and prospective investors will not, in and by itself, result in a disposition by any of the Limited Partners of his or her Units.

B. The Re-designation of any particular Limited Partner’s Existing Units as Class LT Units or Class MT Units, as described in Paragraphs 18 and 19, will not, in and of itself, result in the disposition of the Existing Units by any of the particular Limited Partner.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R7 dated April 22, 2016, and are binding on the CRA provided that the Proposed Transactions are commenced are entered into on or before XXXXXXXXXX.

The above 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.

COMMENTS

Nothing in this letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of:

(a) the fair market value or ACB of any property;

(b) the reasonableness or fair market value of any fees or expenditures referred to herein;

(c) the reasonableness of the allocation of the Partnership’s profit or loss and whether or not section 103 of the Act would apply; and

(d) any tax consequences relating to the Facts and Proposed Transactions described herein, other than those specifically described in the rulings given above.

Yours sincerely,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate