2024 Ruling 2023-0997921R3 - Code 3 - XXXXXXXXXX SIFT Ruling Request

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. Whether New LP will be subject to SIFT tax because it has a tax-exempt partner that holds preferred units of New LP that are exchangeable for publicly traded units of the REIT?; 2. Whether interest is deductible under the intercompany note?; 3. Whether GAAR applies to the subject and proposed transactions?

Position: 1. No because there is no replication; 2. Yes because the requirements of paragraph 20(1)(c) are met; 3. No because there is likely no avoidance transaction, no abuse.

XXXXXXXXXX									2023-099792

XXXXXXXXXX, 2024

Dear XXXXXXXXXX:

RE: Advance Income Tax Ruling Request – Preferred Equity Investment in Subsidiary Partnership
XXXXXXXXXX

We are writing in response to your request for an advance income tax ruling dated XXXXXXXXXX (the “Ruling Request”) on behalf of the above-noted Taxpayers. We also acknowledge the additional information provided in various email correspondence, as well as the information provided during telephone conversations.

We understand that, to the best of your knowledge and that of the Taxpayers involved, none of the Completed, Subject or Proposed Transactions or issues involved in this Ruling request are the same 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) except as provided herein, the subject of a ruling request in respect of the Taxpayers or related persons previously considered by the Income Tax Rulings Directorate.

The Taxpayers have also confirmed that the Completed, Subject and Proposed Transactions described herein will not result in the Taxpayers or any person related to the Taxpayers being unable to pay any of their outstanding tax liabilities.

This document is based solely on the Facts, Completed Transactions, Subject Transactions, Proposed Transactions, Additional Information and Purposes described below. The documentation submitted with your request and any information provided by correspondence or telephone conversations does not form part of the Facts, Completed Transactions, Subject Transactions and Proposed Transactions except as expressly referred to herein, and any references to the documentation are otherwise provided solely for the convenience of the reader.

Unless otherwise stated:

(i) all references to a statute are to the relevant provision of the Income Act R.S.C. 1985 (5th Supp.), c.1, as amended (the “Act”), or, where appropriate, the Income Tax Regulations, C.R.C., c.945, as amended;

(ii) all terms and conditions used in this Ruling request that are defined in the Act (or in the Regulations) have the meaning given in such definition;

(iii) all references to monetary amounts are in Canadian dollars; and

(iv) the singular should be read as plural and vice versa where the circumstances so require.

I. DEFINITIONS

The following abbreviations, terms and expressions have the meanings specified, and the relevant parties to the Completed, Subject and Proposed Transactions (as defined below) will be referred to as follows:

“XXXXXXXXXX Preferred Units” means the XXXXXXXXXX Preferred Exchangeable LP Units of New LP, the terms of which are set forth in the Limited Partnership Agreement as set out in Paragraph 33 of the Subject Transactions;

“Closing” means the completion of the acquisition of the Property in accordance with the provisions of the Purchase Agreement;

“Closing Date” means XXXXXXXXXX, the date on which the acquisition of the Property was completed;

“Consideration Preferred LP Units” means the XXXXXXXXXX Preferred Units that were issued on Closing by New LP to the Vendor Affiliate for a subscription price of $XXXXXXXXXX;

“Consideration REIT Units” means a number of XXXXXXXXXX REIT Units, determined in accordance with the Purchase Agreement, that were issued on Closing by the REIT to the Vendor Affiliate for a subscription price of $XXXXXXXXXX;

“CRA” means the Canada Revenue Agency;

“Deposit” means collectively, the First Deposit and the Second Deposit;

“Distribution Policy” means the distribution policy of the REIT as set out in Paragraph 15 of the Facts;

“eligible group entity” has the meaning assigned in subsection 18.2(1) of the Act;

“Exchange Agreement” means the Exchange Agreement entered into among, inter alia, the REIT, XXXXXXXXXX LP, XXXXXXXXXX GP Trust, New LP, GP Holding Trust and the
Vendor Affiliate on the Closing Date;

“Exchange Price” means the exchange price for the XXXXXXXXXX Preferred Units, which is equal to the Transaction Unit Price of $XXXXXXXXXX, subject to customary anti-dilution adjustments for any split, spin-off events and other special distributions, rights issuances, reorganizations, subdivisions, reclassifications and other modifications to the XXXXXXXXXX REIT Units or the XXXXXXXXXX Preferred Units;

“fair market value” means the highest price available in an open and unrestricted market between informed and prudent parties dealing at arm’s length and under no compulsion to act, expressed in terms of cash;

“First Deposit” means a deposit under the Purchase Agreement in the amount of $XXXXXXXXXX;

“GP Holding Trust” has the meaning set out in Paragraph 19 of the Completed Transactions;

“GP Unit” mean the general partnership interest in New LP;

“Limited Partnership Agreement” means the limited partnership agreement governing New LP, as such agreement may be amended or amended and restated;

“LP Units” means the limited partnership interests in New LP designated as “LP Units” prior to the amendment and restatement of the Limited Partnership Agreement described in step 3 of the Subject Transactions;

“Loan Amount” means the principal amount of the XXXXXXXXXX Loan;

“mutual fund trust” has the meaning assigned by subsection 132(6);

“XXXXXXXXXX GP Trust” means XXXXXXXXXX GP Trust;

“XXXXXXXXXX LP” means XXXXXXXXXX Limited Partnership;

“XXXXXXXXXX LP Ordinary LP Units” means units of XXXXXXXXXX LP designated as “Ordinary LP Units” pursuant to the limited partnership agreement governing XXXXXXXXXX LP;

“Net Asset Value per Unit” as of a particular date means XXXXXXXXXX;

“New LP” has the meaning set out in Paragraph 20 of the Completed Transactions;

“New LP Units” means the Ordinary LP Units, the GP Unit and the XXXXXXXXXX Preferred Units;

“New LP Promissory Note” has the meaning set out in Paragraph 35 of the Subject Transactions;

“Ordinary LP Units” means the limited partnership units of New LP designated as “Ordinary LP Units” pursuant to the Limited Partnership Agreement;

“Paragraph” means a numbered paragraph in this letter;

“Property” means a XXXXXXXXXX acquired by New LP pursuant to the Purchase Agreement;

“XXXXXXXXXX” means XXXXXXXXXX, a unit trust formed under the laws of the Province of XXXXXXXXXX;

“XXXXXXXXXX Loan” has the meaning set out in Paragraph 35 of the Subject Transactions;

“XXXXXXXXXX Trustee” means XXXXXXXXXX, a corporation formed under the laws of the Province of XXXXXXXXXX;

“Purchase Agreement” has the meaning set out in Paragraph 22 of the Completed Transactions;

“Purchase Price” has the meaning set out in Paragraph 22 of the Completed Transactions;

“REIT” means XXXXXXXXXX, an open-ended unit trust formed under the laws of the Province of XXXXXXXXXX;

“REIT Declaration of Trust” means the declaration of trust dated XXXXXXXXXX, as amended and restated as of XXXXXXXXXX, governed by the laws of the Province of XXXXXXXXXX, pursuant to which the REIT was created, as further amended, supplemented or amended and restated from time to time;

“REIT Preferred Units” has the meaning set out in Paragraph 33(g)(iv) of the Subject Transactions;

“REIT Trustees” means the individuals who act as trustees of the REIT in accordance with and subject to the provisions of the REIT Declaration of Trust;

“Second Deposit” means a deposit under the Purchase Agreement in the amount of $XXXXXXXXXX;

“XXXXXXXXXX REIT Units” means units of participating interest in the REIT designated as “XXXXXXXXXX Units”, with each such unit representing an equal undivided beneficial interest, together with the XXXXXXXXXX REIT Units, in the REIT;

“XXXXXXXXXX REIT Units” means non-voting units of participating interest in the REIT designated as “XXXXXXXXXX Units”, with each such unit representing an equal undivided beneficial interest, together with the XXXXXXXXXX REIT Units, in the REIT;

“Special Voting Units” means non-participating special voting units of the REIT, issued in accordance with the provisions of the REIT Declaration of Trust from time to time;

“Transaction Unit Price” means $XXXXXXXXXX, being the lower of (i) $XXXXXXXXXX and (ii) the Net Asset Value per Unit as of the Closing Date;

XXXXXXXXXX;

“Units” means XXXXXXXXXX REIT Units and XXXXXXXXXX REIT Units and for the avoidance of doubt, does not include Special Voting Units;

“Unit Direction” has the meaning set out in Paragraph 24 of the Completed Transactions;

“Vendor” means the previous owner of the Property and the “Vendor” under the Purchase Agreement, being a corporation resident in Canada that is exempt from the payment of tax under Part I of the Act; and

“Vendor Affiliate” means an affiliate of the Vendor that was issued the Consideration Units and the Consideration Preferred LP Units at Closing. The Vendor Affiliate is a corporation resident in Canada that is exempt from the payment of tax under Part I of the Tax Act.

II. FACTS

The Entities

1. The REIT is an open-ended unit trust formed under the laws of the Province of XXXXXXXXXX.

2. The taxation year of the REIT is the calendar year. The REIT’s registered address is XXXXXXXXXX. The REIT files its return with the XXXXXXXXXX.

3. The REIT Trustees manage the affairs of the REIT in accordance with and subject to the terms of the REIT Declaration of Trust. As of the date hereof, the REIT Trustees consist of XXXXXXXXXX.

4. The REIT, through subsidiary trusts and partnerships, owns, manages, leases and develops XXXXXXXXXX. The REIT’s portfolio is geographically diversified across Canada. The REIT does not directly or indirectly hold any properties located outside of Canada.

5. The REIT qualifies as a “mutual fund trust” for purposes of the Act. The REIT is operated so as to qualify as a “real estate investment trust”, and therefore is not a “SIFT trust” under the Act.

6. The REIT is an “excluded entity” within the meaning of subsection 18.2(1) by virtue of paragraph (c) of such definition and in particular:

a. all or substantially all of the businesses, undertakings and activities of the REIT and each eligible group entity in respect of the REIT are carried on in Canada;

b. the REIT does not have, and no eligible group entity in respect of the REIT has, any foreign affiliates, and neither the REIT nor any eligible group entity in respect of the REIT is a member of a partnership that has any foreign affiliates;

c. no non-resident of Canada or partnership more than 50% of the fair market value of all interests in which can reasonably be considered to be held, directly or indirectly, by non-resident persons, holds more than 25% of the fair market value of the Units; and

d. neither the REIT nor any eligible group entity in respect of the REIT owes any debt, or is otherwise obligated to pay any interest and financing expenses, to any tax-indifferent investor with which it does not deal at arm’s length for purposes of the Act.

7. XXXXXXXXXX LP is a limited partnership formed under the laws of the Province of XXXXXXXXXX. The sole general partner of XXXXXXXXXX LP is XXXXXXXXXX GP Trust and the sole limited partner of XXXXXXXXXX LP is the REIT. The limited partnership agreement of XXXXXXXXXX LP also provides for limited partnership interests designated as “XXXXXXXXXX Units” which are economically equivalent to and exchangeable for XXXXXXXXXX REIT Units on a one-for-one basis. No such XXXXXXXXXX Units were issued and outstanding at any time since XXXXXXXXXX. As of XXXXXXXXXX, XXXXXXXXXX LP, indirectly and through subsidiary partnerships, owned approximately XXXXXXXXXX% (by asset value) of the REIT’s properties.

8. XXXXXXXXXX GP Trust is an open-ended unit trust formed under the laws of the Province of XXXXXXXXXX. The REIT owns all of the issued and outstanding units of XXXXXXXXXX GP Trust. XXXXXXXXXX.

9. XXXXXXXXXX is an open-ended unit trust formed under the laws of the Province of XXXXXXXXXX. All of the units of XXXXXXXXXX are owned by the REIT. The sole trustee of XXXXXXXXXX is XXXXXXXXXX Trustee. The REIT owns all of the issued and outstanding shares of XXXXXXXXXX Trustee. XXXXXXXXXX, directly and indirectly (through subsidiary partnerships), owns approximately XXXXXXXXXX% (by asset value) of the REIT’s properties.

The REIT Units

10. Pursuant to the REIT Declaration of Trust, the beneficial interests in the REIT are divided into two classes designated as “Units” and “Special Voting Units”. The Units are further subdivided into XXXXXXXXXX REIT Units and XXXXXXXXXX REIT Units. Each Unit represents an undivided interest in the REIT. All Units outstanding from time to time participate pro rata in any distribution made by the REIT and, in the event of the termination of the REIT, in the income or capital of the REIT following the satisfaction of liabilities. Special Voting Units do not entitle the holder thereof to any legal or beneficial interest in the distributions or capital of the REIT. Each XXXXXXXXXX REIT Unit and Special Voting Unit confers the right to one vote at all meetings of the holders of Units and Special Voting Units. XXXXXXXXXX.

11. The XXXXXXXXXX REIT Units are listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX and are widely held by the public.

12. The trading price of the XXXXXXXXXX REIT Units on the XXXXXXXXXX over the XXXXXXXXXX period from XXXXXXXXXX ranged from $XXXXXXXXXX. The trading price of the XXXXXXXXXX REIT Units on XXXXXXXXXX ranged between $XXXXXXXXXX.

13. As of XXXXXXXXXX, the REIT had XXXXXXXXXX REIT Units issued and outstanding. There are currently no XXXXXXXXXX REIT Units or Special Voting Units issued or outstanding.

14. Distributions on the Units of the REIT are payable in the discretion of the REIT Trustees. Any such distributions are payable to holders of XXXXXXXXXX REIT Units and XXXXXXXXXX REIT Units pro rata based on the number of Units held. Notwithstanding the foregoing, the REIT Declaration of Trust requires that sufficient distributions be paid or made payable to holders of Units for each taxation year of the REIT so as to ensure that the REIT will not be liable for any non-refundable income tax under Part I of the Act for the taxation year.

15. The REIT Trustees have adopted a distribution policy, which is described in XXXXXXXXXX. The REIT’s last monthly distribution before the Closing Date, paid on XXXXXXXXXX was in the amount of $XXXXXXXXXX per unit.

16. The Distribution Policy is not binding upon the REIT Trustees, and may be changed by the REIT Trustees at any time in their discretion.

17. Distributions on the XXXXXXXXXX REIT Units do not vary with or depend on the REIT’s direct or indirect share of the income or capital of any particular subsidiary of the REIT, including New LP. The terms of the XXXXXXXXXX REIT Units do not provide unitholders with any legal entitlement (including in the case of a dissolution of New LP) to, or in respect of, amounts of capital, revenue or income from New LP or interest payable by New LP.

18. Pursuant to the REIT Declaration of Trust, the XXXXXXXXXX REIT Units are redeemable by the REIT for cash at the option of the holder for a redemption price that is based upon the trading price of the XXXXXXXXXX REIT Units on the XXXXXXXXXX. The XXXXXXXXXX REIT Units are not convertible into or exchangeable for, directly or indirectly, any other securities.

III. COMPLETED TRANSACTIONS

Formation of New Entities

19. On XXXXXXXXXX, XXXXXXXXXX LP settled XXXXXXXXXX (“GP Holding Trust”) as a new unit trust under the laws of the Province of XXXXXXXXXX. XXXXXXXXXX LP is the sole beneficiary of GP Holding Trust. XXXXXXXXXX are the trustees of GP Holding Trust.

20. On XXXXXXXXXX, the REIT, XXXXXXXXXX LP and GP Holding Trust formed XXXXXXXXXX (“New LP”) as a new subsidiary limited partnership under the laws of the Province of XXXXXXXXXX. GP Holding Trust is the sole general partner of New LP. The fiscal period of New LP for purposes of the Act is the calendar year.

21. The Limited Partnership Agreement provides for limited partner interests represented by the “LP Units”. On XXXXXXXXXX, the REIT subscribed for XXXXXXXXXX LP Units issuable at a price of $XXXXXXXXXX per Unit (representing XXXXXXXXXX% of the LP Units) and XXXXXXXXXX LP subscribed for XXXXXXXXXX LP Units issuable at a price of $XXXXXXXXXX per Unit (representing XXXXXXXXXX% of the LP Units). The subscriptions were paid for in cash.

Purchase Agreement

22. On XXXXXXXXXX, the REIT, New LP and the Vendor entered into an agreement of purchase and sale pursuant to which the REIT agreed to cause New LP to purchase the Property from the Vendor (the “Purchase Agreement”). Under the Purchase Agreement, the purchase price payable by New LP for the acquisition of the Property (the “Purchase Price”) is $XXXXXXXXXX, subject to customary adjustments.

23. The Purchase Agreement provides that the Purchase Price will be paid in cash.

24. The Purchase Agreement provides that on Closing, the Vendor Affiliate will subscribe for the Consideration Preferred LP Units and the Consideration REIT Units, and the REIT and New LP will direct the Vendor Affiliate to pay the subscription price of the Consideration Preferred LP Units and the Consideration REIT Units to the Vendor on New LP’s behalf in partial satisfaction of the Purchase Price (the “Unit Direction”). Under the Unit Direction, the REIT will subscribe for additional XXXXXXXXXX LP Ordinary LP Units and Ordinary LP Units of New LP for an aggregate subscription price equal to the subscription price of the Consideration REIT Units, and XXXXXXXXXX LP will subscribe for Ordinary LP Units of New LP for a subscription price equal to the subscription price receivable by it from the REIT, and the parties will each direct that the subscription proceeds are used to fund the Purchase Price.

25. On XXXXXXXXXX the REIT paid the First Deposit to Vendor’s solicitors, to be held in trust for the benefit of the REIT and applied in satisfaction of a portion of the Purchase Price in accordance with the Purchase Agreement.

26. XXXXXXXXXX.

IV. SUBJECT TRANSACTIONS

Subsequent to the submission of the Ruling request, the following transactions that had been proposed to take place were undertaken and executed at the times and in the manner set forth below:

Pre-Closing Steps

Step 1 - Payment of Second Deposit

27. Prior to Closing, the REIT paid the Second Deposit to the Vendor’s solicitors, to be held in trust for the benefit of the REIT and applied in satisfaction of a portion of the Purchase Price in accordance with the Purchase Agreement.

Step 2 – Assignment of Purchase Agreement to New LP

28. Prior to Closing, the REIT transferred and assigned to New LP, and New LP accepted and assumed from the REIT, all of the REIT’s rights and obligations under the Purchase Agreement, other than the REIT’s interest in the Deposit and certain retained liabilities. For greater certainty, the REIT continued to be the beneficial owner of the Deposit funds until the Closing Date.

Step 3 – Amended and Restated Limited Partnership Agreement

29. Shortly prior to Closing, the Limited Partnership Agreement was amended and restated to, inter alia, create a new class of limited partnership units designated as “XXXXXXXXXX Preferred Exchangeable LP Units” (hereinafter referred to as the “XXXXXXXXXX Preferred Units”) and to re-designate the LP Units as “Ordinary LP Units”.

30. Pursuant to the amended Limited Partnership Agreement, the general partner, as the holder of the GP Unit, has the right to receive XXXXXXXXXX% of any distributions paid on the Ordinary LP Units, to a maximum of $XXXXXXXXXX per annum. Upon the dissolution or winding up of New LP, after expenses and liabilities have been paid and all distributions have been paid on the XXXXXXXXXX Preferred Units, the GP Unit confers upon the general partner the right to receive XXXXXXXXXX% of the remaining assets of New LP. The GP Unit is not exchangeable for or convertible into XXXXXXXXXX REIT Units or any other property.

31. Holders of Ordinary LP Units are entitled to receive notice of, to attend and to vote at, all meetings of holders of limited partnership units of New LP. In addition, on the dissolution or liquidation of New LP, the holders of Ordinary LP Units will be entitled, after the required distributions to the holders of the XXXXXXXXXX Preferred Units have been paid in full, to receive an amount per unit equal to the holder’s pro rata share of the total of amounts payable to all limited partners less the amount paid to the holders of XXXXXXXXXX Preferred Units. The Ordinary LP Units are not exchangeable for or convertible into XXXXXXXXXX REIT Units or any other property.

32. XXXXXXXXXX Preferred Units will be issuable at a price and with a face amount of $XXXXXXXXXX per unit. XXXXXXXXXX Preferred Units will be exchangeable for XXXXXXXXXX REIT Units at the Exchange Price, as described in greater detail below.

Terms of XXXXXXXXXX Preferred Units

33. The XXXXXXXXXX Preferred Units have the following attributes:

a. Rank senior to any other outstanding units of New LP with respect to distributions and rights upon liquidation, wind-up, or dissolution.

b. No maturity date.

c. Non-voting.

d. Non-transferable other than to affiliates of the Vendor Affiliate.

e. Distributions:

i. Holders of XXXXXXXXXX Preferred Units are entitled to a non-cumulative preferred distribution of XXXXXXXXXX% per annum (or $XXXXXXXXXX per XXXXXXXXXX Preferred Unit) which will accumulate and accrue (but not compound) daily and be payable quarterly in cash.

ii. Under the terms of the Limited Partnership Agreement, for so long as any XXXXXXXXXX Preferred Units remain outstanding, unless New LP has paid or set apart for payment all accrued and payable distributions on the XXXXXXXXXX Preferred Units, no distribution may be paid, or capital returned (through a redemption of units or otherwise) on any other New LP Units or on the XXXXXXXXXX REIT Units other than (i) distributions to holders of XXXXXXXXXX REIT Units in the form of additional XXXXXXXXXX REIT Units (subject to applicable withholding taxes), or (ii) redemptions of XXXXXXXXXX REIT Units in accordance with the REIT Declaration of Trust.

iii. Under the terms of the Exchange Agreement, if New LP does not have sufficient funds to pay any distribution on the XXXXXXXXXX Preferred Units as required by the Limited Partnership Agreement, the REIT will provide capital contributions directly and indirectly to New LP to fund the payment deficit.

iv. For the purposes of the Act, income and taxable capital gains realized by New LP in a fiscal period, will, to the extent possible, be allocated to holders of XXXXXXXXXX Preferred Units in such a manner that the proportion of distributions on the XXXXXXXXXX Preferred Units treated as income (excluding taxable capital gains) or taxable capital gains for purposes of the Act for such fiscal period will be the same as the proportion of distributions on the XXXXXXXXXX REIT Units treated as such for its corresponding taxation year.

f. Exchange Rights of the Holder

i. Holders of XXXXXXXXXX Preferred Units have the right to exchange the XXXXXXXXXX Preferred Units at any time for a number of XXXXXXXXXX REIT Units determined by dividing (A) $XXXXXXXXXX plus all accrued but unpaid distributions by (B) the Exchange Price (with the resulting quotient being rounded up to the nearest whole unit). The Exchange Price as set out in the Exchange Agreement is $XXXXXXXXXX. Generally, this means that a Holder of XXXXXXXXXX Preferred Units is entitled to a conversion rate of XXXXXXXXXX REIT Units for XXXXXXXXXX Preferred Unit, determined without reference to accrued and unpaid distributions, if any.

g. Exchange Rights of the Issuer

i. New LP may, from time to time, require the exchange of all or a portion of the XXXXXXXXXX Preferred Units for a number of XXXXXXXXXX REIT Units determined by dividing (A) $XXXXXXXXXX plus all accrued but unpaid distributions by (B) the Exchange Price (or, XXXXXXXXXX REIT Units for 1 XXXXXXXXXX Preferred Unit, determined without reference to accrued and unpaid distributions, if any) if and only if both of the following have occurred:

1. at least XXXXXXXXXX years have elapsed since the Closing Date; and

2. the 30-day volume weighted average trading price of the XXXXXXXXXX REIT Units on the XXXXXXXXXX, as of the close of trading on the trading date immediately prior to the date on which the notice of mandatory exchange is provided by the REIT, is greater than XXXXXXXXXX% of the Exchange Price.

ii. Subject to receipt of any necessary approvals by unitholders of the REIT, New LP may at any time require the exchange of all, but not less than all, of the XXXXXXXXXX Preferred Units for preferred equity units of the REIT (“REIT Preferred Units”) having substantially identical terms, rights and protections as the XXXXXXXXXX Preferred Units.

Step 4 – Funding of New LP

34. In order to fund New LP, the REIT subscribed for units of XXXXXXXXXX for an aggregate subscription price equal to $XXXXXXXXXX. XXXXXXXXXX, as well as the Deposit funds held by the Vendor’s solicitors in trust for the benefit of the REIT.

35. XXXXXXXXXX used the proceeds of the subscription from the REIT to make an interest-bearing loan to New LP (the “XXXXXXXXXX Loan”), evidenced by a five-year interest-bearing promissory note issued by New LP in favour of XXXXXXXXXX (the “New LP Promissory Note”). Interest on the XXXXXXXXXX Loan is payable quarterly in arrears. The interest rate on the XXXXXXXXXX Loan was determined based on prevailing market rates, and is XXXXXXXXXX% per annum.

Closing Date Steps

36. At Closing, the Vendor Affiliate subscribed for the Consideration REIT Units and the Consideration Preferred LP Units. The subscription price was paid to the Vendor on behalf of New LP in partial satisfaction of the Purchase Price pursuant to and in accordance with the Unit Direction. New LP used the proceeds from the XXXXXXXXXX Loan to pay the balance of the Purchase Price.

37. The Vendor transferred the Property to New LP at the Closing.

38. Concurrent with the Closing, the REIT, XXXXXXXXXX LP, XXXXXXXXXX GP Trust, New LP, GP Holding Trust and the Vendor Affiliate entered into the Exchange Agreement. Pursuant to the Exchange Agreement, among other things, the parties covenanted to facilitate exchanges of XXXXXXXXXX Preferred Units for XXXXXXXXXX REIT Units in accordance with the terms of the Limited Partnership Agreement and the REIT covenanted to ensure that New LP’s obligations under the terms of the XXXXXXXXXX Preferred Units, including with respect to distributions payable on the XXXXXXXXXX Preferred Units, are complied with.

V. PROPOSED TRANSACTIONS

Post-Closing Date Steps

The following steps will be undertaken shortly after the date of this Ruling letter:

39. New LP will pay to XXXXXXXXXX all accrued but unpaid interest owing in respect of the XXXXXXXXXX Loan.

40. XXXXXXXXXX will make a distribution on the units of XXXXXXXXXX in an aggregate amount equal to the Loan Amount. XXXXXXXXXX will pay the distribution by transferring the New LP Promissory Note to the REIT (as the sole holder of units of XXXXXXXXXX).

41. The REIT will subscribe for additional XXXXXXXXXX LP Ordinary LP Units for an aggregate subscription price equal to XXXXXXXXXX% of the Loan Amount. The REIT will satisfy the subscription price by transferring a XXXXXXXXXX% undivided interest in the New LP Promissory Note to XXXXXXXXXX LP.

42. The REIT will subscribe for additional Ordinary LP Units for an aggregate subscription price equal to XXXXXXXXXX% of the Loan Amount and XXXXXXXXXX LP will subscribe for additional Ordinary LP Units for an aggregate subscription price equal to XXXXXXXXXX% of the Loan Amount. The REIT and XXXXXXXXXX LP’s obligations to pay the subscription price for such Ordinary LP Units will be set off against the obligation of New LP to pay the amount owing under the New LP Promissory Note to the REIT and XXXXXXXXXX LP, and the New LP Promissory Note will be cancelled.

I. ADDITIONAL INFORMATION

43. Immediately following the Closing, the value of the Property represented approximately XXXXXXXXXX% of all assets owned directly or indirectly by the REIT.

44. Holders of XXXXXXXXXX REIT Units: (i) have no specific right to any of the assets of the REIT, which includes the REIT’s interest in New LP; and (ii) have no specific right to any of the income or revenue of the REIT, which includes the REIT’s allocation of income from New LP.

45. As of the Closing Date, the Exchange Price ($XXXXXXXXXX) was significantly greater than the closing trading price of the XXXXXXXXXX REIT Units on the XXXXXXXXXX, such that at Closing, the fair market value of the XXXXXXXXXX REIT Units for which the XXXXXXXXXX Preferred Units are exchangeable was substantially lower than the face amount of the XXXXXXXXXX Preferred Units.

46. It is not currently expected that New LP will exercise its right to cause the exchange of the XXXXXXXXXX Preferred Units for REIT Preferred Units. It is expected that New LP will exercise its right to cause the exchange of the XXXXXXXXXX Preferred Units for XXXXXXXXXX REIT Units as soon as practicable after it is permitted to do so, unless the Vendor Affiliate has previously exercised its right to effect such exchange.

47. The Vendor Affiliate had sufficient cash to pay the portion of the Purchase Price that was paid directly to the Vendor, in accordance with the Unit Direction described in paragraph 36.

VI. PURPOSES OF THE COMPLETED, SUBJECT AND PROPOSED TRANSACTIONS

48. The Completed, Subject and Proposed Transactions have been and are being effected in order to enable the REIT to acquire the Property according to the commercial terms agreed between the REIT and the Vendor, including the indirect acquisition by the Vendor of preferred equity in the REIT group.

49. Significant restructuring and unitholder approvals would have been required to permit the REIT to issue preferred units directly to the Vendor Affiliate. For that reason, New LP is the issuing entity of the preferred equity to the Vendor Affiliate.

50. For greater certainty, the purpose of the exchange rights included in the terms and conditions of the XXXXXXXXXX Preferred Units is not to create an instrument that replicates the return on or value of a XXXXXXXXXX REIT Unit.

51. The reason for the terms and conditions of the XXXXXXXXXX Preferred Units described in Paragraph 33(e)(iv) above (related to income and taxable capital gains allocations for tax purposes) is to ensure that the Completed, Subject and Proposed Transactions have substantially the same result as would an issuance of preferred units by the REIT. Such terms and conditions are intended to provide assurance that the Completed, Subject and Proposed Transactions have not been and are not being entered into to circumvent subsection 104(7.1).

52. The purpose of the XXXXXXXXXX Loan is to fund a portion of the Purchase Price in a manner that gives rise to deductible interest payable by New LP.

VII. RULINGS

Provided that

a) the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, transactions and the purposes of the transactions,

b) the Completed and Subject Transactions were completed in the manner described above,

c) the Proposed Transactions are completed in the manner described above, and

d) there are no other transactions which may be relevant to the Rulings requested,

we rule as follows:

A. The holding of Consideration Preferred LP Units by the Vendor Affiliate will not, in and of itself, cause New LP to be a “SIFT partnership” for purposes of the Act.

B. Provided New LP has a legal obligation to pay interest on the XXXXXXXXXX Loan, and that New LP holds the Property for the purpose of gaining or producing income at all times while the XXXXXXXXXX Loan is outstanding, New LP will be entitled pursuant to paragraph 20(1)(c) to deduct the lesser of (i) the interest paid or payable (depending on the method regularly followed by New LP in computing its income for purposes of the Act) on the XXXXXXXXXX Loan and (ii) a reasonable amount in respect thereof, in each fiscal period of New LP during which the XXXXXXXXXX Loan is outstanding.

C. Subsection 245(2) will not apply to redetermine the tax consequences described in the foregoing rulings.

VIII. OTHER COMMENTS

Except as expressly stated, the Rulings provided herein do not imply acceptance, approval or confirmation of any income tax implications of the Facts, Completed Transactions, Subject Transactions, Proposed Transactions or Additional Information. In particular, nothing in this letter should be interpreted as confirming that the CRA has agreed to, reviewed or has made any determination, either expressly or implicitly, in respect of:

a) the reasonableness of the allocation of New LP’s profit or loss and whether or not section 103 of the Act would apply;

b) the calculation of the at-risk-amount in respect of any partnership interest;

c) the FMV or adjusted cost base of any partnership interest;

d) the FMV or adjusted cost base of any property referred to herein;

e) the income or capital nature of any asset, payment or other transaction;

f) the reasonableness or FMV of any fees or expenditures referred to herein;

g) whether any loan or other advance made by any partnership is a distribution of the partnership’s income or capital;

h) any other tax consequence relating to the Facts, Completed Transactions, Subject Transactions, Proposed Transactions, or any transaction or event taking place either prior to or subsequent to the such transactions, whether described in this letter or not, other than those specifically described in the Rulings given above, including whether any of the Completed, Subject, or 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.

The above Rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R12 dated April 1, 2022, and are binding on the CRA provided that the Proposed Transactions described above are commenced and entered into on or before XXXXXXXXXX.

Nothing in this letter should be construed as a confirmation, express or implied, that, for the purpose of any of the opinions given above, any adjustment to the FMV of the properties transferred or the consideration received, whether pursuant to a price adjustment clause or otherwise, will be effective retroactively to the time of the transfer. Furthermore, none of the opinions given in this letter are intended to apply to or in the event of the operation of a price adjustment clause, since such adjustment will be due to circumstances that do not constitute proposed transactions.

The above Rulings are based on the law as it presently reads and do not take into account any proposed amendments to the Act and the Regulations which, if enacted, could have an effect on the Rulings provided herein.

If the Facts, Completed Transactions, Subject Transactions, Proposed Transactions or the Additional Information as described above change after the date of this letter and prior to the completion of the Proposed Transactions, the Rulings provided may not apply unless a subsequent ruling letter is issued.

Yours truly,

XXXXXXXXXX
for Director
Partnerships and Corporate Financing Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch