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.
941138
XXXXXXXXXX C. R. Brown
Attention: XXXXXXXXXX
May 10, 1994
Dear Sirs:
Re: Proposed Legislation on Negative Adjusted Cost Base
This is in reply to your letter dated April 7, 1994 and your facsimile transmission dated April 29 with respect to the "transitional relief relating to the February 22, 1994 budget proposals concerning negative partnership adjusted cost base and convertible debt" (the "Release").
You have asked for our comments on the following situation.
An offering memorandum (the "Memorandum") was distributed before February 22, 1994 whereby a limited partnership (the "Partnership") offered its units (the "Units") for sale to investors. Solicitations in respect of the sale of the Units were made before February 22, 1994. The Partnership was established to invest in certified productions through the acquisition of units (the "Film Units") in limited partnerships (the "Film Partnerships") which have been formed for the purpose of acquiring undivided ownership rights in such certified productions. The Memorandum contains a complete description of the Units as well as the terms and conditions of the offering of the Units. Although no specific Film Partnerships or certified production are mentioned in the Memorandum, the conditions which must be met prior to the acquisition of Film Units and certified productions are fully described in the Memorandum. In addition, the Memorandum describes the manner in which profits will be allocated and certified productions will be financed.
The Memorandum provides that investors must acquire the Units in 1994. The consideration for the Units is payable by the proceeds of a loan to be disbursed to the Partnership in 1994, a cheque payable on the date of acquisition and postdated cheques which are tendered on acquisition date some of which are dated for February and March of 1995.
The Film Partnerships will acquire certified productions in 1994 and will use the net proceeds from the subscription of the Film Units by the Partnership to pay the purchase price of the certified production. The purchase and sale agreements governing the acquisition of the certified production generally require that the purchase price be paid in instalments, with the final such payment made in March of 1995 to coincide with the payment by the investors in the Units.
You have asked us to confirm the following:
1. The funds raised in the manner described above would be considered to be raised in 1994 within the meaning of the Release.
2.An amendment to the Memorandum to comply with the transitional rule provided in paragraph 1B(d) of the Release or in paragraph 1B(e) of the Release would be acceptable. In other words, the sale of units would still be considered to be substantially in accordance with the Memorandum.
3. An amendment to the year-end of the Partnership and to the date on which the revenues of the Partnership will first be distributed would be acceptable and the sale of units would be considered to be substantially in accordance with the Memorandum.
4. For the purposes of the transitional relief provisions, the Partnership will be considered to be acquiring its interest in the Film Partnerships pursuant to the Memorandum.
5.The certified productions owned by the Film Partnerships will be considered to be property of the Partnership within the meaning of paragraph 1B(e) of the Release, in order that the Partnership may have until the end of February 1995 to expend its capital to acquire the Film Units. Generally such capital is related to the postdated cheques to be received in February 1995 or later.
An additional issue involves an offering memorandum distributed before February 22, 1994 which called for a closing no later than XXXXXXXXXX. There was a closing on that date for less than the full number of units. In such cases the usual practice is to have a later closing before the end of 1994 to sell any unsold units. There are no rules or regulations which preclude such sales. You have asked us to confirm the following:
6.That a closing for the sale of unsold units prior to 1995 would be acceptable and that the sale of these latter units would be substantially in accordance with the offering memorandum.
Resolution 6 of the Notice of Ways and Means Motion to amend the Income Tax Act, contained in the federal budget released on February 22, 1994, provides that a gain will be realized where, at the end of a fiscal period, a limited partner holds a partnership interest that has a negative adjusted cost base. This general rule does not apply where;
(a)at the end of the relevant fiscal period, the partnership continued to carry on the business that was carried on by it on February 22, 1994,
(b)the limited partner held the partnership interest on February 22, 1994, and
(c)there has been no substantial contribution of capital to the partnership or substantial partnership borrowings after February 21, 1994 (other than in certain limited circumstances).
On March 30, 1994, the Minister of Finance issued the Release which clarifies the operation of the transitional relief set out in (a), (b) and (c) above. The Release indicates, inter alia, that a limited partner is exempt from the application of the proposed amendments respecting the negative adjusted cost base, by virtue of the transitional relief under the following circumstances:
A.an offering memorandum was distributed before February 22, 1994 containing a complete description of the securities contemplated in the offering as well as the terms and conditions of the offering of securities,
B.solicitations in respect of the sale of the securities contemplated by the offering memorandum were made before February 22, 1994 and funds are raised before 1995 substantially in accordance with the offering memorandum,
C.the funds so raised are expended before 1995 in accordance with the offering memorandum (or March 1995 in the case of certain certified productions),
D.the limited partnership units are issued on or prior to December 31, 1994 in accordance with the offering memorandum, and
E.the funds raised by and in accordance with the offering memorandum are expended in the manner contemplated in the offering memorandum.
Accordingly, our views with respect to the issues set out in 1 to 6 above are as follows:
1.It is our view that, for the purposes of the transitional relief, the funds would be considered to be raised in 1994 notwithstanding the fact that payment for the limited partnership unit will be made in part by cheques that are postdated to 1995. In order to meet condition A, above it is necessary that the memorandum be "distributed" within the meaning of the term "distributed" or its synonym as defined or implied in the relevant provincial or federal legislation governing such offerings. We also assume that the terms and conditions of the Memorandum set out the maximum amount of the offering prior to February 22, 1994. If there is no fixed amount this opinion and the following opinions do not represent the Departments views. In such cases, the Department would make a determination by an investigation of the facts and circumstances. Assuming the offering is for a fixed amount and is distributed in the manner discussed above, it appears that the requirements for transitional relief are met based on the facts provided.
However, a final determination could only be made through an examination of the specific documents and the details of distribution and solicitation.
2.An amendment to the Memorandum to meet the requirement that the funds be raised and spent in 1994 or 1995 in certain circumstances would not in and by itself provide the basis for denying the transitional relief.
3.An amendment to the Memorandum
(a) changing the year end of the partnership but which does not have the effect of increasing the offering amount, and
(b)changing the time at which funds are distributed to the limited partners,
would not in and by itself or in combination with the amendment described in 2 above provide the basis for denying the transitional relief.
4.We agree that, for the purposes of the transitional relief provisions, the Partnership will be considered to acquire its interest in the Film Partnerships pursuant to the Memorandum.
5.We agree that the certified productions owned by the Film Partnerships will be considered to be property of the Partnership within the meaning of paragraph 1B(e) of the Release, in order that the Partnership may have until the end of February 1995 to expend its capital to acquire the Film Units.
6.We agree that an additional closing for the sale of unsold units prior to 1995 in the circumstances set out above would be acceptable and that the sale of these latter units would be substantially in accordance with the offering memorandum.
These opinions are subject to the proviso that legislation is enacted substantially in the form of the transitional relief as clarified by the Release.
The above opinions are not rulings and accordingly they are not binding on Revenue Canada, Customs, Excise and Taxation.
We trust these comments will be of assistance.
Yours truly,
for Director
Manufacturing Industries, Partnerships
and Trusts Division
Rulings Directorate
Legislative and Intergovernmental
Affairs Branch
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