30 November 1995 Ruling 9613383 - XXXXXXXXXX TAX SHELTER

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:

This is standard XXXXXXXXXX limited partnership arrangement with a two -tiered partnership consisting of a first tier XXXXXXXXXX partnership and a bottom tier XXXXXXXXXX partnership.

XXXXXXXXXX

The distinguishing features are that there is no debt (other than interim financing which is to be eliminated when all the investor funds are received) in either of the partnerships because of new proposed rules on limited recourse debt. There is full recourse to the investor as previously. The other significant change is that XXXXXXXXXX There are two types of XXXXXXXXXX limited partnership units solely to allow the investors to recover their capital before XXXXXXXXXX Since there are no provisions of the act that deal with returns of partnership capital, partners may decide this amongst themselves and arrangement in this ruling does not raise any tax or ruling concerns. The income and loss are shared on the basis of units held and is considered appropriate.

Position:

The usual rulings and opinions were provided. In addition the opinions that we have provided on 143.2 in the mutual fund commission partnership were added. This to make taxpayer aware of the scope of this legislation when arranging financing to purchase tax shelters. It was stated in the ruling that investors give representations that they will not finance their purchase with limited recourse debt. Since this may not be effective and since there maybe offside debt in either of the partnership, these opinion should be included in the ruling.

Reasons:

Standard rulings and opinions

XXXXXXXXXX
XXXXXXXXXX							961338
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to your request of XXXXXXXXXX for an advance income tax ruling on behalf of:

(a)XXXXXXXXXX (the "XXXXXXXXXX Partnership");

(b)XXXXXXXXXX (the "XXXXXXXXXX Partnership"); and

(c)those investors who acquire a limited partnership interest in the XXXXXXXXXX Partnership during XXXXXXXXXX (individually, an "Investor" and collectively, the "Investors");

You confirm that to the best of the knowledge of the parties hereto, none of the issues involved in this ruling request is currently being considered by a District Tax Services Office or a Taxation Centre in connection with a tax return already filed, and none of the issues is currently under objection.

In your letter of XXXXXXXXXX you provided the draft documents. Although there will be negotiations with the parties involved and there may be modifications XXXXXXXXXX our rulings, as contained in this letter, are based on the draft documents we received subject to the amendments outlined in your letter of XXXXXXXXXX.

The following general documents were provided:

(a)XXXXXXXXXX
(b)XXXXXXXXXX
(c)XXXXXXXXXX
(d)XXXXXXXXXX
(e)XXXXXXXXXX
(f)XXXXXXXXXX
(g)XXXXXXXXXX

XXXXXXXXXX

(a)XXXXXXXXXX
(b)XXXXXXXXXX
(c)XXXXXXXXXX
(d)XXXXXXXXXX

XXXXXXXXXX

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to:

(a)afford private Canadian investors the opportunity to invest in

XXXXXXXXXX

(b)encourage and facilitate the XXXXXXXXXX thereby creating employment in Canada and utilizing and enhancing the expertise of Canadian XXXXXXXXXX personnel.

FACTS AND PROPOSED TRANSACTIONS

Organization

1.The XXXXXXXXXX Partnership was established on XXXXXXXXXX and a declaration was filed under the Limited Partnerships Act (XXXXXXXXXX) on that date. The general partner (the "General Partner") of the XXXXXXXXXX Partnership is XXXXXXXXXX The initial limited partner of the XXXXXXXXXX Partnership is XXXXXXXXXX (the "Initial Limited Partner"). Each of these corporations is a resident of Canada for the purposes of the Income Tax Act (Canada), as amended (the "Act") and all the outstanding shares in the capital stock of these corporations are owned by XXXXXXXXXX The registered and business office of the General Partner is located in Canada and the business of the XXXXXXXXXX Partnership will be conducted from this office. The fiscal year end of the XXXXXXXXXX Partnership is XXXXXXXXXX The XXXXXXXXXX Partnership will apply for, and will obtain, a tax shelter identification number. The XXXXXXXXXX Partnership will also obtain a partnership identification number for the purposes of the Act.

2.The XXXXXXXXXX Partnership was established as a limited partnership on XXXXXXXXXX pursuant to the Limited Partnership Act (XXXXXXXXXX). The general partner of the XXXXXXXXXX Partnership (the "XXXXXXXXXX General Partner") is the General Partner referred to in 1 above and the initial limited partner of the XXXXXXXXXX Partnership is the Initial Limited Partner referred to in 1 above. The registered and business office of the XXXXXXXXXX General Partner is located in Canada. The XXXXXXXXXX Partnership will be registered for GST purposes pursuant to the Excise Tax Act (Canada), as amended. The fiscal year end of the XXXXXXXXXX Partnership will be XXXXXXXXXX

XXXXXXXXXX

3. XXXXXXXXXX

4. XXXXXXXXXX

5.At least XXXXXXXXXX% of the XXXXXXXXXX Expenses of the XXXXXXXXXX Partnership will be incurred in respect of XXXXXXXXXX performed in Canada by Canadian residents.

6.Ownership of all results of the XXXXXXXXXX, including any tangible property and equipment purchased and supplied in connection with the XXXXXXXXXX, will immediately vest in and be retained by XXXXXXXXXX will own XXXXXXXXXX The XXXXXXXXXX Partnership will neither own nor acquire any interest in XXXXXXXXXX. The XXXXXXXXXX Partnership will agree with

XXXXXXXXXX

7.The XXXXXXXXXX Partnership will agree to prepare XXXXXXXXXX reports that may be reasonably required by XXXXXXXXXX The XXXXXXXXXX Partnership will agree to comply with

XXXXXXXXXX

XXXXXXXXXX

8.In consideration for providing the XXXXXXXXXX , the XXXXXXXXXX Partnership will be entitled to receive a fee (the "XXXXXXXXXX Fee"). The XXXXXXXXXX Fee will be segregated into the XXXXXXXXXX components described below. The segregation of the XXXXXXXXXX Fee in this manner is intended to permit the XXXXXXXXXX Partnership to recoup its investment in the XXXXXXXXXX Expenses and to earn a profit in a manner which takes into account, XXXXXXXXXX, the other contributors and participants in the XXXXXXXXXX, including XXXXXXXXXX

(a) The XXXXXXXXXX Partnership will be entitled to a fee computed with reference to "XXXXXXXXXX" ( which exclude pre-sales) earned in connection with

XXXXXXXXXX

(b) Thereafter, the XXXXXXXXXX Partnership will be entitled to a fee computed with reference to the

XXXXXXXXXX

(c) Thereafter, the XXXXXXXXXX Partnership will be entitled to a fee equal to a negotiated percentage of net profits from the XXXXXXXXXX, in the range of approximately XXXXXXXXXX%.

9.All amounts earned on account of the XXXXXXXXXX Fee will be reported for Income Tax purposes by the XXXXXXXXXX Partnership on an accrual basis. The actual payment of the XXXXXXXXXX Fee will take place as follows. XXXXXXXXXX will be required to report XXXXXXXXXX to the XXXXXXXXXX Partnership, with reports being due approximately XXXXXXXXXX after each reporting period. The first report will be due

XXXXXXXXXX

XXXXXXXXXX

10. XXXXXXXXXX

11.As security for the payment of a portion of the XXXXXXXXXX Fee that may be owing to the XXXXXXXXXX Partnership, XXXXXXXXXX will deposit or pledge a negotiated amount, which may be comprised of cash or other securities, with the Lender (as defined below).

Financing

12.The XXXXXXXXXX Partnership intends to raise financing to pay the XXXXXXXXXX Expenses through the issuance of Class XXXXXXXXXX Limited Partnership Units (the " XXXXXXXXXX Units") and Class XXXXXXXXXX Limited Partnership Units (the " XXXXXXXXXX Units"), as more particularly set out below. XXXXXXXXXX will agree to provide interim financing, directly or through an affiliate, to permit the XXXXXXXXXX Partnership to fund the XXXXXXXXXX Expenses pending the issuance of the XXXXXXXXXX Units and the XXXXXXXXXX Units. The Interim Loan Agreement will provide for one or more loan facilities (collectively, the "Interim Loan"), each of which will be denominated in Canadian dollars. The maximum aggregate amount that may be drawn by the XXXXXXXXXX Partnership will generally be equal to the anticipated XXXXXXXXXX Expenses (plus 7% to assist the XXXXXXXXXX Partnership to fund applicable GST obligations pending receipt of input tax credits). The terms of each facility comprising the Interim Loan may differ. It is contemplated that all or a majority of the amounts drawn under the facilities will be repaid by the XXXXXXXXXX Partnership on or before XXXXXXXXXX (the outside date for repayment of all facilities will be XXXXXXXXXX).

13.The Investors will subscribe for limited partnership units (the "Units") of the XXXXXXXXXX Partnership at various times throughout XXXXXXXXXX (each such date being referred to as a "Closing Date"). Each of the Units will be identical in all respects. In general terms, the General Partner of the XXXXXXXXXX Partnership will be entitled to XXXXXXXXXX% of all profits, losses and distributions of the XXXXXXXXXX Partnership. The holders of Units, in the aggregate, will be entitled to XXXXXXXXXX% of all profits, losses and distributions of the XXXXXXXXXX Partnership.

14.The Investors will be afforded the opportunity to borrow (the "Bank Loan") approximately XXXXXXXXXX% of the funds necessary to fund the subscription for Units (the "Subscription Price") from XXXXXXXXXX, or from such other financial institution as may be acceptable to the General Partner (in any case, the "Lender"). The Lender will deal at arm's length with the XXXXXXXXXX Partnership, the XXXXXXXXXX Partnership, XXXXXXXXXX and each of the Investors, XXXXXXXXXX for purposes of the Act. XXXXXXXXXX from XXXXXXXXXX. The Bank Loan will bear interest until maturity at a negotiated commercial rate of interest (which rate will, at all times, be greater than or equal to the lesser of the prescribed rate for purposes of the Act in effect on the date that the Bank Loan is advanced to the Investor and the prescribed rate in effect from time to time during the period that the Bank Loan remains outstanding). Interest on the Bank Loan which accrues in each taxation year must be paid on or before XXXXXXXXXX of the following year. The Bank Loan will be fully repayable, together with accrued interest, on or before the XXXXXXXXXX anniversary of the date of advance. The Bank Loan may be prepaid by the Investor in whole or in part, without penalty, at any time. The Bank Loan will be a full recourse obligation of the Investor, and will be secured in first position by an assignment of the Investor's Units in the XXXXXXXXXX Partnership.

15.Each Investor will be responsible for arranging the financing of the balance of the Subscription Price for the Units. Each Investor will represent and warrant that any financing obtained by the Investor to acquire Units (including financing arranged by an Investor who does not choose to borrow under the Bank Loan) will not, directly or indirectly, constitute a "limited recourse amount" for the purposes of the Act.

XXXXXXXXXX

16.On a Closing Date, the XXXXXXXXXX Partnership will use the majority of the subscription proceeds to acquire XXXXXXXXXX Units of the XXXXXXXXXX Partnership. The remaining funds will be used to pay fees and expenses associated with the offering of Units and the management of the XXXXXXXXXX Partnership. The Initial Limited Partner's Units of the XXXXXXXXXX Partnership will be redeemed following the purchase of Units by the Investors.

17.The XXXXXXXXXX Partnership will use the majority of the subscription proceeds raised from the issuance of the XXXXXXXXXX Units to fund a portion of the XXXXXXXXXX and/or to repay a portion of the Interim Loan. The remaining funds will be used to pay fees and expenses associated with the offering of the XXXXXXXXXX Units and the management of the XXXXXXXXXX Partnership. The initial limited partner's units of a XXXXXXXXXX Partnership will be redeemed following the acquisition of XXXXXXXXXX Units by the XXXXXXXXXX Partnership.

18.XXXXXXXXXX or a person affiliated with XXXXXXXXXX (the "Class XXXXXXXXXX Investor") will subscribe for, and will acquire, the XXXXXXXXXX Units of the XXXXXXXXXX Partnership. The subscription proceeds from the issuance of the XXXXXXXXXX Units will be utilized by the XXXXXXXXXX Partnership to fund a portion of the XXXXXXXXXX and/or to repay a portion of the Interim Loan. The remaining funds will be used to pay fees and expenses associated with the issuance of the XXXXXXXXXX Units and the management of the XXXXXXXXXX Partnership. The Class XXXXXXXXXX Investor will be responsible for financing the entire Subscription Price for the XXXXXXXXXX Units. The Class XXXXXXXXXX Investor will represent and warrant that such financing does not, directly or indirectly, constitute a "limited recourse amount" for the purposes of the Act.

19.The specific terms of the partnership agreement governing these arrangements (the "Partnership Agreement") will be subject to negotiation between the XXXXXXXXXX Partnership and will be substantially similar to the draft provided in your XXXXXXXXXX submission. The significant terms are as follows:

(a) the XXXXXXXXXX Units, in the aggregate, will represent approximately a XXXXXXXXXX% interest in the XXXXXXXXXX Partnership and the XXXXXXXXXX Units will represent approximately a XXXXXXXXXX% interest in the XXXXXXXXXX Partnership;

(b) the profits and losses of a XXXXXXXXXX Partnership will be allocated rateably in each fiscal period of the XXXXXXXXXX Partnership based upon the amount of partnership capital represented by the XXXXXXXXXX and XXXXXXXXXX Units held in the XXXXXXXXXX Partnership;

(c) the XXXXXXXXXX Units will be entitled to a priority distribution of cash on hand which is distributed by the XXXXXXXXXX Partnership and the XXXXXXXXXX Units will be entitled to the distribution of cash on hand which is subsequently distributed. After the respective investments in each of the XXXXXXXXXX Units and the XXXXXXXXXX Units have been fully recouped, all cash on hand will be distributed rateably based upon the number of XXXXXXXXXX and XXXXXXXXXX Units held in the XXXXXXXXXX Partnership. To the extent that any distributable cash is retained by the XXXXXXXXXX Partnership as a reserve or to fund future business or investment activities of the XXXXXXXXXX Partnership, any investment income earned by the XXXXXXXXXX Partnership in the interim will be distributed to the holders of the XXXXXXXXXX Units or the XXXXXXXXXX Units, as the case may be, in accordance with their respective entitlement to such distributable cash; and

(d) the holders of the XXXXXXXXXX Units and the XXXXXXXXXX Units will be entitled to one vote per unit held at any meeting of the unitholders of the XXXXXXXXXX Partnership.

RULINGS GIVEN

Provided that the statement of facts, the proposed transactions and the purposes thereof, all as described above, is accurate and constitute complete disclosure of all of the representations, relevant facts, proposed transactions and the purposes thereof, and provided further that all of the proposed transactions are carried out as described above, and that the offering documents or executive summary contain a reference, such as described on page 2 of this letter, in respect of the existence of caveats in the rulings given and provided that the XXXXXXXXXX Partnership and the XXXXXXXXXX Partnership are partnerships at law, we confirm that:

A.The outlays and expenses incurred by the XXXXXXXXXX Partnership and forming part of the XXXXXXXXXX will be deductible in computing the income or loss of the XXXXXXXXXX Partnership for the taxation year in which the outlays and expenses are incurred pursuant to Section 9 of the Act provided that:

(a) such reporting conforms with generally accepted accounting principles;

(b) the outlays and expenses are not on account of capital; and

(c) the outlays and expenses are made for the purpose of gaining or producing income from a business with a reasonable expectation of profit.

B.Losses allocated by the XXXXXXXXXX Partnership to the XXXXXXXXXX Partnership for a taxation year will be deductible in computing the income or loss of the XXXXXXXXXX Partnership to the extent of the at-risk amount of the XXXXXXXXXX Partnership in respect of the XXXXXXXXXX Partnership at the end of that taxation year;

C.Losses allocated by the XXXXXXXXXX Partnership to an Investor for the Investor's taxation year will be deductible in computing the income or loss of the Investor to the extent of the at-risk amount of the Investor in respect of the XXXXXXXXXX Partnership at the end of that taxation year;

D.Subject to the application of paragraphs (b), (b.1) and (c) of subsection 96(2.2) of the Act, the at-risk amount, within the meaning of subsection 96(2.2) of the Act, of the XXXXXXXXXX Partnership in the XXXXXXXXXX Partnership, at the end of the XXXXXXXXXX taxation year of the XXXXXXXXXX Partnership, will be equal to the amount of the XXXXXXXXXX Partnership's investment in units of the XXXXXXXXXX Partnership as described in 16 above, i.e., the XXXXXXXXXX Partnership capital to the extent that the XXXXXXXXXX Partnership, or a person with whom the XXXXXXXXXX Partnership does not deal at arm's length, does not receive or obtain any amount or benefit referred to in paragraph 96(2.2)(d) of the Act other than an amount or benefit excluded by virtue of one of subparagraphs (i) to (vii) of that paragraph;

E.Subject to the application of paragraphs (b), (b.1) and (c) of subsection 96(2.2) of the Act, the at-risk amount, within the meaning of subsection 96(2.2) of the Act, of an Investor in the XXXXXXXXXX Partnership, at the end of the XXXXXXXXXX taxation year of the XXXXXXXXXX Partnership, will be equal to the amount of the Investor's investment in units of the XXXXXXXXXX Partnership as described in 13 and 14 above, to the extent that the Investor, or a person with whom the Investor does not deal at arm's length, does not receive or obtain any amount or benefit referred to in paragraph 96(2.2)(d) of the Act other than an amount or benefit excluded by virtue of one of subparagraphs (i) to (vii) of that paragraph;

F.Subject to the application of 18(9) of the Act, interest paid in a taxation year or payable in respect of a taxation year by an Investor (depending upon the method regularly followed by the Investor in computing income) in connection with the Bank Loan will be deductible in computing income in that taxation year in accordance with paragraph 20(1)(c) of the Act to the extent that the amount thereof is reasonable and paid pursuant to a legal obligation to pay interest on borrowed money used for the purpose of earning income from a business or property with a reasonable expectation of profit.

These rulings relate only to the proposed transactions described above and are given subject to the limitations and qualifications set out in Information Circular 70-6R2 dated September 28, 1990, as amended by Special Release dated September 30, 1992, issued by Revenue Canada and are binding, provided that the proposed transactions are completed on or before XXXXXXXXXX.

These rulings are based on the Act and the Regulations as of the date hereof without taking into account any future amendments thereto, whether currently proposed or not. Furthermore, these rulings are also based on our understanding that the draft documents mentioned on page 1 above which were still in the process of revision will, when finalized, be in accordance with the facts and proposals set out above. A material difference between the final wording of one of these documents and facts and proposals as set out above may affect some or all of the rulings given.

Furthermore, nothing in this letter should be interpreted as confirming, either expressly or implicitly;

the reasonableness of the XXXXXXXXXX;

the proper generally accepted accounting principle applicable in the determination of the timing of the deduction of any of the XXXXXXXXXX;

the existence of a reasonable expectation of profit of the XXXXXXXXXX Partnership, the XXXXXXXXXX Partnership or the Investor;

the applicability or non applicability of paragraph 96(2.2)(d) of the Act;

any cost or fair market value of any asset referred to in this letter;

the applicability or non applicability of subsection 245(2) of the Act;

the merits of any comment made in the offering documents with respect to the tax implications of the proposed transactions;

(h)the GST implications of any of the proposed transactions; and

(i)any other tax consequences of the proposed transactions described herein or of related transactions or events that are not described herein.

COMMENTS

The views expressed below are opinions, and consequently are not binding on the Department.

While we do not rule on questions of fact, given the current state of the law, i.e., the decision of the Federal Court Trial Division in the case of Asamera Oil (Indonesia) Limited v. The Queen (73 DTC 5274) and provided that the facts and proposed transactions do not change in any material fashion and that the proposed transactions are carried out by XXXXXXXXXX it is our opinion that salaries, wages, rent, supplies and other expenses which are normally current in nature and are incurred by the XXXXXXXXXX Partnership would not be considered as incurred on capital account.

2.It is our opinion that if any amount of gross revenue related to XXXXXXXXXX is ascertainable, whether contingent or otherwise, at the time that the Investor acquires a unit of the XXXXXXXXXX Partnership this would affect the at-risk amount.

3.It is our opinion that the payment or partial payment by an Investor in the units of the XXXXXXXXXX Partnership by way of post dated cheque will have the effect of reducing the at-risk amount by virtue of paragraph 96(2.2)(c) of the Act.

4.(a)Notwithstanding the Rulings given in this letter, if the provisions of draft section 143.2 of the Act are enacted as proposed in the Notice of Ways and Means Motion tabled on June 20, 1996, by the Minister of Finance, it is our opinion that the amount of any expenditures made by the XXXXXXXXXX Partnership or the XXXXXXXXXX Partnership, including, but not limited to, XXXXXXXXXX and the issuance expenditures, would be reduced by the total of

the "limited-recourse amounts" of

the XXXXXXXXXX Partnership or XXXXXXXXXX Partnership and

all taxpayers not dealing at arm's length with these partnerships

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

the XXXXXXXXXX Partnership's or XXXXXXXXXX Partnership's "at-risk adjustment" in respect of the particular expenditures, and

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

(b) For greater certainty, if draft section 143.2 of the Act is enacted as proposed in the Notice of Ways and Means Motion tabled on June 20, 1996, by the Minister of Finance, and if any Investor has limited-recourse amounts that can reasonably be considered to relate to the acquisition of XXXXXXXXXX Partnership Units, it is our opinion that:

(i) draft subsection 143.2(6) of the Act (not subparagraph 53(2)(c)(i.3)) would apply to reduce that Limited Partner's cost of the Units, and

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

(c) If draft section 143.2 of the Act is enacted as proposed in the Notice of Ways and Means Motion tabled on June 20, 1996, by the Minister of Finance, and any indebtedness of the XXXXXXXXXX Partnership or XXXXXXXXXX Partnership, is considered to be a limited-recourse amount so as to reduce the amount of any expenditure of the Partnership that would otherwise be deductible in computing its income, it is our opinion that if a repayment of such borrowing is not part of a series of loans or other indebtedness and repayments by the Partnership, the repayment at any time by the these partnerships of such indebtedness will, pursuant to subsection 143.2(9) of the Act, result in the said expenditure being deemed to have been made or incurred at that time to the extent of the amount of the repayment.

(d) If draft section 143.2 of the Act is enacted as proposed in the Notice of Ways and Means Motion tabled on June 20, 1996, by the Minister of Finance, subsection 143.2(6) of the Act will not be applied to reduce the amount of a Limited Partner's expenditure to acquire Units of the Partnership

(i) by reason of the distribution of capital by the XXXXXXXXXX Partnership to XXXXXXXXXX and XXXXXXXXXX Units as described above in paragraph 19(c), or

(ii) by reason of the XXXXXXXXXX Partnership's entitlement to the XXXXXXXXXX Fee payable as described above in paragraph 8.

Yours truly,

for Director
Resources, Partnerships
and Trusts Division
Rulings Directorate
Policy and
Legislation Branch