2017 Ruling 2017-0699531R3 - Application of section 115.2

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 an acquisition, holding, and disposition of certain “qualified investments” within the meaning of section 115.2 by partnerships through the services of a Canadian service provider and the provision of services by the Canadian service provider to the partnerships will, in and by themselves, cause non-resident partners of the top-tier partnership to be considered to be carrying on business in Canada for purposes of subsections 115(1) and 150(1) and Part XIV of the Act.

Position: No

Reasons: The services provided by the Canadian service provider to the partnerships will satisfy the requirements of subsection 115.2(2) and will not otherwise cause the non-resident members of the partnerships to be considered to be carrying on business in Canada.

XXXXXXXXXX						2017-069953

XXXXXXXXXX, 2017

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, as amended by subsequent letters dated XXXXXXXXXX and XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted Taxpayer.

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.

To the best of your knowledge, and that of the Taxpayer, this advance income tax ruling does not involve proposed transactions and/or issues that are the same as or substantially similar to transactions and/or issues that are:

(i) in a previously filed tax return of the Taxpayer or a related person;

(ii) being considered by a tax services office or tax 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) 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 Income Tax Rulings Directorate.

Unless otherwise stated, all references to a statute are to the Act, as defined below, 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 Facts, Proposed Transactions and the Purpose of the Proposed Transactions is as follows:

DEFINITIONS

The following definitions apply in this advance income tax ruling. Throughout this advance income tax ruling, the singular should be read as plural and vice versa where the circumstances so require.

“Aco” means XXXXXXXXXX.

“Act” means the Income Tax Act, R.S.C. 1985 (5th Supp.), c.1, as amended.

“affiliated” has the meaning assigned by section 251.1.

“Bco” means XXXXXXXXXX.

“Canadian service provider” has the meaning assigned by subsection 115.2(1).

“Canco” means XXXXXXXXXX.

“designated entity” has the meaning assigned by paragraph 115.2(3)(b).

“Facts” means the facts described in Paragraphs 1 - 8.

“Limited Partners” means limited partners of New Fund LP.

“LP Agreements” means the amended and restated limited partnership agreements of New Fund LP and any Project LPs.

“Management Agreement” means one or more investment management agreements to be entered into among the Manager, New Canada GP and New Fund LP or any Project LP, as the case may be, pursuant to which the Manager will provide its services to New Fund LP or the Project LP, as described in Paragraph 27.

“Manager” means XXXXXXXXXX.

“Net Profit Participation” means a share of profit in XXXXXXXXXX that is financed with a Project Investment. The interest in, and share of revenue and profits of XXXXXXXXXX, if any, that constitutes a Net Profit Participation will be negotiated and defined under each unique Project Investment.

“New Canada GP” means XXXXXXXXXX.

“New Fund LP” means XXXXXXXXXX.

“New Fund LP Agreement” means the amended and restated limited partnership agreement of New Fund LP.

“NPP Subsidiary” means one or more unlimited liability companies to be formed under the laws of XXXXXXXXXX (or one of Canada’s other provinces) that is a Subsidiary Entity, and formed for the purpose of acquiring, holding and disposing of Net Profit Participations.

“Paragraph” refers to a numbered paragraph in this advance income tax ruling.

“Partnerships” means, collectively, any and all Project LPs and New Fund LP.

“Project Investments” means private credit investments of Canadian and non-resident XXXXXXXXXX.

“Project LP” means any limited partnership that is a Subsidiary Entity, formed for the purpose of making Project Investments or holding shares of NPP Subsidiary.

“Proposed Transactions” means the transactions described in Paragraphs 9 -32.

“Qualified Investment” has the meaning assigned in subsection 115.2(1).

“Subsidiary Entity” means a corporation (other than a limited liability company), limited partnership, or limited liability company formed for the purpose of acquiring, holding, and disposing of Project Investments, Net Profit Participations, or other investments, of which New Fund LP is a shareholder, limited partner, or member of, as the case may be, and that is controlled by New Canada GP. The shares or interests in each Subsidiary Entity will be a Qualified Investment.

“taxable Canadian corporation” has the meaning set out in subsection 248(1).

“Taxpayer” means XXXXXXXXXX.

FACTS

1. Canco is a taxable Canadian corporation incorporated under the laws of the province of XXXXXXXXXX.

2. Canco has one class of shares issued and outstanding. Each of Aco and Bco holds 50 per cent of the issued and outstanding shares of the capital stock of Canco. Aco and Bco are resident in Canada for the purposes of the Act, and they are not related to, or affiliated with, each other for purposes of the Act.

3. The Manager is a wholly-owned subsidiary of Canco and is a taxable Canadian corporation, incorporated under the laws of the province of XXXXXXXXXX.

4. The Manager’s offices are situated at XXXXXXXXXX. The Manager’s Taxation Centre is XXXXXXXXXX and it deals with the XXXXXXXXXX Tax Services Office. The Manager’s business number is XXXXXXXXXX.

5. At all relevant times, the Manager will carry on business in Canada for the purposes of the Act.

6. Taxpayer is a corporation formed under the laws of XXXXXXXXXX and is a resident of XXXXXXXXXX. The Taxpayer is not resident in, and does not have a permanent establishment in, Canada. The Taxpayer is a wholly-owned subsidiary of Aco and is not related or affiliated with the Manager for purposes of the Act.

7. The Manager believes that the current business and economic environment creates an attractive opportunity in which to make Project Investments, and that there is a demand for Project Investments from XXXXXXXXXX with financing needs that are not being met by larger financial institutions. The Manager is seeking to solicit commitments from arm's length non-resident investors, including the Taxpayer, for the purpose of forming New Fund LP to invest in Project Investments.

8. The Manager intends to provide, among other things, investment advisory, management, identification, underwriting, and administration services with respect to Project Investments to New Fund LP and any Project LPs.

PROPOSED TRANSACTIONS

9. New Canada GP will be incorporated under the laws of the province of XXXXXXXXXX. New Canada GP will be a wholly-owned subsidiary of Canco.

10. New Fund LP will be formed as a limited partnership under the laws of XXXXXXXXXX. New Canada GP will be the general partner of New Fund LP. For purposes of forming New Fund LP, the initial limited partner of New Fund LP will be XXXXXXXXXX, an individual resident in Canada and XXXXXXXXXX.

11. Each Project LP will be formed as a limited partnership under the laws of XXXXXXXXXX. New Canada GP will be the general partner of each Project LP. New Fund LP will be a (and often, the sole) limited partner of each Project LP. Additional limited partnerships may be formed for each new Project Investment.

12. New Fund LP and Project LPs are partnerships for the purposes of the Act.

13. New Fund LP may invest in Project Investments directly, but will usually form a Subsidiary Entity, including a Project LP, to make the investment.

14. NPP Subsidiary will be incorporated under the laws of the province of XXXXXXXXXX or one of Canada’s other provinces to acquire Net Profit Participations and will be wholly-owned by New Fund LP or a Project LP. NPP Subsidiary will be a taxable Canadian corporation. Additional NPP Subsidiaries may be formed in the future.

15. New Fund LP will accept subscriptions for limited partnership interests from persons that are not resident in Canada for purposes of the Act, including the Taxpayer, and partnerships that are not Canadian partnerships. The interests in New Fund LP will only be marketed to non-resident investors and subscriptions for partnership interests in New Fund LP will be accepted on a continuous basis.

16. None of the Limited Partners who subscribe for interests in New Fund LP will be related to, or affiliated with, any of Canco, New Canada GP, the Manager, any sub-advisor to whom the services provided by the Manager may be subcontracted, or any person or partnership (other than New Fund LP or Project LPs) described in clause 115.2(2)(c)(ii)(A) or clause 115.2(2)(c)(ii)(B) in respect of the Manager or such sub-advisor.

17. New Fund LP will invest substantially all of its assets in limited partnership interests of one or more Project LPs, other Subsidiary Entities (including NPP Subsidiaries), and the Project Investments. New Fund LP will be formed primarily for acquiring the Project Investments, either directly or through Project LPs, and its investments in NPP Subsidiaries are ancillary to that objective.

18. The Project Investments made by New Fund LP, Project LPs, or other Subsidiary Entities, will be in Canadian and non-resident XXXXXXXXXX that generally have maturity or other contractual terms of XXXXXXXXXX years or less, measured at the time of investment, including specialty mezzanine and other debt instruments. It is anticipated that the Project Investments will be issued primarily by persons resident in XXXXXXXXXX.

19. Each of the Project Investments will be “indebtedness” and a “qualified investment” for the purposes of section 115.2, and each Management Agreement will provide that only investments in Qualified Investments will be permitted to be made by New Fund LP and the Project LPs. New Fund LP and the Project LPs will not hold any property that is not a Qualified Investment.

20. NPP Subsidiary will acquire Net Profit Participation from the issuers of the Project Investments. NPP Subsidiary will be taxable in Canada on any income generated with respect to the Net Profit Participations acquired, and will pay federal and provincial income taxes on that income. It is anticipated that any net income generated, net of corporate income taxes payable, will be distributed to New Fund LP or the Project LPs through the declaration of dividends.

21. A capital account shall be established on the books of New Fund LP for each partner. In general terms, under the New Fund LP Agreement, the capital accounts of the Limited Partners will be credited with their respective capital contributions and will be periodically adjusted by (i) crediting to or debiting from such capital accounts on a pro rata basis amounts representing an increase or a decrease in the net asset value of New Fund LP (as the case may be) as determined under the New Fund LP Agreement, but disregarding any Net Profit Participation; (ii) crediting to such capital accounts on a pro rata basis amounts equal to XXXXXXXXXX per cent of the amount of each dividend paid by NPP Subsidiaries; and (iii) debiting from such capital accounts any withdrawals and distributions. An amount equal to the remaining XXXXXXXXXX per cent of the dividends paid by NPP Subsidiaries will be allocated to the capital account of New Canada GP, which account will be reduced upon distributions paid to New Canada GP from its capital account.

22. New Fund LP, at New Canada GP’s discretion, may make quarterly distributions to the partners from their capital accounts in New Fund LP on a pro rata basis in accordance with their capital account balances. For greater certainty, no material amounts will be distributed to New Canada GP from Project LPs directly.

23. Subject to the provisions of the New Fund LP Agreement and at least XXXXXXXXXX day notice, a Limited Partner may request a withdrawal from its capital account on the last business day of a calendar quarter.

24. For the purposes of the Act, the proportionate share of each of the partners of New Fund LP (including New Canada GP) of the income, gains, losses and deductions for each fiscal period of New Fund LP attributable to each source (including income earned through Project LPs) will be determined proportionately to their respective capital account balances during the fiscal period.

25. Each of New Fund LP and the Project LPs will file form NR302 to obtain either full or partial relief from Part XIII tax to the extent the tax is, or would be, attributable to a share, determined as described in the previous paragraph, of the income of that partnership owned by a partner who is resident in Canada or a partner who is resident of a country that has a tax treaty with Canada and who is entitled to relief from Part XIII tax under the relevant tax treaty.

26. Pursuant to the terms of the LP Agreements, New Canada GP will have the authority to manage the operations and affairs of New Fund LP and Project LPs, and to make all the decisions of New Fund LP and the Project LPs.

27. New Canada GP and New Fund LP or any Project LP, as the case may be, will enter into one or more Management Agreements with the Manager pursuant to which the New Canada GP, on behalf of the Partnerships, will appoint the Manager to act as its investment advisor and debt financing underwriter and servicer, and New Canada GP will delegate all of its functions with respect to New Fund LP, Project LPs, and other Subsidiary Entities, including approving Project Investments and approving dispositions. As a result, New Canada GP will have no active role in the making, monitoring, and disposing of Project Investments, the receipt of investment capital from or distribution of returns to the Limited Partners, reporting to the Limited Partners or any other matters.

28. In particular, the Manager will have full power and authority to:

(a) make investment decisions for the Partnerships and monitor the Partnerships’ investment activities, including:

i. sourcing, negotiating and acquiring the Project Investments on behalf of the Partnerships, including determination of the use of derivatives, cash and other investments contained in the portfolio;

ii. conducting appropriate due diligence for each Project Investment;

iii. issuing orders and instructions with respect to currency forwards, future contracts and commodity contracts and options thereon, and other securities and derivatives (including any over-the-counter derivatives) selected by the Manager;

iv. maintaining one or more trading accounts with brokers and dealers for the execution of transactions on behalf of the Partnerships and negotiating, entering into, executing, delivering, performing, renewing, extending and terminating all contracts, agreements and other undertakings on behalf of the Partnerships with brokers, dealers or other counterparties;

v. borrowing or raising money on the Partnerships’ behalf, as in the opinion of the Manager may be necessary or advisable for the purposes of making the Project Investments; and

vi. investigating, selecting and overseeing sub-advisors to make investment decisions for the Partnerships, monitor the Partnerships’ investment activities and provide such other services to the Partnerships as the Manager may determine in its discretion;

(b) act on behalf of the Partnerships as nominee or agent as may be required in connection with the acquisition of the Project Investments, the execution of notes, loan agreements or other instruments in writing for or on behalf of the Partnerships and the handling, prosecuting and settling of any claims of the Partnerships relating to the Project Investments, including the enforcement of any loan, lien, or other security interest securing the Project Investments;

(c) consider whether and in what manner all rights conferred by the Project Investments should be exercised and exercise such rights, including the power to mortgage, pledge, hypothecate and otherwise act to acquire, dispose of, and exercise all rights, powers and other incidents of ownership or possession with respect to the Project Investments;

(d) service and administer the Project Investments on behalf of the Partnerships, ensuring the maintenance of related account records in respect of each of the Project Investments and overseeing any third party with respect to the maintenance of financial records related to the Project Investments;

(e) formulate and implement the investment guidelines and report to the Partnerships in connection with the Project Investments;

(f) provide those services as may be required in connection with the collection, handling, prosecuting and settling of any claims of the Partnerships with respect to the Project Investments, including enforcing the Project Investments and other liens and security interests securing the Project Investments;

(g) act as the exempt commodity operator and exempt commodity trading advisor;

(h) manage the activities and day-to-day operations of the Partnerships and in particular:

i. provide to the Partnerships all services necessary or desirable to conduct and operate the day-to-day activities of the Partnerships;

ii. calculate or cause to be calculated the Partnerships’ “Net Asset Value”, as defined in the LP Agreements;

iii. make, or authorize the making of, payments of operating expenses incurred on behalf of the Partnerships;

iv. carry out all matters relating to the offering and issuing of interests in the Partnerships;

v. arrange for and supervise the preparation and audit of the financial statements, income tax returns and forms, annual and quarterly reports; ensure that financial and accounting information is provided to the Limited Partners; maintain or cause to be maintained accounting records for the Partnerships;

vi. assist the Partnerships in forming the Subsidiary Entities, the operations of which may be managed by the Manager subject to a separate agreement between any such Subsidiary Entity and the Manager;

vii. negotiate agreements with providers of services;

viii. arrange for office space, facilities and personnel of the Manager involved in the administration of the day-to-day operations of the Partnerships;

ix. compensate, or cause to be compensated, all persons in connection with the operations of the Partnerships and distribution and redemption of interests in the Partnerships;

x. provide, or arrange for the provision of, marketing services in respect of the sale of interests in the Partnerships and administrative services required by the Partnerships;

xi. engage, liaise with, report to and establish policies and procedures with respect to the advisory committee;

xii. monitor and comply with securities and tax legislation and any and all other applicable laws and requirements in connection with the operation of the Partnerships;

xiii. accept or reject in its discretion subscription for the purchase of interests in the Partnerships; and

xiv. after consulting with New Canada GP, commence or defend any litigation or arbitration that pertains to the Partnerships.

29. The Manager may provide the services to the Partnerships itself or may subcontract the performance of certain of these services to sub-advisors. To the extent any of the services are subcontracted to sub-advisors in Canada, such sub-advisors will qualify as “Canadian service providers”.

30. New Fund LP will pay a fee for the services provided by the Manager pursuant to the Management Agreement which fee will be based on the capital invested in New Fund LP. To the extent the Manager also provides services to Project LPs, the Manager will receive fees from the Project LPs in respect of such services. The Manager will be taxable in Canada on its fee income.

31. An advisory committee will be established to act as a consultative body to the Manager, to review any material conflicts of interest involving Canco and its affiliates, New Fund LP, and Project LPs, and to consider the variation of investment objectives and investment restrictions of Project LPs (if any). It also may provide input on certain other matters as requested by the Manager. The advisory committee will generally be comprised of XXXXXXXXXX (and no more than XXXXXXXXXX) persons selected from among the Limited Partners of New Fund LP.

32. Under the Management Agreement, New Canada GP will reserve the right to terminate the Manager and appoint a replacement manager.

PURPOSE OF PROPOSED TRANSACTIONS

33. The Manager's principal activity is acting as an investment manager in connection with the investing of funds by arm's length investors, and it is seeking to establish New Fund LP, Project LPs, and other Subsidiary Entities, in the course of that business. The purpose of having the investors invest through New Fund LP is to simplify the investment process, and to conform to internationally recognized arrangements for investing in similar forms of credit investments in other private fund contexts.

34. The purpose of marketing investments in New Fund LP solely to non-residents of Canada, such as the Taxpayer, is to provide such investors with access to Project Investments. Other investment funds managed by the Manager are not suitable for, and do not permit, investments by non-residents of Canada.

RULING

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions, and Purpose of the Proposed Transactions, and provided further that the Proposed Transactions are carried out as described above, our ruling is as follows:

We confirm that subsection 115.2(2) will apply to the Taxpayer such that the provision by the Manager of the services described in Paragraph 28 above to New Fund LP and Project LPs, and the acquisition, holding, and disposition through the services of the Manager of (i) Project Investments by Project LPs, and (ii) shares of NPP Subsidiary by New Fund LP or Project LPs in the course of the Proposed Transactions will not, in and by themselves, cause the Taxpayer to be carrying on a business in Canada for the purposes of subsections 115(1) and 150(1) and Part XIV.

This ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R7, Advance Income Tax Rulings and Technical Interpretations, and is binding on the Canada Revenue Agency provided that subscription agreements are accepted by or capital commitments of the Taxpayer are made to New Fund LP before XXXXXXXXXX.

COMMENTS

Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the Facts and Proposed Transactions described herein other than those specifically described in the ruling given above or, without limiting the generality of the foregoing,

any issues concerning the validity or existence of the Partnerships or any issues or considerations arising from the LP Agreements, including allocation of income, gains or losses of the Partnerships and the application of section 103;

any withholding tax considerations as may be relevant for the purposes of the Proposed Transactions; and

the GST implications of any of the Proposed Transactions.

Yours truly,

XXXXXXXXXX
Section Manager
For Division Director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch