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:
To qualify for exemption under paragraph 149(1)(o.2), can the shareholders of the corporation described therein be a combination of the persons described in clauses 149(1)(o.2)(iv)(A), (B), (C) and (D), as well as persons that fall under one particular clause?
Position TAKEN:
The shareholders may be one of, or a combination of, the persons described in clauses 149(1)(o.2)(iv)(A), (B), (C) and (D).
Reasons FOR POSITION TAKEN:
Position taken in other files.
In addition, a restrictive interpretation of subparagraph 149(1)(o.2)(iv) would have inappropriate results in light of paragraphs 4802(1)(f) and (g) of the Regulations. Based on this Regulation, it does not appear that it was intended that a qualifying corporation be owned by persons described in only one of the previously noted clauses. This is further supported by the technical notes to the 1983 amendment (1983-84, c.1, s. 83(1)) which added clause 149(1)(o.2)(iv)(D). These notes state: "This will allow for regulations to be made to accommodate different forms of ownership of such corporations where they are nonetheless established for the exclusive benefit of registered pension plans.
In Re Davisville Investment Co. Ltd, and City of Toronto et al, 15 O.R. (2nd) 533, the Court stated:
"...The well understood rules of statutory construction require that the word "or" be given its ordinary disjunctive meaning unless it is necessary to read it conjunctively to carry out the manifest intention of the Legislature or to avoid an absurd consequence: Maxwell, Interpretation of Statutes, 12th ed. (1969), pp. 232-4."
XXXXXXXXXX 3-970914
XXXXXXXXXX
Attention: XXXXXXXXXX
XXXXXXXXXX, 1997
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-noted taxpayer.
To the best of your knowledge and that of the taxpayer involved, none of the issues involved in the requested ruling is being considered by a Tax Services Office or a Tax Centre in connection with an income tax return already filed and none of the issues is under objection or appeal.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
FACTS
1.XXXXXXXXXX is a corporation incorporated under the Business Corporations Act XXXXXXXXXX. Its principal activity is the management of corporations, partnerships and trusts engaged in making venture capital investments in the XXXXXXXXXX. XXXXXXXXXX is a Canadian-controlled private corporation within the meaning of subsection 125(7) of the Income Tax Act (the "Act").
2.Registered pension plans (as defined in subsection 248(1) of the Act) and other investors exempt from tax under Part I of the Act are interested in making venture capital investments, including investments in the XXXXXXXXXX.
PROPOSED TRANSACTIONS
3.A new corporation ("Newco") will be incorporated under the Business Corporations Act XXXXXXXXXX. Newco's articles of incorporation will provide that its authorized share capital will consist of an unlimited number of common shares. Newco will be a vehicle through which registered pension plans and certain other tax-exempt entities can make venture capital investments in the XXXXXXXXXX.
4.The articles of incorporation of Newco will contain restrictions on persons that may own, or have the right to acquire, shares of Newco (the "Shareholder Restrictions") and restrictions on the nature of investments and activities of Newco (the "Investment Restrictions"). The Shareholder Restrictions will provide that shares, and rights to acquire shares, of Newco may only be owned by a person that is:
(a) a registered pension plan;
(b) a trust, all of the beneficiaries of which are registered pension plans;
(c) a related segregated fund trust within the meaning assigned by paragraph 138.1(1)(a) of the Act, all of the beneficiaries of which are registered pension plans; or
(d) a prescribed person as defined in subsection 4802(1) of the Income Tax Regulations (the "Regulations").
The Investment Restrictions will include restrictions that:
(e) Newco may make no investments other than investments that a pension fund or plan is permitted to make under the XXXXXXXXXX;
(f) at all times, at least 98% of its assets must consist of cash and investments;
(g) at no time may it issue a debt obligation or accept deposits; and
(h) in each taxation year, it must derive at least 98% of its income from, or from the disposition of, investments.
5.Newco will enter into a management agreement with XXXXXXXXXX pursuant to which XXXXXXXXXX will present appropriate investment and divestment opportunities to Newco for its consideration and render certain management and administrative services and facilities to Newco. All decisions to make an investment or dispose of an investment will be made by the Board of Directors of Newco.
6.Newco will issue shares to a number of investors. Each will be a registered pension plan or a person described in subsection 4802(1) of the Regulations.
7.Newco will use part of the subscription proceeds to purchase, for fair market value, a portfolio of investments from XXXXXXXXXX, a taxable Canadian corporation as defined in subsection 89(1) of the Act. All of the initial shareholders of Newco are currently shareholders of XXXXXXXXXX.
8.Newco will issue additional shares from time to time to other investors that comply with the Shareholder Restrictions. Such share issuances will be made in reliance on exemptions from the prospectus requirements under applicable securities legislation.
9.It is anticipated that Newco will make an election under subsection 259(1) of the Act.
PURPOSE OF THE PROPOSED TRANSACTIONS
10.XXXXXXXXXX considers that registered pension plans and other tax-exempt investors will be prepared to make greater venture capital investments in the XXXXXXXXXX if they can do so through an investment vehicle that is not subject to tax. Furthermore, XXXXXXXXXX considers that a limited partnership is not a desirable investment vehicle due to governance issues, including the fact that a limited partner would generally lose its limited liability if it took part in the control of the partnership's business. On the other hand, in the case of a corporation incorporated under the Business Corporations Act XXXXXXXXXX, shareholders will not lose the benefit of limited liability if they elect directors who are actively involved in the activities of the corporation and who make decisions with respect to investment recommendations made by XXXXXXXXXX under the management contract.
RULING
Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:
If, at all relevant times, Newco satisfies the conditions in subparagraph 149(1)(o.2)(iii) of the Act and its shareholders consist of one or more of the following:
(i) registered pension plans,
(ii) trusts, all of the beneficiaries of which are registered pension plans,
(iii)related segregated fund trusts (within the meaning assigned by paragraph 138.1(1)(a) of the Act), all the beneficiaries of which are registered pension plans, and
(iv) prescribed persons under subsection 4802(1) of the Regulations,
we confirm that Newco will be exempt from tax under Part I of the Act, as provided in paragraph 149(1)(o.2) of the Act.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996, and is binding provided that the proposed transactions are completed by XXXXXXXXXX.
Yours truly,
for Director
Business and Publications Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch
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