30 November 1995 Ruling 9626743 - SELLING COMMISSIONS - MUTUAL FUND LTD PARTNERSHIP

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:

Public mutual fund limited partnership formed to fund selling commissions. Basically the same deal as file #953217 dated XXXXXXXXXX, 1996, except the prospectus is being amended to raise additional capital to fund selling commissions.

Position:

Rulings and opinions given as file #953217, except the 143.2 opinions have been updated to reflect the NWMM tabled XXXXXXXXXX.

Reasons:

Consistent with prior ruling for same taxpayer

XXXXXXXXXX 3-962674

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: Advance Income Tax Ruling
XXXXXXXXXX

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

The facts and proposed transactions described herein are the same as those stated in our letter dated XXXXXXXXXX, 1996, (and referred to as the "Prior Ruling"), except as detailed herein.

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 in this ruling request is being considered by a Tax Services Office and/or Taxation Center in connection with a tax return that has already been filed or relating to any issues currently under objection.

Except as noted herein all statutory references are to the Income Tax Act (Canada) (the "Tax Act"). All undefined capitalized terms have the meaning ascribed to them in the Prospectus and/or Prior Ruling.

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

FACTS

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

XXXXXXXXXX.

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

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".

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.

XXXXXXXXXX.

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) of the Tax Act;

-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 Center, deals with the XXXXXXXXXX Tax Services Office under tax account number XXXXXXXXXX and has a fiscal year end of XXXXXXXXXX; and

-is not a limited partner of the Partnership.

XXXXXXXXXX

XXXXXXXXXX is a registered mutual fund dealer and as such, has been granted certain distribution rights in respect of the Funds. It is a party to the "Distribution Agreement" in order to waive those rights in favour of the Partnership.

Pursuant to the Distribution Agreement, the Partnership was 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 more fully described below).

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

The significant terms of the Distribution Agreement are as follows:

(i) The Partnership has been 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").

"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 commenced on XXXXXXXXXX and will continue until XXXXXXXXXX, subject to earlier termination or modification in certain circumstances described below.

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

(iv) Selling commissions are 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 are equal to XXXXXXXXXX% of the purchase price of such securities (the "Selling Commissions"). More specifically, as Redemption Fee Securities are sold, the Partnership is invoiced ( XXXXXXXXXX ) by the Manager and the Partnership satisfies such invoices forthwith.

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

(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.

The "Distribution Fee" payable to the Partnership by the Manager equals XXXXXXXXXX% of 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.

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 as at XXXXXXXXXX of the prior year plus XXXXXXXXXX% of the number of Redemption Fee Securities acquired through purchases or reinvestments of distributions during the then current calendar year; and

(v) redemptions of Reinvested Securities.

Holders of Distributed Securities may transfer between different Funds or an Additional Fund 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.

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.

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.

Pursuant to the Prospectus, the Partnership distributed XXXXXXXXXX limited partnership units (the "Partnership Units") at a price of $XXXXXXXXXX per Partnership Unit (the "Offering") to the public in certain provinces in Canada. The Offering was completed XXXXXXXXXX

XXXXXXXXXX

The General Partner has entered into the Partnership Agreement with each "Limited Partner". 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.

The Partnership Agreement includes, among other things, the following provisions:

(i) The net income of the Partnership for tax purposes for a fiscal period is 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 are 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 receives 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 are 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 moneys 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.

The Manager has guaranteed the repayment of amounts owing by the Partnership to recognized financial institutions. Such guarantee, has been provided solely for legitimate commercial reasons, in particular, that because the Partnership does not have substantial assets, Canadian banks would not provide it with financing in the absence of such security. The guarantee has not been 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 and one month 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.

The Manager may, at any time, 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.

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. The proceeds attributable to the XXXXXXXXXX Partnership Units sold were expended in XXXXXXXXXX.

On XXXXXXXXXX, the Partnership commenced distributing to the Limited Partners who were the registered holders of Partnership Units on the last day of each fiscal quarter, pro rata, XXXXXXXXXX% of the Distributable Cash. Such payments will continue to be made quarterly to Limited Partners until XXXXXXXXXX. "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.

Proceeds of the Offering were first applied to the expenses of issuing Partnership Units pursuant to the Prospectus and the Agents' commission. The remaining proceeds have been applied to the payment of Selling Commissions and to repay amounts borrowed to make such payments.

The Partnership Units are a tax shelter within the meaning assigned by subsection 237.1(1) of the Tax Act. The Partnership has been assigned a tax shelter identification number XXXXXXXXXX pursuant to subsection 237.1(2) of the Tax Act. The General Partner will file annual tax shelter information returns and provide copies to the Limited Partners pursuant to subsection 237.1(7) of the Tax Act.

For financial reporting purposes, the Selling Commissions described above, are 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.

PROPOSED TRANSACTIONS:

The Manager wishes to amend the Prospectus to increase the size of the Offering to XXXXXXXXXX limited partnership units. The Manager will make the necessary amendments to the Distribution Agreement and the Prospectus to effect the increase in the size of the Offering.

The Manager wishes to create a new mutual fund (the "New Fund") to be called "XXXXXXXXXX" and wishes to include such fund as an Additional Fund under the Distribution Agreement such that all of the provisions of the Distribution Agreement shall apply to the New Fund as if it were an original signatory to the Distribution Agreement effective on the date of the New Fund's creation.

The New Fund will distribute its securities on the same basis as the Funds; and

The New Fund will not be added as an Additional Fund to the Distribution Agreement prior to the date of the advance tax rulings sought hereunder. For greater certainty, the Partnership will not pay Selling Commissions in respect of the sale of units of the New Fund prior to such date.

PURPOSE OF PROPOSED TRANSACTIONS

The purpose of increasing the size of the Offering is to allow the Partnership to arrange for the distribution of more Redemption Fee Securities and to permit inventory in Partnership Units to profit to the extent that revenues derived from the business exceed the expenses of the Partnership.

The purpose of adding the New Fund as an Additional Fund under the Distribution Agreement is to permit the Partnership to arrange for the distribution of Redemption Fee Securities of the New Fund, to permit investors in Partnership Units to receive revenues derived in respect of Redemption Fee Securities of the New Fund and to permit investors in the Funds to transfer their investments to the New Fund without incurring a redemption fee.

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 paragraph 9(iv) above, paid or payable by the Partnership to the Manager in trust for distribution by the Manager to the registered dealers for the distribution of Redemption Fee Securities, including those of the New Fund, sold on or after the date of this letter and ending on or before XXXXXXXXXX, 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, as described above in paragraph 18(i), and

-entitled to deduct, subject to the provisions of subsections 96(2.1) and 237.1(6) of the Tax Act, 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) on money borrowed to fund the payment of the Partnership's obligations as described in paragraph 18(iv) above, pursuant to subparagraph 20(1)(c)(i) of the Tax Act, provided the interest is paid or payable pursuant to a legal obligation to pay.

D.The provisions of paragraph 96(2.2)(d) of the Tax Act will not be applied to reduce a Limited Partner's "at-risk" amount in respect of the Partnership at the end of any fiscal year thereof by reason of

(a)the Partnership's entitlement to Distribution Fees and Redemption Fees payable pursuant to the Distribution Agreement as described in paragraphs 8 and 9 above and borrowings made by, or guarantees provided to, the Partnership as described in paragraph 18(iv) above; and

(b)distributions as described in paragraph 21 above as these will reduce the adjusted cost base of the Limited Partner's Partnership Units by virtue of subparagraph 53(2)(c)(v) of the Tax Act.

E.Expenses incurred by the Partnership in the course of issuing and selling the new Partnership Units under the amended Prospectus, as described in paragraph 22, will, to the extent of the lesser of:

(a) that proportion of 20% of the expense that the number of days in the year is of 365 and

(b) the amount, if any, by which the expense exceeds the total of all amounts deductible by the Partnership in respect of these expenses in computing its income for a preceding taxation year,

and to the extent that they are reasonable, be deductible in computing the income of the Partnership pursuant to and in accordance with paragraph 20(1)(e) of the Tax Act.

F.As a result of the proposed transactions, in and of themselves, subsection 245(2) of the Tax Act 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.

OPINIONS

Notwithstanding the Rulings given in this letter, if the provisions of draft section 143.2 of the Tax Act are enacted as proposed by the Minister of Finance in the Notice of Ways and Means Motion tabled on June 20, 1996, it is our opinion that

the amount of any "expenditures"1 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

the "limited-recourse amounts"11 of the Partnership, and all taxpayers not dealing at arm's length with the Partnership that can reasonably be considered to relate to the particular expenditures,

the Partnership's "at-risk adjustment"11 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 Partnership, directly or indirectly, that can reasonably be considered to relate to the particular expenditures.

For greater certainty, if any Limited Partner has limited-recourse amounts that can reasonably be considered to relate to the acquisition of his Partnership Units:

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

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.

Indebtedness of the Partnership, referred to above in paragraph 18(iv) above, will, pursuant to draft subsection 143.2(8) of the Tax Act, be 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. 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 Partnership of such indebtedness will, pursuant to draft subsection 143.2(10) of the Tax 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.

Draft subsection 143.2(6) of the Tax Act will not be applied to reduce the amount of a Limited Partner's expenditure to acquire new Partnership units by reason of

the Partnership Agreement providing for the distribution of capital by the Partnership to Limited Partners in certain cases such as described above in paragraph 21, or

the Partnership's entitlement to the Distribution Fees and Redemption Fees payable under the Distribution Agreement (as described in paragraph 9(v)).

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.

As stated in paragraph 6 of the Information Circular 70-6R2, binding rulings are not provided for transactions that are not seriously contemplated and are hypothetical in nature.

Yours truly,

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

ENDNOTES

1. As defined in draft section 143.2 of the Tax Act.