30 November 1995 Ruling 9630963 - XXXXXXXXXX TAX SHELTER 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:

1. XXXXXXXXXX deal which is almost identical to one previously issued for XXXXXXXXXX (file #952030, dated XXXXXXXXXX/96). The Bank described in the prior ruling was limited by regulatory requirements to the amount it may lend to any one partnership. The anticipated funding needed by XXXXXXXXXX would exceed the Bank's cap. Therefore, two new partnerships are being set up to do the same deal with the Bank. They have also requested a ruling for XXXXXXXXXX (our file #963097). The main issue in this file was whether the draft limited-recourse debt rules in 143.2 would impact this ruling.

2. Does the application of Regulation 7000 deem interest to be paid to XXXXXXXXXX so that withholding tax would be exigible (or is there some sort of benefit conveyed), in the event that XXXXXXXXXX gives the XXXXXXXXXX Partnership a short-term non-interest bearing loan to finance the XXXXXXXXXX expenses (see paragraph 20).

Position:

1. Same rulings and opinions as given previously.

2. Nothing we need to comment on in the ruling.

Reasons:

1. Reading of the draft legislation and our understanding of Finance's policy.

2. Notwithstanding that structuring the deal this way allows them to avoid withholding tax in respect of the interest otherwise payable on the loan, there is no legal requirement to charge interest and the loan will only be outstanding for a few months (the amount should not be too significant). The loan is offered as part of the overall arrangements and is repaid by the end of the year. In order to apply Regulation 7000 we would have to say part of XXXXXXXXXX business revenue represented interest on the loan. Since we cannot ascertain what the amount of interest would be, we cannot apply Reg. 7000.

XXXXXXXXXX 963096

Attention: XXXXXXXXXX

XXXXXXXXXX, 1996

Dear Sirs:

Re: XXXXXXXXXX
Advance Income Tax Rulings

This is in reply to your letter dated XXXXXXXXXX, wherein you requested advance income tax rulings on behalf of the above mentioned parties in connection with the proposed transactions described below.

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

FACTS

XXXXXXXXXX, a wholly-owned subsidiary of XXXXXXXXXX provides XXXXXXXXXX services through limited partnerships which it controls.

XXXXXXXXXX

XXXXXXXXXX

The Partnership is a limited partnership formed on XXXXXXXXXX pursuant to the laws of the province of XXXXXXXXXX. The fiscal period of the Partnership ends on XXXXXXXXXX of each year.

XXXXXXXXXX (the "General Partner") is the general partner of the Partnership. The General Partner was incorporated pursuant to the laws of XXXXXXXXXX and is a wholly-owned subsidiary of XXXXXXXXXX The General Partner will deal at arm's length to XXXXXXXXXX and all members of the XXXXXXXXXX group of companies. All of the issued and outstanding shares of XXXXXXXXXX are owned by XXXXXXXXXX. XXXXXXXXXX is the President of the General Partner XXXXXXXXXX. XXXXXXXXXX has been involved in limited partnership management since XXXXXXXXXX and has served, directly or indirectly, as general partner in XXXXXXXXXX The General Partner's obligations are set out in the partnership agreement for the Partnership and include the preparation of financial statements and maintaining of the books and records for the Partnership. The General Partner will file all income tax returns with the XXXXXXXXXX Tax Services Office and is in the process of applying for a business identification number. The registered office of the General Partner is located at XXXXXXXXXX. The General Partner is entitled to a XXXXXXXXXX% interest in the profits and losses of the Partnership, as well as the capital of the Partnership in the event of dissolution. The initial limited partner of the Partnership is XXXXXXXXXX, a resident of Canada. The limited partners of the Partnership are entitled to a pro rata portion of a XXXXXXXXXX% interest in the profits and losses of the Partnership, as well as the capital of the Partnership in the event of dissolution. The partnership agreement for the Partnership permits the Partnership to make capital distributions to limited partners without concurrent capital distributions to the General Partner. This will not in any way impair the capital of the General Partner, but will potentially provide the Limited Partners with funds to repay indebtedness incurred by them to acquire their interests in the Partnership.

The business of the Partnership is to provide, directly or indirectly, through other limited partnerships, XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX and its general partner is XXXXXXXXXX, a resident of Canada which is a wholly-owned subsidiary of XXXXXXXXXX. XXXXXXXXXX in turn is a wholly-owned subsidiary of XXXXXXXXXX. The initial limited partner of the XXXXXXXXXX Partnership is XXXXXXXXXX, a resident of Canada. The fiscal period of the XXXXXXXXXX Partnership will end on XXXXXXXXXX of each year. Pursuant to the partnership agreement of the XXXXXXXXXX Partnership, XXXXXXXXXX% of the profits and losses of the XXXXXXXXXX Partnership, and XXXXXXXXXX% of the capital of the XXXXXXXXXX Partnership in the event of dissolution, will be allocated to its limited partners on a pro rata basis. The general partner of the XXXXXXXXXX Partnership will have a XXXXXXXXXX% interest in the profits and losses of the XXXXXXXXXX Partnership, as well as in the capital of the XXXXXXXXXX Partnership in the event of dissolution. Other than in the event of dissolution, the partnership agreement for the XXXXXXXXXX Partnership will permit the particular XXXXXXXXXX Partnership to make capital distributions to its limited partners without concurrent capital distributions to its general partner. This will not in any way impair the capital of the general partner, but will potentially provide the limited partners with funds to repay indebtedness incurred to acquire their interests in the Partnership.

XXXXXXXXXX principal places of business are XXXXXXXXXX

XXXXXXXXXX

XXXXXXXXXX deals at arm's length with all the other parties mentioned in this letter.

Other than those identified in this letter, there will be no agreements between the parties to the proposed transactions described herein that could reasonably be considered to impact on the rulings given in this letter.

To the best of your knowledge and that of the parties involved, none of the issues involved in this ruling are being considered by a Tax Services Office or a Taxation Centre in connection with a tax return already filed, and none of the issues are under appeal or objection.

PROPOSED TRANSACTIONS

XXXXXXXXXX, in its capacity as agent for the Partnership, will offer (the "Offering") limited partnership units (the "Units") of the Partnership for sale by way of offering memorandum (the "Offering Memorandum") to residents of Canada (the "Limited Partners") at a price of $XXXXXXXXXX per Unit (the "Unit Price"). Although the Offering will involve an unlimited number of Units, it is estimated that the proceeds from the sale of Units will be between $XXXXXXXXXX. As consideration for its acting as agent for the Partnership, XXXXXXXXXX will receive a fair market value commission. The Units will be capital property to their holders. The interest of the initial limited partner of the Partnership will be repurchased by the Partnership on the date of the Offering. The entire Unit Price will be paid on or before XXXXXXXXXX. The Offering Memorandum will contain the following mention:

XXXXXXXXXX

The Limited Partners will subscribe for Units between

XXXXXXXXXX

The Limited Partners will finance $XXXXXXXXXX per Unit of the Unit Price through two loan facilities (described below in paragraphs 15 and 16) with XXXXXXXXXX (the "Bank"). The Bank will deal at arm's length with all the other parties mentioned in this letter. Each Limited Partner will be responsible to provide their own funding for the balance of $XXXXXXXXXX of the Unit Price.

The first loan facility (the "Primary Loans") will be in an amount equal to $XXXXXXXXXX per Unit. The Primary Loans will be advanced by the Bank to the Limited Partners in XXXXXXXXXX and will mature on XXXXXXXXXX. The Primary Loans will be full recourse to the Limited Partners and will bear interest at an annual rate which shall not be less than the prescribed rate within the meaning of paragraph 4301(c) of the Regulations to the Income Tax Act (Canada) on the date such loan is advanced. The principal amount of the Primary Loans and interest owing thereunder shall be due and payable in full on XXXXXXXXXX

The second loan facility to be provided by the Bank to the Limited Partners (the "Secondary Loans") will be in an amount equal to $XXXXXXXXXX per Unit. The Secondary Loans will be advanced by the Bank to the Limited Partners in XXXXXXXXXX and will mature on XXXXXXXXXX. The Secondary Loans will be full recourse to the Limited Partners and will bear interest at an annual rate which shall not be less than the prescribed rate within the meaning of paragraph 4301(c) of the Regulations to the Income Tax Act (Canada) on the date such loan is advanced. Interest on the Secondary Loans will be payable by the Limited Partners each year no later than XXXXXXXXXX in respect of the previous year.

As security for repayment of the Primary Loans and the Secondary Loans, the Limited Partners will pledge their Units to the Bank, including all future entitlements from the Partnership. Both the Primary Loans and the Secondary Loans will be arranged by XXXXXXXXXX on behalf of the Limited Partners.

In consideration for arranging the Primary Loans and the Secondary Loans, XXXXXXXXXX will be entitled to receive a fee (the "Loan Arrangement Fee") from each Limited Partner, the amount of which will be equal to the fair market value of such services; estimated to be approximately $XXXXXXXXXX per Unit purchased by such Limited Partner.

The amount of net proceeds from the Offering will be used by the Partnership to subscribe for limited partnership units of various limited partnerships, including the XXXXXXXXXX Partnership (hereinafter referred to as "XXXXXXXXXX Partnership Units"). It is estimated that the Partnership will invest $XXXXXXXXXX to acquire XXXXXXXXXX Partnership Units. The interest of the initial limited partner of the XXXXXXXXXX Partnership will be repurchased by such XXXXXXXXXX Partnership on the date of the subscription by the Partnership. The subscription price for XXXXXXXXXX Partnership Units will be paid in full prior to the end of the XXXXXXXXXX Partnership's XXXXXXXXXX fiscal year. At the end of such fiscal period, neither the Partnership nor any person or partnership not dealing at arm's length with the Partnership will owe any amount to the XXXXXXXXXX Partnership or to a person or partnership not dealing at arm's length with the XXXXXXXXXX Partnership.

The XXXXXXXXXX Partnership will enter into an agreement (the "XXXXXXXXXX Services Agreement") with XXXXXXXXXX to provide the services and facilities necessary to XXXXXXXXXX for a fee as outlined below in paragraph 22. The terms of the XXXXXXXXXX Services Agreement will provide that XXXXXXXXXX will retain all XXXXXXXXXX rights in the Property. All XXXXXXXXXX services to be rendered by the XXXXXXXXXX Partnership (the "XXXXXXXXXX Services") will be rendered exclusively in Canada. In order to assist in paying the XXXXXXXXXX expenses, and as part of the overall arrangements, XXXXXXXXXX may loan funds to the XXXXXXXXXX Partnership prior to closing on a non-interest bearing basis. These amounts will be full recourse to the XXXXXXXXXX Partnership and will be repaid in full on the closing date of the Offering, which shall be prior to XXXXXXXXXX. The XXXXXXXXXX Partnership will use funds received from the sale of its units to the Partnership (as described above in paragraph 19) to repay the amount owing to XXXXXXXXXX

XXXXXXXXXX

(a)The XXXXXXXXXX Services will include: (i) all things and services in respect of the XXXXXXXXXX, including the

XXXXXXXXXX

(b) The XXXXXXXXXX Partnership will: (i) ensure that XXXXXXXXXX% of the expenses pertaining to the XXXXXXXXXX Services will be for services performed in Canada by Canadian residents; (ii) promptly prepare such XXXXXXXXXX reports as XXXXXXXXXX may reasonably request and supply copies thereof to XXXXXXXXXX by telefax or by personal delivery; (iii) comply with all applicable laws, statutes, rules, regulations and requirements of all governmental agencies and regulatory bodies and duly and promptly apply for and provide all necessary consents, licenses and permits which may be required by any governmental agency or authority of competent jurisdiction in connection with XXXXXXXXXX in accordance with the final cash XXXXXXXXXX budget approved by XXXXXXXXXX; and (vi)

XXXXXXXXXX

(c) In order to assist the XXXXXXXXXX Partnership in meeting its obligations referred to above in 21.(b)(i), the XXXXXXXXXX Services Agreement will also stipulate

XXXXXXXXXX

In consideration for providing the XXXXXXXXXX Services, the XXXXXXXXXX Partnership will be entitled to receive a fee (the "XXXXXXXXXX Fee") from XXXXXXXXXX. The XXXXXXXXXX Fee can be broken down into XXXXXXXXXX components. These components are as follows:

(a) a fee equal to XXXXXXXXXX

(b) thereafter, a fee equal to XXXXXXXXXX

(c) thereafter, a fee equal to XXXXXXXXXX

All amounts earned on account of the XXXXXXXXXX Fee will be reported by the XXXXXXXXXX Partnership for income tax purposes on an accrual basis. However, XXXXXXXXXX will not make any payment to the XXXXXXXXXX Partnership, on account of the XXXXXXXXXX Fee, until XXXXXXXXXX (the "First Payment Date"). Thereafter, XXXXXXXXXX will be required to report XXXXXXXXXX to the XXXXXXXXXX Partnership for periods ending on XXXXXXXXXX. Reports would be due XXXXXXXXXX after the end of each reporting period. Any portion of the XXXXXXXXXX Fee owing by XXXXXXXXXX to the XXXXXXXXXX Partnership in respect of any reporting period would be due on the same date that the reports with respect to such period would be due. Amounts received by the XXXXXXXXXX Partnership on account of the XXXXXXXXXX Fee will be distributed to the Partnership and then on to the Limited Partners, who will have directed such amounts to be applied against their respective Primary Loans to the extent that indebtedness under such loans remains outstanding. Amounts received by the XXXXXXXXXX Partnership on account of the XXXXXXXXXX Fee will be distributed to the Partnership and then on to the Limited Partners, who will have directed such amounts to be applied against their respective Secondary Loans to the extent that indebtedness under such loans remains outstanding. Additional amounts received by the XXXXXXXXXX Partnership on account of the XXXXXXXXXX Fee will be distributed to the Partnership and on to the Limited Partners. Any such amounts may be retained by the Limited Partners.

As security for its obligation to pay the XXXXXXXXXX Fee when due, XXXXXXXXXX will provide security to the XXXXXXXXXX Partnership by way of a cash deposit or deposits with the Bank.

XXXXXXXXXX

XXXXXXXXXX

32.The Partnership and the XXXXXXXXXX Partnership will be tax shelters within the meaning assigned by subsection 237.1(1) of the Income Tax Act (Canada) (the "Act"). The General Partner and the general partner of the XXXXXXXXXX Partnership will each apply for a tax shelter identification number for the Partnership and for the respective XXXXXXXXXX Partnership, and upon receipt of the number, will file annual tax shelter information returns, pursuant to and in accordance with subsections 237.1(2) and (7) of the Act.

PURPOSE OF THE PROPOSED TRANSACTIONS

33.The purpose of the proposed transactions is to XXXXXXXXXX.

RULINGS

34.Provided that the statement of facts, the proposed transactions and the purposes thereof, all as described above, is accurate and constitutes 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 4 of this letter, in respect of the existence of caveats in the rulings given and provided that the Partnership and the XXXXXXXXXX Partnerships are partnerships at law, we confirm the following:

A.Outlays or expenses incurred after the date of this letter by the XXXXXXXXXX Partnership and forming part of the XXXXXXXXXX Services rendered by it will be deductible in the computation of the XXXXXXXXXX Partnership's income or loss for the relevant taxation year to the extent that it is in conformity with generally accepted accounting principles and provided that the outlays or expenses are made or incurred for the purpose of gaining or producing income from a business with a reasonable expectation of profit.

B.Subject to the application of paragraphs 96(2.2)(b) and (b.1) of the Act, the at-risk amount, within the meaning of subsection 96(2.2) of the Act, of the Partnership in the XXXXXXXXXX Partnership, at the end of the XXXXXXXXXX fiscal year of the XXXXXXXXXX Partnership, will be equal to the amount of the Partnership's investment in XXXXXXXXXX Partnership Units of the XXXXXXXXXX Partnership as described in paragraph 19 above, to the extent that the Partnership, or a person with whom the 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.

C.Subject to the application of paragraphs (b) and (b.1) of subsection 96(2.2) of the Act, the at-risk amount, within the meaning of subsection 96(2.2) of the Act, of a Limited Partner in the Partnership, at the end of the XXXXXXXXXX taxation year of the Partnership, will be equal to the amount of the Limited Partner's investment in Units of the Partnership as described above in paragraphs 13 to 16, to the extent that the Limited Partner, or a person with whom the Limited Partner 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.

These Rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R2 issued by Revenue Canada, Taxation on September 28, 1990 (as amended by Special Release dated September 30, 1992) and are binding provided the proposed transactions are completed on or before XXXXXXXXXX. These Rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments. 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 or fair market value of any expenditures referred to in this letter;

(b)the proper generally accepted accounting principle applicable in the determination of the timing of the deduction of the cost of XXXXXXXXXX Services paid by the XXXXXXXXXX Partnership;

(c)the existence of a reasonable expectation of profit of the Partnership, of the XXXXXXXXXX Partnership, or of any Limited Partner;

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

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

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

As stated in paragraph 6 of Information Circular 70-6R2, rulings are not provided for transactions that are not seriously contemplated and are hypothetical in nature. Accordingly, no rulings have been provided in respect of possible transactions to be entered into with XXXXXXXXXX partnerships XXXXXXXXXX other than XXXXXXXXXX, respectively (as noted above in paragraphs 19, 25-27 and 29-30). We are also not ruling in respect of transactions with XXXXXXXXXX

OPINIONS

35.It is our opinion that if any amount of XXXXXXXXXX (referred to above in paragraph 22(a)) is ascertainable, whether contingent or otherwise, at the time that the Limited Partner acquires a Unit of the Partnership this would affect the at-risk amount.

36.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, it is our opinion that:

(1)The Secondary Loans, XXXXXXXXXX, will not constitute a "limited-recourse amount" (as defined in proposed subsection 143.2(1)) and, accordingly, the Secondary Loans will not result in the application of proposed subparagraph 143.2(6)(b)(i) to reduce the cost of a Limited Partner's Unit or the cost of the XXXXXXXXXX Services.

(2)Neither the Management Services Agreement nor the XXXXXXXXXX will, in and of themselves, result in there being an "at-risk adjustment" (as defined in proposed subsection 143.2(2)) for the Limited Partners or the Partnership and, accordingly, proposed subparagraph 143.2(6)(b)(ii) will not apply to reduce the cost of a Limited Partner's Unit, the Partnership's cost of a XXXXXXXXXX Partnership Unit of the XXXXXXXXXX Partnership, or the amount of any expenditure of the Partnership or of the XXXXXXXXXX Partnership;

(3) XXXXXXXXXX;

(4)If any Limited Partner funds any portion of the balance of their $XXXXXXXXXX investment in a Unit (as described above in paragraph 14) with limited-recourse financing, it is our opinion that the provisions of draft subsection 143.2(6) of the Act would apply.

(5) Any amount of unpaid principal the XXXXXXXXXX Partnership owes under the XXXXXXXXXX Facility (referred to above in paragraph 24) will be a limited-recourse amount and the provisions of draft subsection 143.2(6) of the Act would apply, thereto.

(6)Any amount of unpaid principal the Partnership owes under the Interim Loan Facility (referred to above in paragraph 13) will be a limited-recourse amount and the provisions of draft subsection 143.2(6) of the Act would apply, thereto. To the extent the amount of the proceeds from the Primary and Secondary Loans are used by the Partnership to repay the amount owing under the Interim Loan Facility, the provisions of draft subsection 143.2(10) of the Act would apply.

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