30 November 1995 Ruling 9532173 - LIMITED PARTNERSHIP FOR MUTUAL FUND COMMISSIONS

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.

Principal Issues: Mutual fund distribution limited partnership

1. timing of deductibility of sales commissions;

2. application of at-risk rules in respect of fees, distributions and a guarantee on bank loans to partnership.

3. application of draft section 143.2.

Position: Favourable ruling

1. 1/3 per year.

2. at-risk amount not reduced.

3. opinions given

Reasons: Standard arrangement. With respect to guarantee, it is not intended to reduce partners' risk of loss.

XXXXXXXXXX 953217

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

We are writing in reply to your letter dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of XXXXXXXXXX (the "Partnership").

You advise that to the best of the knowledge of XXXXXXXXXX the general partner of the Partnership (the "General Partner"), none of the issues involved herein is being considered by a Tax Services Office and/or Taxation Centre in connection with a tax return that has already been filed or relating to any issues currently under objection.

Unless otherwise noted, all references to statute are to the Income Tax Act.

Our understanding of the facts, proposed transactions and their purposes is as follows.

FACTS

1.XXXXXXXXXX (collectively, the "Funds" and, individually, a "Fund") consists of the following XXXXXXXXXX mutual funds:

XXXXXXXXXX

2.Each of the Funds is a "mutual fund trust" as defined in subsection 132(6), established under XXXXXXXXXX and managed by XXXXXXXXXX (the "Manager"), a corporation incorporated under XXXXXXXXXX.

3.Each of the Funds was formed under a declaration of trust governed by XXXXXXXXXX The capital of each Fund is divided into units, referred to herein as "Securities".

4.On XXXXXXXXXX, the Partnership was formed under XXXXXXXXXX by the filing of a Declaration of Limited Partnership under XXXXXXXXXX The Partnership was formed for the purpose of arranging for the distribution of certain Securities, as described more fully below, XXXXXXXXXX and will carry on its activities with a view to making a profit. Its fiscal year end is XXXXXXXXXX

The initial limited partner, XXXXXXXXXX contributed $XXXXXXXXXX to the capital of the Partnership.

XXXXXXXXXX

5.The General Partner

-was incorporated under XXXXXXXXXX, and is a "taxable Canadian corporation" and a "private corporation" within the meaning of those expressions in subsection 89(1);

-is responsible for the management of the Partnership on a day-to-day basis and may engage agents, including the Manager, to assist it in carrying out its management obligations to the Partnership;

-files its income tax returns with the XXXXXXXXXX Taxation Centre, deals with the XXXXXXXXXX Tax Services Office under tax account number XXXXXXXXXX and has a fiscal year end of XXXXXXXXXX; and

-does not intend to be a limited partner of the Partnership.

6. XXXXXXXXXX.

7.For purposes of securities legislation, the Manager is considered the promoter of the offering described below. It will be a party to the "Agency Agreement" (described below) in order to give certain representations and warranties as such promoter.

XXXXXXXXXX is a registered mutual fund dealer and as such, was granted certain distribution rights in respect of the Funds. It will be a party to the "Distribution Agreement" (described below) in order to waive those rights in favour of the Partnership.

PROPOSED TRANSACTIONS

8.Pursuant to an agreement to be made between the Funds, the Partnership, XXXXXXXXXX and the Manager (the "Distribution Agreement"), the Partnership will be granted the right to arrange for the distribution of certain Securities of the Funds in respect of which investors in such Funds are not required to pay sales commissions at the time of purchase but which generally are subject to a deferred sales charge ("Redemption Fee Securities", as described more fully below).

As described more fully below, the Partnership will be obligated to pay an amount in respect of selling commissions to the registered dealers through which the Redemption Fee Securities will be sold and will receive certain fees.

9.The significant terms of the Distribution Agreement will be as follows:

(i) The Partnership will be granted the right to arrange for the distribution of "Redemption Fee Securities" (as described below) of the Funds and those of any other open-end mutual fund created or reorganized, or the management rights of which are acquired, by the Manager (an "Additional Fund"). As of this date, no Additional Fund is specifically contemplated.

"Redemption Fee Securities" are Securities which are acquired by investors without the payment of a sales commission at the time of purchase but in respect of which the investors are required to pay, subject to certain exemptions described below, a deferred sales charge.

Redemption Fee Securities may or may not be "Distributed Securities" as defined below.

(ii) The distribution right granted to the Partnership will commence on the effective date of the Distribution Agreement and will continue until XXXXXXXXXX, subject to earlier termination or modification in certain circumstances described below.

The distribution right will not be so granted prior to the date of this advance ruling and nor will the Partnership expend any funds, or incur any obligations, on or in respect of Selling Commissions, as described below, prior to such date.

(iii) The Partnership's right to arrange for distribution of Redemption Fee Securities will be exclusive, subject to earlier termination or modification in certain circumstances described below.

(iv) Selling commissions will be paid by the Partnership to the Manager in trust for distribution by the Manager to the registered dealers through which Redemption Fee Securities are sold to investors; such commissions will be equal to XXXXXXXXXX% of the purchase price of such securities (the "Selling Commissions"). More specifically, as Redemption Fee Securities are sold, the Partnership will be invoiced ( XXXXXXXXXX ) by the Manager and the Partnership will satisfy such invoices forthwith.

(v)In consideration for arranging for the distribution of the Redemption Fee Securities and paying the Selling Commissions, the Partnership will receive:

(a) a "Distribution Fee", as described below, and

(b) deferred sales charges paid by investors on the redemption of Distributed Securities to the Manager, in its capacity as manager of the XXXXXXXXXX

10.The "Distribution Fee" payable to the Partnership by the Manager will be a fee not exceeding XXXXXXXXXX% and not less than XXXXXXXXXX% of the value (the "Net Asset Value", as described below) of the Distributed Securities as at XXXXXXXXXX

"Distributed Securities" means: (a) Redemption Fee Securities in respect of which a Selling Commission has been paid by the Partnership; (b) Redemption Fee Securities purchased upon the immediate reinvestment of proceeds of redemption or deemed redemption of Redemption Fee Securities described in (a); and (c) Securities issued upon the automatic reinvestment of distributions on Redemption Fee Securities described in (a) (the Redemption Fee Securities described in (c) are hereinafter referred to as "Reinvested Securities").

"Net Asset Value" means, with reference to a Distributed Security, the amount determined on each market day by dividing the value of the assets of the Fund less its liabilities at the close of trading on such day by the total number of Securities then outstanding.

11.To the extent that Distributed Securities are redeemed within XXXXXXXXXX from the date of their issue (or deemed date of issue), deferred sales charges which are charged to the investor will be paid by the Manager to the Partnership as a "Redemption Fee".

The deferred sales charge is a percentage of the original purchase price of the Distributed Securities. The percentage commences at XXXXXXXXXX% if redemption occurs during the XXXXXXXXXX after the date or deemed date of purchase by the investor and decreases over time to XXXXXXXXXX after the XXXXXXXXXX after purchase.

All Reinvested Securities are deemed to have been issued on the date or deemed date of the issue of the Distributed Securities to which such distributions are attributable.

In certain circumstances, an investor in a Fund may redeem Distributed Securities without payment of a deferred sales charge and, therefore, the Partnership will not receive the Redemption Fee in respect of such redemptions. Such circumstances include:

(i) redemptions of Distributed Securities of a Fund where the proceeds of redemption are applied to the purchase of Securities of a Fund or an Additional Fund, except Securities so purchased shall be deemed to have been issued as of the date of issue of such Distributed Securities and the deferred sales charges shall be payable in respect of such purchased Securities on their redemption;

(ii) where an investment in Distributed Securities is otherwise transferred from one Fund to another Fund or an Additional Fund;

(iii) redemptions made in accordance with the provisions of National Policy Statement No. 39 of the Canadian securities administrators, because of a failure of the subscriber to make timely payment for a Redemption Fee Security;

(iv) redemptions, in any calendar year, of, generally, up to XXXXXXXXXX% of the aggregate number of Redemption Fee Securities held by the investor XXXXXXXXXX; and

(v) redemptions of Reinvested Securities.

12.Holders of Distributed Securities may transfer between different Funds without incurring a Redemption Fee. Neither a deferred sales charge nor a Selling Commission is payable in respect of such transfers. The Distributed Securities purchased on such a transfer will be subject to the same deferred sales charges which would have applied to the Distributed Securities redeemed.

13.The Partnership will be entitled to receive the Distribution Fee and the Redemption Fee irrespective of the Partnership's right to arrange for distribution of Redemption Fee Securities becoming non-exclusive, expiring or being terminated.

14.The assets of the Partnership not immediately required for payment of Selling Commissions or other expenses or to make distributions to the partners of the Partnership will be invested by the Manager, acting as investment manager to the Partnership pursuant to an investment management agreement, in short-term investments, which may include securities of the Funds or other funds managed by the Manager.

15.The Partnership will offer a minimum of XXXXXXXXXX limited partnership units (the "Partnership Units") and a maximum of XXXXXXXXXX Partnership Units at a price of $XXXXXXXXXX per Partnership Unit (the "Offering") for sale to the public in certain provinces in Canada by way of a prospectus (the "Prospectus"). The minimum subscription amount will be $XXXXXXXXXX Partnership Units.

16. XXXXXXXXXX.

17. XXXXXXXXXX both of which are registered XXXXXXXXXX dealers, (the "Agents") will enter into an agency agreement (the "Agency Agreement") with the Partnership, the General Partner and the Manager pursuant to which the Agents will agree to offer the Partnership Units for sale on a best efforts basis. In addition to soliciting offers for the purchase of Partnership Units, the Agents will:

(i) act as financial advisors and provide advice to the Partnership with respect to the terms and conditions and possibility and method of distributing the Partnership Units;

(ii) advise and assist in the preparation of the Prospectus; and

(iii) facilitate the distribution of the Partnership Units pursuant to the Prospectus.

18.A commission of XXXXXXXXXX% of the subscription price will be payable by the Partnership to the Agents for each Partnership Unit sold.

Issue expenses of the Partnership are estimated to be $XXXXXXXXXX. The issue expenses include advertising and marketing expenses related to the Offering, cost of preparing and printing the Prospectus, legal and accounting fees relating to the Prospectus and cost of registration and delivery of deposit receipts and certificates for the Partnership Units.

19.The General Partner, XXXXXXXXXX as the initial limited partner, and each person who is admitted to the Partnership as a limited partner will enter into a limited partnership agreement (the "Partnership Agreement"). A limited partner is a person who owns Partnership Units and whose name has been entered on the record of the Partnership as a limited partner ("Limited Partner").

20.The Partnership Agreement will include, among other things, the following provisions:

(i) The net income of the Partnership for tax purposes for a fiscal period will be allocated as to XXXXXXXXXX% to the General Partner and XXXXXXXXXX% to the Limited Partners of record on XXXXXXXXXX of such fiscal period. Losses of the Partnership for each fiscal period are to be allocated among the General Partner and the Limited Partners on the same basis.

Allocations to Limited Partners will be in proportion to the number of Partnership Units held on that date, regardless of the fact that not all of such Limited Partners may have participated in the distributions made by the Partnership during the fiscal period or that Limited Partners may not have held their Partnership Units for the entire fiscal period.

(ii) The General Partner is entitled to be reimbursed for expenses incurred on behalf of the Partnership.

(iii) The General Partner shall receive a monthly fee from the Partnership equal to XXXXXXXXXX% of the expenses incurred by the General Partner on behalf of the Partnership other than interest or any other expenses related to any borrowings by the Partnership, the Selling Commissions payable by the Partnership, the cost of the offering, fees payable by the Partnership in respect of the investment of the Partnership's assets and other expenses not incurred by the General Partner.

Compensation for all services provided by the General Partner, its associates and affiliates will be at rates not exceeding those at which such services are available from independent parties dealing at arm's length.

(iv) The General Partner has the authority to borrow funds in the name of the Partnership from time to time, from the Manager or its affiliates, or from recognized financial institutions selected by it, only to pay the operating expenses, interest and related costs of the Partnership or Selling Commissions on Redemption Fee Securities. The rate of interest on any monies borrowed from the Manager or its affiliates shall not exceed that which the Manager or its affiliates pay in relation to borrowings from its principal lenders plus XXXXXXXXXX% per annum, and shall never surpass that which the Partnership could obtain from recognized financial institutions with respect to similar borrowings. The Partnership will repay the principal of any amount borrowed prior to the end of the year in which that borrowing took place.

XXXXXXXXXX will guarantee the repayment of all amounts owing by the Partnership to such recognized financial institutions. In connection with such guarantee, you advise that the guarantee is provided solely for legitimate commercial reasons, in particular, that because the Partnership does not have sufficient assets, Canadian banks will not provide it with financing in the absence of security, including the guarantee of XXXXXXXXXX and is not provided to reduce the risks to which limited partners are exposed. In the event the guarantee is called upon, the Partnership would be liable to the guarantors in the same manner as that in which it is liable to the bank.

(v) The Partnership will continue until XXXXXXXXXX after the issuance of the last Distributed Security unless earlier dissolved upon certain events as provided for in the Partnership Agreement.

(vi) The Partnership shall follow the procedure for dissolution established in the Partnership Agreement on the date on which the General Partner determines that the Partnership is no longer economically viable or the continuing profitability of the Partnership is in doubt, or upon the occurrence of certain events.

(vii) Upon dissolution of the Partnership, its assets, if any, will be liquidated, its liabilities paid, the capital contribution of the Limited Partners paid pro rata and the balance of the assets, if any, distributed as to XXXXXXXXXX% to the General Partner and XXXXXXXXXX% to the Limited Partners pro rata. Except on dissolution of the Partnership, no Limited Partner will be entitled to any reimbursement of his contribution to the capital of the Partnership.

21.If for any reason the Partnership is unable to pay the Selling Commissions, XXXXXXXXXX the Manager may terminate or limit the Partnership's exclusive right to arrange for the distribution of Redemption Fee Securities and may (i) pay Selling Commissions itself; (ii) limit the number of Redemption Fee Securities in respect of which the Partnership is entitled to arrange distribution; or (iii) arrange, or may grant others the right to arrange, for the distribution of Redemption Fee Securities.

22.In the event that on a date prior to XXXXXXXXXX the Partnership has expended the proceeds of the Offering (less issue expenses and Agents' commission), the exclusive right to arrange for the distribution of Redemption Fee Securities will cease.

23.Commencing on XXXXXXXXXX the Partnership will distribute quarterly to Limited Partners who are the registered holders of Partnership Units on the last day of each fiscal quarter, pro rata, XXXXXXXXXX% of the Distributable Cash."Distributable Cash" means the amount by which the Distribution Fee, investment income and Redemption Fee earned by the Partnership during the fiscal quarter and the amount of any reserves retained at the end of the previous fiscal quarter (excluding amortized expenses) exceed the expenses (excluding Selling Commissions) of the Partnership for such fiscal quarter (including the amount of interest on any borrowings) and any reserves established by the General Partner for the current fiscal quarter. After XXXXXXXXXX, such distributions will be made annually on the first business day of each year commencing on XXXXXXXXXX

24.Proceeds of the Offering will first be applied to the expenses of issuing Partnership Units pursuant to the Prospectus and the Agents' commission. The remaining proceeds will be applied to the payment of Selling Commissions and to repay amounts borrowed to make such payments and, if the Distribution Fee, Redemption Fee and investment income received by the Partnership are not sufficient to pay operating expenses, to the payment of operating expenses.

25.The Partnership Units will be a tax shelter within the meaning assigned by subsection 237.1(1). The General Partner will apply for an identification number in respect of the Partnership pursuant to subsection 237.1(2). The General Partner will file annual tax shelter information returns and provide copies to the Limited Partners pursuant to subsection 237.1(7).

26.For financial reporting purposes, the Selling Commissions described above will be accounted for in accordance with the treatment required under the Canadian Institute of Chartered Accountants Emerging Issues Committee EIC-33 Abstract dated November 20, 1991, which provides that sales commissions and other distribution costs should be accounted for as a deferred charge and amortized over the periods in which revenue is expected to be recognized.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of the Partnership is to arrange for the distribution of Redemption Fee Securities and to permit investors in Partnership Units to profit to the extent that revenues derived from the business exceed the expenses of the Partnership.

RULINGS GIVEN

Provided all relevant facts, proposed transactions and their purposes have been fully disclosed and, as summarized above, are accurate, and further provided that the Partnership is a partnership at law, we confirm the following.

A.The Selling Commissions described in 9 above, paid or payable by the Partnership on or after the date of this advance income tax ruling and on or before XXXXXXXXXX to registered dealers on the Redemption Fee Securities for which it arranges distribution will be amortized and deductible over three fiscal year periods by the Partnership in computing its income or loss for its fiscal period in the following manner:

-33 1/3% for the fiscal period in which the Selling Commissions are paid or payable; and

-33 1/3% for each of the subsequent two fiscal periods after the fiscal period in which the Selling Commissions are paid or payable.

B.Each Limited Partner who owns Partnership Units at the end of a fiscal period of the Partnership will be

-required to include the amount of the income of the Partnership for such fiscal period allocated to the Limited Partner in accordance with the terms of the Partnership Agreement, and

-entitled to deduct, subject to the provisions of subsections 96(2.1) and 237.1(6), the amount of the losses of the Partnership for such fiscal period allocated to the Limited Partner in accordance with the terms of the Partnership Agreement

in computing the Limited Partner's income or loss for income tax purposes for the taxation year in which such fiscal period ends.

C.The Partnership will be entitled to deduct in computing its income or loss for income tax purposes of the relevant fiscal period, interest of a reasonable amount paid or payable (depending on the method regularly followed by the Partnership) by the Partnership in respect of such fiscal period pursuant to a legal obligation to pay interest on money borrowed to fund the Partnership's obligations as described in 20(iv) above, pursuant to subparagraph 20(1)(c)(i).

D.The provisions of paragraph 96(2.2)(d) will not be applied to reduce a Limited Partner's "at-risk" amount by reason of

(a)the Partnership's entitlement to Distribution Fees and Redemption Fees pursuant to the Distribution Agreement as described in 10 and 11 above and borrowings made by, or guarantees provided to, the Partnership as described in 20(iv) above; and

(b)distributions as described in 23 above as these will reduce the adjusted cost base of the Limited Partner's Partnership Units by virtue of subparagraph 53(2)(c)(v).

E.Expenses incurred by the Partnership in the course of issuing and selling the Partnership Units under the Prospectus, as described in 18 above, will, to the extent that they are reasonable, be deductible in computing the income of the Partnership pursuant to paragraph 20(1)(e) at the rate of 20% per year subject to a pro rata deduction in the Partnership's first taxation year based on the number of days in such year.

F.As a result of the proposed transactions, in and of themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given above.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 issued by Revenue Canada on September 28, 1990 (as amended by Special Release dated September 30, 1992) and is binding on the Department provided the proposed transactions are implemented as described above on or before XXXXXXXXXX. This ruling is based on the Income Tax Act in its present form and does not take into account the effects of any proposed amendments thereto. Except as expressly stated, our rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions. In particular, nothing in this letter should be interpreted as confirming, either expressly or implicitly: (a) the reasonableness of any of the expenses of the Partnership; and (b) the existence of a reasonable expectation of profit of the Partnership or any partner of the Partnership.

As set out in paragraph 6 of Information Circular 70-6R2, advance rulings are only provided in respect of transactions that are seriously contemplated. Accordingly, no rulings have been provided with respect to transactions relating to any Additional Funds as described above.

OPINIONS

1.Notwithstanding the rulings given in this letter, if the provisions of draft section 143.2 are enacted as proposed by the Minister of Finance on December 14, 1995, it is our opinion that the amount of any "expenditures"* made by the Partnership, including, but not limited to, Selling Commissions and the issuance expenditures referred to in rulings A and E above, would be reduced by the total of

(a)the "limited-recourse amounts"* of

(A)the Partnership, and

(B)all taxpayers not dealing at arm's length with the Partnership

that can reasonably be considered to relate to the particular expenditures,

(b)the Partnership's "at-risk adjustment"* in respect of the particular expenditures, and

(c)the limited-recourse amounts and at-risk adjustments of each taxpayer who deals at arm's length with and holds an interest in the Partnership that can reasonably be considered to relate to the particular expenditures.

2.To the extent that monies borrowed by the Partnership in any particular fiscal year are repaid in full by the end of such fiscal year of the Partnership, as described in 20(iv) above, and such repayment is not part of a series of loans or other indebtedness and repayments by the Partnership, it is our opinion that if draft section 143.2 is enacted as proposed by the Minister of Finance on December 14, 1995, such indebtedness and repayment will not, in and of itself, result in the application of draft section 143.2 to reduce the amounts otherwise deductible by the Partnership.

3.For greater certainty, if draft section 143.2 is enacted as proposed by the Minister of Finance on December 14, 1995, and if any Limited Partner has limited-recourse amounts that can reasonably be considered to relate to the acquisition of his Partnership Units, it is our opinion that:

(a)draft subsection 143.2(6) would apply to reduce that Limited Partner's cost of the Partnership Units, and

(b)the expenditures made by the Partnership would also be considered to relate to those limited-recourse amounts and would be reduced by the total of such limited-recourse amounts.

* As defined in draft section 143.2.

The opinions expressed above are provided in accordance with paragraph 22 of Information Circular 70-6R2. Such opinions do not constitute advance income tax rulings and are not binding on the Department.

Yours truly,

for Director
Manufacturing Industries, Partnerships
and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch