2023 Ruling 2022-0924531R3 - XXXXXXXXXX Merger

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 the "squeeze out" transactions under the DRULPA, as described under the Proposed Transactions, will result in 1) a disposition at the partner level, and 2) a disposition at the partnership level.

Position: 1) No, based on the facts provided. 2) No, based on the facts provided.

Reasons: The surviving partnership does not cease to exist.

XXXXXXXXXX 2022-092453

XXXXXXXXXX, 2023

Dear XXXXXXXXXX:

Re: Advance income tax ruling request
XXXXXXXXXX

This is in response to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling (“Ruling Request”) on behalf of XXXXXXXXXX. (collectively the “Taxpayers”). We also acknowledge the information provided in subsequent correspondence in connection with your request.

We understand that, to the best of your knowledge and that of the Taxpayers involved, none of the proposed transactions or issues involved in this letter are the same as or substantially similar to transactions or issues that are:

i. in a previously filed tax return of the Taxpayers or a related person and:

A. being considered by the CRA in connection with such return;

B. under objection by the Taxpayers or a related person; or

C. the subject of a current or completed court process involving the Taxpayers or a related person; or

ii. the subject of a ruling request previously considered by the Income Tax Rulings Directorate.

Unless otherwise indicated, all statutory references in this letter are to the corresponding provisions of the Income Tax Act, R.S.C. 1985, c.1 (5th supp.), as amended to the date of this advance income tax ruling (“Act”).

For greater certainty, all the documents and information submitted in support of your Ruling Request are part of this letter only to the extent described herein and any reference to these documents is provided solely for the convenience of the reader. The rulings given herein are based solely on the Facts, Proposed Transactions, and the Purpose of the Proposed Transactions described below.

DEFINITIONS:

“adjusted cost base” has the meaning assigned by section 54;

“Canco1” means XXXXXXXXXX, a corporation incorporated under the laws of the Province of XXXXXXXXXX;

“Canco2” means XXXXXXXXXX, a corporation incorporated under the laws of the Province of XXXXXXXXXX;

“Canco3” means XXXXXXXXXX, a corporation incorporated under the laws of the Province of XXXXXXXXXX;

“CanLP” means XXXXXXXXXX, a limited partnership established under the laws of the Province of XXXXXXXXXX that is a Canadian partnership as defined in section 102;

“De Minimis Limited Partners” means the limited partners of USLP2, other than Individual A, who owned less than a one percent interest in USLP2 as of XXXXXXXXXX;

“Distribution Percentage Interest” means the percentage of distribution with respect to XXXXXXXXXX Cash Flow that each partner of USLP1 is entitled to, as determined in Section 2.5 of the Limited Partnership Agreement of USLP1;

“DRULPA” means the XXXXXXXXXX Revised Uniform Limited Partnership Act;

“GP Net Cash Flow” means the gross cash proceeds to USLP1 attributable to the General Partner’s interest in USLP2 less the portion thereof used to pay USLP1’s expenses relating to the General Partner’s interest in USLP2 or to establish reserves for USLP1 expenses and contingencies (including adequate reserves for the cost of future events) relating to the General Partner’s interest in USLP2, all as reasonably determined by the general partner of USLP1, as defined in the Limited Partnership Agreement of USLP1;

“General Partner” means USco2, the general partner of USLP2;

“Individual A” means XXXXXXXXXX;

“LP Net Cash Flow” means all the gross cash proceeds to USLP1, excluding GP Net Cash Flow, from any source less the portion thereof used to pay USLP1’s expenses or to establish reserves for USLP1’s expenses and contingencies (including adequate reserves for the cost of future events), all as reasonably determined by the general partner of USLP1, as defined in the Limited Partnership Agreement of USLP1;

“LP2Units” means LP units of USLP2;

“Limited Partnership Agreement of USLP1” means the XXXXXXXXXX Agreement of Limited Partnership of USLP1, which entered into effect as of XXXXXXXXXX, by USco1, CanLP, and other limited partners of USLP1 at the time the agreement was entered into, as amended to XXXXXXXXXX;

“Limited Partnership Agreement of USLP2” means the XXXXXXXXXX Agreement of Limited Partnership of USLP2, which entered into effect as of XXXXXXXXXX, by USco2, USLP1, CanLP and other limited partners of USLP2 at the time the agreement was entered into;

“Merger” means the merger between USLP2 and NewLP, in accordance with section 17-211 of the DRULPA;

“Merger Agreement” means the merger agreement and plan of merger between USLP2 and NewLP;

“Merger Consideration” means the right to receive cash on the Merger;

XXXXXXXXXX;

“NewGP” means a limited liability company to be established under the laws of the State of XXXXXXXXXX in the United States as described under “Proposed Transactions” below;

“NewLP” means a limited partnership to be established under the DRULPA as described under “Proposed Transactions” below;

“own” in relation to a partnership is a reference to the property used in the partnership activities or owned by the partnership;

“Profits” and “Losses” has the meaning described in the Limited Partnership Agreement of USLP1;

“Remaining Limited Partners” means all of the limited partners of USLP2 (other than the De Minimis Limited Partners) after the Merger;

“taxable Canadian corporation” has the meaning assigned in subsection 89(1);

“TXXXXXXXXXX” means the XXXXXXXXXX.

“USco1” means XXXXXXXXXX, a corporation established under the laws of the XXXXXXXXXX;

“USco2” means XXXXXXXXXX, a limited liability company established under the laws of the XXXXXXXXXX;

“USLP1” means XXXXXXXXXX, a limited partnership established under the laws of the XXXXXXXXXX;

“USLP2” means XXXXXXXXXX as a XXXXXXXXXX limited partnership under the DRULPA.

FACTS:

1. Individual A is a resident of Canada for the purposes of the Act.

2. Individual A owns a XXXXXXXXXX% limited partnership interest (through a nominee corporation, Canco3) in CanLP. The other partners of CanLP are Canco2 as to a XXXXXXXXXX% limited partnership interest and Canco1 as to a XXXXXXXXXX% general partnership interest. Each of Canco1 and Canco2 is a taxable Canadian corporation. Individual A owns all the shares of Canco1 and Canco2.

3. CanLP owns 2 Class A units issued by USLP1, which represent an aggregate XXXXXXXXXX% Distribution Percentage Interest with respect to “GP Net Cash Flow”, and 1 Class B unit issued by USLP1, which represents a XXXXXXXXXX% Distribution Percentage Interest with respect to “LP Net Cash Flow”. In addition, CanLP also has a special allocation in USLP1 with respect to all distributions of cash and property and all Profits and Losses with respect to XXXXXXXXXX LP2Units.

4. CanLP owns XXXXXXXXXX shares of common stock issued by USco1, which represents a XXXXXXXXXX% equity interest in USco1. USco1 holds a XXXXXXXXXX% general partnership interest in USLP1.

5. USLP1 owns XXXXXXXXXX LP2Units. USLP1 owns a XXXXXXXXXX% equity interest in USco2. USco2 holds a XXXXXXXXXX% general partnership interest in USLP2 and is the General Partner. The XXXXXXXXXX LP2Units represent XXXXXXXXXX% of the outstanding LP2Units, and XXXXXXXXXX% interest in USLP2 after taking into account the XXXXXXXXXX% general partnership interest owned by USco2.

6. CanLP owns XXXXXXXXXX LP2Units, representing XXXXXXXXXX% of the total outstanding LP2Units and XXXXXXXXXX% interest in USLP2 after taking into account the XXXXXXXXXX% general partnership interest owned by USco2. Individual A owns XXXXXXXXXX LP2Units, representing XXXXXXXXXX% of the total outstanding LP2Units and XXXXXXXXXX% interest in USLP2 after taking into account the XXXXXXXXXX% general partner interest owned by USco2. In total, Individual A and CanLP own directly in USLP2 or indirectly in USLP2 through USLP1 XXXXXXXXXX% of the LP2Units (including the special allocation to CanLP of the LP2Units held by USLP1).

7. USLP2 is the owner of XXXXXXXXXX TXXXXXXXXXX.

8. Recently, management, through the General Partner and with the support of XXXXXXXXXX, expressed a desire for XXXXXXXXXX TXXXXXXXXXX to have an ownership group comprised predominantly of members who have a meaningful equity position in order to promote efficient governance and to assure financial stability.

9. As of XXXXXXXXXX, there were XXXXXXXXXX De Minimis Limited Partners. Each of the De Minimis Limited Partners was given the option to: (1) increase its ownership interest in USLP2 to XXXXXXXXXX% at XXXXXXXXXX per LP2Unit (based on a third party appraisal); or (2) sell its LP2Units to USLP2 at XXXXXXXXXX per LP2Unit. Pursuant to the terms of the Limited Partnership Agreement of USLP2, an increase in the limited partnership ownership interests or a sale of LP2Units by the De Minimis Limited Partners would not cause a dissolution of USLP2.

10. All of the De Minimis Limited Partners but XXXXXXXXXX have either increased their limited partnership ownership interest to XXXXXXXXXX% in USLP2 or have sold their LP2Units and are no longer partners of USLP2. The remaining XXXXXXXXXX De Minimis Limited Partners have refused to increase their limited partnership ownership interests in USLP2 or to have their LP2Units acquired by USLP2.

PROPOSED TRANSACTIONS:

11. USLP2 will establish NewGP. USLP2 will be the only member of NewGP and will acquire all of the limited liability company interests in NewGP for nominal consideration. NewGP and USLP2 will establish NewLP. USLP2 and NewGP will acquire their interests in NewLP for no consideration. The partners of NewLP will be USLP2 as the sole limited partner holding a XXXXXXXXXX% partnership interest and NewGP as the sole general partner holding a XXXXXXXXXX% partnership interest.

12. Pursuant to the Merger Agreement between USLP2 and NewLP, NewLP will merge with and into USLP2 with USLP2 surviving the Merger, in accordance with section 17-211 of the DRULPA. The Merger Agreement will designate USLP2 as the survivor of the Merger. At the effective time of the Merger, USLP2 (and the General Partner on behalf of USLP2) will file a certificate of merger with the Secretary of State of the XXXXXXXXXX containing the information required by DRULPA and designating USLP2 as the surviving entity in the Merger. Pursuant to the Merger Agreement

(i) all of the De Minimis Limited Partners will have their LP2Units cancelled in exchange for the Merger Consideration,
(ii) the general partner interest of USLP2 owned by the General Partner will remain outstanding and be unaffected by the Merger and the General Partner will continue as the general partner of USLP2,
(iii) the LP2Units owned by the Remaining Limited Partners will remain outstanding and be unaffected by the Merger, (iv) USLP2’s partnership interest in NewLP will be cancelled for no consideration, and (v) NewGP’s partnership interest in NewLP will be cancelled for no consideration.

13. Pursuant to the terms of the Limited Partnership Agreement of USLP2, the proposed transactions referred to in Paragraph 12 above would not cause a dissolution of USLP2.

14. USLP2 has the cash (in US dollars) available to pay the Merger Consideration and will not need to sell assets for this purpose.

15. The Merger Consideration is denominated in US dollars.

16. At no time will NewLP hold any assets.

17. Both the fair market value and the adjusted cost base of the partnership interest in NewLP held by USLP2 will remain nil between the date of acquisition of the interest and the date of cancellation of the interest.

18. Both the fair market value and the adjusted cost base of the partnership interest in NewLP held by NewGP will remain nil between the date of acquisition of the interest and the date of cancellation of the interest.

19. Following the Merger, NewGP will be dissolved and wound up in due course.

20. Under the laws of the XXXXXXXXXX and in particular, the DRULPA, USLP2 will be the same legal entity immediately following the Merger as it was immediately prior to the Merger; and the Merger will not result in the disposition (1) of any LP2Units to or from the Remaining Limited Partners; and (2) of any of the assets of USLP2 to any person (except for the assets of USLP2 used to pay the Merger Consideration).

PURPOSE OF THE PROPOSED TRANSACTIONS:

21. USLP2 wishes to purchase the interests of the XXXXXXXXXX De Minimis Limited Partners through a “squeeze out” transaction permitted under the DRULPA, as described above under “Proposed Transactions”.

22. The purpose of the proposed transactions is to effectuate the desire of management, through the General Partner and with the support of XXXXXXXXXX, to have the ownership group of XXXXXXXXXX TXXXXXXXXXX be comprised predominantly of members who have a meaningful equity position in order to promote efficient governance and to assure financial stability.

RULINGS:

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided further that the proposed transactions are completed in the manner described above, we rule as follows:

A. The Merger will not result in a disposition by Individual A, CanLP or USLP1 of any of their partnership interests in USLP2 for the purposes of the Act.

B. The Merger will not result in a disposition by USLP2 of any of its assets for the purposes of the Act, except for (i) USLP2's partnership interest in NewLP which will be cancelled for no consideration, and (ii) the assets of USLP2 used to pay the Merger Consideration.

The above rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R12 issued on April 1, 2022, and are binding on the CRA provided that the Proposed Transactions are completed within six months of the date of this letter.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act, which if enacted, could have an effect on the rulings provided herein.

COMMENTS ON FOREIGN EXCHANGE

The Remaining Limited Partners who are residents of Canada may realize foreign exchange gains or losses with respect to the payment of the Merger Consideration.

ADDITIONAL COMMENTS:

Unless otherwise confirmed in the above rulings, nothing in this letter should be construed as implying that the CRA has confirmed, reviewed or has made any determination in respect of:

a) the fair market value or the adjusted cost base of any property described in this letter;

b) the classification of any entity described in this letter for the purposes of the Act;

c) the residency of any person referred to in this letter;

d) any other tax consequences relating to the Facts, Proposed Transactions or any transaction or event taking place either prior to the Proposed Transactions or subsequent to the Proposed Transactions, whether described in this letter or not, other than those specifically described in the rulings given above, including whether any of the Proposed Transactions would also be included in a series of transactions or events that includes other transactions or events that are not described in this letter.

An invoice for our fees in connection with this ruling request will be forwarded to you under separate cover.

Yours truly,

XXXXXXXXXX
for director
International Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch