12 June 1992 Income Tax Severed Letter 9216385 - Co-generation Project Non-recourse Financing

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.

Please note that the following document, although believed to be correct at the time of issue, may not represent the current position of the Department. Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.

SUBJECT: CO-GENERATION PROJECT NON-RECOURSE FINANCING SECTION: 96(2.2)]

1992 CPTS ROUNDTABLE

QUESTION

• 4. Structuring a major co-generation project to maximize the benefits of Class 34 of Schedule II of the Income Tax Regulations often includes principal business energy corporations as partners in the project. The partners provide equity financing as general partners and based on the amount of partnership equity, the general partnership negotiates project financing with recourse only to the project assets.
• Revenue Canada has indicated in a technical interpretation that it would not normally apply paragraph 96(2.2)(d) of the Act where a general partnership has obtained "non-recourse or limited recourse financing that arose as a result of legitimate commercial transactions unrelated to a general partner's acquisition of a partnership interest". Would this policy apply in the above circumstances?
• In what circumstances involving non-recourse or limited recourse financing at the partnership level will Revenue Canada consider such financing to be related to the acquisition of a partnership interest?

ANSWER

• 4. It is our view that paragraph 96(2.2)(d) of the Act generally will not apply with respect to the benefit that may arise by virtue of a general partnership obtaining non-recourse or limited recourse financing that arose as a result of legitimate commercial transactions unrelated to a general partner's acquisition of a partnership interest. The situation described above appears to be consistent with this view. However, it is not possible to state that non-recourse or limited recourse loans to a general partnership will never constitute a benefit under paragraph 96(2.2)(d) for the purposes of the at-risk rules in section 96 of the Act.
• The circumstances involving non-recourse or limited recourse financing at the partnership level in which Revenue Canada will consider such financing to be related to the acquisition of a partnership interest will depend on each specific situation and no general guidelines are currently available.

Prepared by: Bruce Rankin
ISSUE SHEET

1991 CPTS Roundtable Bruce Rankin
Question 4 5-921638
June 12, 1992

This question was submitted by XXX,XXX

The text of the question refers to earlier technical opinions (#911724 dated August 14, 1991 and #910823 of June 11, 1991, both by C. Bowen) which state that the Department would not normally apply 96(2.2)(d) of the Act where a general partnership obtains non-recourse financing pursuant to legitimate commercial transactions not related to the partner's acquisition of a partnership interest. Our research brought to our attention a number of technical interpretations on similar questions.

The scenario is the same as the situation described in the previous opinions in which partners contribute capital to a general partnership which then arranges its own financing on commercial terms. In this case the opinions given were that Revenue Canada would not consider a benefit under 96(2.2)(d) to have occurred.

We note however that the facts presented with the previous opinions did not indicate that it was planned that the partner's capital would be withdrawn, thus limiting the capital financing in the project to the borrowed funds. If the intent is to refund the partner's original investment at some convenient time once the non-recourse financing is in place, it may (or may not depending on the circumstances) be appropriate for the at-risk rules to apply to limit the partners' access to the accelerated CCA deductions.

John Chan discussed the question and answer with Mr. John Bentley at his office on June 10, 1992 and he does not have any concerns about the question and answer.

A copy of the question and answer together with the issue sheet was sent by fax to Simon Thompson, Dept. of Finance on June 9, 1992 and John Chan spoke to Mr Thompson on June 10. Mr. Thompson said that Finance does not have any concerns about the question and answer.

The question and answer was reviewed by John Kurrant, Oil & Gas Specialist on June 12 and he said that he does not have any concerns.