5 December 1989 Income Tax Severed Letter 3-2679 - Limited partner at-risk rules

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.

Purpose

We are writing to request your direction concerning the possible application of paragraph 96(2.2)(d) of the Act in a fact situation on which we have been asked to provide an advance income tax ruling.

Background

For a description of the issue and the relevant facts in this case, reference is made to our Memo to the Review Committee dated November 8, 1989 (copy attached) which was discussed during the November 22 meeting of your Committee.

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Analysis of Similar Provisions in the Act

We looked at the following similar provisions in the Act and Regulations which include references to indemnities:

• 1. Subparagraph 248(a)(iii) of the Act at the definition of Term preferred share ("the issuing corporation ... may be required to provide any form of guarantee, security or similar indemnity ... with respect to the share");
• 2. Subparagraph 6205(1)(a)(ii) of the Regulations concerning prescribed shares for the purposes of the capital gains exemption ("a prescribed share is a share of the capital stock of a corporation where ... no person or partnership has ... an obligation to provide ... any form of undertaking with respect to the share (including any guarantee, security, indemnity ... that may reasonably be considered to have been given to ensure ... loss ... limited ... or (B) the holder of the share will derive earnings ...");
• 3. Draft paragraph 6202.1(1)(c) of the Regulations concerning prescribed shares for the purposes of the flow-through share legislation ("is a prescribed share if ... any person ... has an obligation ... to effect any undertaking. with respect to the share or the agreement under which the share is issued including any guarantee, security, indemnity ... that may reasonably be considered to have been given to ensure ... any loss ... is limited ... or ... the holder will derive earnings ..."); and
• 4. Paragraph 6202(b) of the Regulations concerning prescribed shares for the purposes of the old flow-through share legislation ("... is a prescribed share if ... a member of the related issuing group provides ... any form of guarantee, security or similar indemnity with respect to the share ...").

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At pages 829 and 830 of the 1984 Canadian Tax Foundation Conference Report (copy attached), Revenue Canada stated that the provisions of an indemnity whereunder a company agreed to indemnify the subscriber for any liability that might be incurred as a result of the resource company incurring the requisite expenses as agent for the subscriber would not generally result in the share being a prescribed share within the meaning of Section 6202 of the then draft Regulations.

The wording of the question responded to at the 1984 Conference was very broad, but if we view it in the same light as the above discussions, XXX.

Alternatives

Based on the above information and that contained in our November 8 memo to the Review Committee we submit the following alternatives:

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Recommendation

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