30 November 1997 Ruling 9802053 - 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:

Do draft matchable expenditure rules apply to partnership?

Position:

yes

Reasons:

not excluded by 18.1(15)

XXXXXXXXXX							980205
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: XXXXXXXXXX

We are writing in response to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling with respect to the above noted taxpayer. We also acknowledge your letters dated XXXXXXXXXX and our several telephone conversations. You have advised us that, to the best of the knowledge of XXXXXXXXXX, none of the issues involved in this ruling request has been considered by a Tax Services Office or Taxation Centre in connection with a tax return already filed and none of the issues is under objection or appeal.

The tax account number of XXXXXXXXXX is XXXXXXXXXX. XXXXXXXXXX files its income tax returns through the XXXXXXXXXX Taxation Centre of Revenue Canada.

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

Facts

1. XXXXXXXXXX (collectively referred to as the "Mutual Funds" and individually as the "Mutual Fund") are mutual fund trusts XXXXXXXXXX within the meaning of the Income Tax Act (the "Act").

2. XXXXXXXXXX is a taxable Canadian corporation XXXXXXXXXX acts as manager of each of the Mutual Funds and, as such, is responsible for the day-to-day affairs of each of the Mutual Funds including the management of its investment portfolio. XXXXXXXXXX is also the trustee of each of the Mutual Funds XXXXXXXXXX.

3. XXXXXXXXXX presently acts as primary wholesale distributor for securities of each of the Mutual Funds pursuant to distributorship agreements (the "Distributorship Agreements") between XXXXXXXXXX and each of the Mutual Funds or, in the case of certain Mutual Funds XXXXXXXXXX, pursuant to the declarations of trust establishing such Mutual Funds. Under the Distributorship Agreements or declarations of trust, XXXXXXXXXX is appointed the distributor to act as agent for the sale of securities of each of the Mutual Funds. Investors may purchase securities of a Mutual Fund on a front-end sales charge basis by paying a sales charge at the time of purchase, or on a deferred sales charge basis whereby no sales charge is paid by the investor at the time of purchase but the investor is subject to a deferred sales charge payable on certain redemptions of the securities purchased (as described in paragraph 6 below). Securities of each Mutual Fund are offered for sale pursuant to prospectus documents filed with applicable securities regulators in Canada.

XXXXXXXXXX

XXXXXXXXXX receives the proceeds of the contingent deferred sales charges that are payable on redemptions of securities of the Mutual Funds purchased on a deferred sales charge basis.

4. In the course of acting as the distributor of securities of the Mutual Funds purchased on a deferred sales charge basis, and as set out in the simplified prospectuses offering securities of the Mutual Funds, XXXXXXXXXX has represented that it will pay, or cause to be paid, to investment dealers or brokers a flat cash fee of XXXXXXXXXX% of the subscription price of any order for such securities which has been accepted by a Mutual Fund, irrespective of the size of such order. XXXXXXXXXX also offers various other incentives to dealers and their representatives. In order to enhance ongoing service to investors, XXXXXXXXXX also pays a quarterly fee to dealers in respect of each qualifying dealer representative who has clients with securities of the Mutual Funds.

5. The net asset value of each Mutual Fund is the value of all assets of the Mutual Fund less its liabilities. The net asset value per security of a Mutual Fund is computed by dividing the net asset value of the Mutual Fund by the total number of securities of the Mutual Fund outstanding at the time and adjusting the quotient to the nearest cent per security.

6. XXXXXXXXXX

7. No contingent deferred sales charge is payable on a redemption of deferred sales charge securities of a Mutual Fund issued on the reinvestment of XXXXXXXXXX distributions paid by a Mutual Fund, on a redemption of deferred sales charge securities made for the purpose of investment in the securities of another Mutual Fund XXXXXXXXXX. In addition, no contingent deferred sales charges will be payable in respect of redemptions of deferred sales charge securities up to the maximum established by XXXXXXXXXX from time to time (the "free redemption right"). Currently, under the free redemption right investors acquiring deferred sales charge securities of a Mutual Fund will be entitled to redeem in any calendar year without payment of any contingent deferred sales charge up to XXXXXXXXXX% of the net asset value of the deferred sales charge securities of that Fund as at the previous December 31 and XXXXXXXXXX% of the aggregate cost of securities purchased on a deferred sales charge basis in the current calendar year prior to the date of redemption. In addition, no contingent deferred sales charge will be applicable where securities of Mutual Funds are redeemed due to a failure of a subscriber to make timely payment therefor or to pay any administrative fees to the trustee of registered retirement savings plans or registered retirement income funds promoted by XXXXXXXXXX.

8. XXXXXXXXXX currently has non-capital losses, all or some of which will expire if the proposed transactions as described below do not occur.

Proposed Transactions

9. A limited partnership will be established under the laws of the Province of XXXXXXXXXX with the name XXXXXXXXXX. The Partnership will carry on the business of arranging for the distribution of securities of the Mutual Funds purchased on a deferred sales charge basis with a view to making a profit. A limited partnership agreement (the "Partnership Agreement") will be entered into between XXXXXXXXXX The General Partner will be XXXXXXXXXX. The principal place of business of the Partnership shall be XXXXXXXXXX.

10. The Partnership will offer XXXXXXXXXX units on a private placement basis. The Partnership proposes to issue such units XXXXXXXXXX, but will only do so if the rulings requested below are issued. The subscription price for these units will be payable in XXXXXXXXXX instalments each payable in XXXXXXXXXX. The General Partner will contribute XXXXXXXXXX% of the total capital of the Partnership. The General Partner’s capital contribution also will be made in XXXXXXXXXX instalments each payable in XXXXXXXXXX. The amount of each partner’s instalments will be fixed at the time that the Partnership is established.

11. The proceeds to be raised by the Partnership XXXXXXXXXX, will be determined based solely on the amount of funds which the Partnership estimates it will need in order to pay Sales Commissions (as defined below) during the period of the Partnership's distribution right and its other business expenses. It is estimated that the Partnership will need proceeds within the range of $XXXXXXXXXX.

12. The Partnership will enter into an agreement (the "Distribution Agreement") with XXXXXXXXXX whereunder the Partnership will be granted by XXXXXXXXXX, with the consent of the Mutual Funds, the right to arrange for the distribution of securities of the Mutual Funds to be purchased on a deferred sales charge basis. It is proposed that the distribution right will commence as soon as possible in early XXXXXXXXXX and immediately after the tax rulings requested below have been issued. The distribution right will continue until XXXXXXXXXX, subject to early termination in certain circumstances (as described in paragraph 16 below). The distribution right will be exclusive. In separate agreements, XXXXXXXXXX, as trustee of each of the Mutual Funds XXXXXXXXXX, will consent to the grant by XXXXXXXXXX of the right to arrange for the distribution of such securities.

13. The Partnership will offer to pay registered dealers a fixed fee of XXXXXXXXXX% of the subscription price of any order for securities of the Mutual Funds to be purchased on a deferred sales charge basis which has been accepted by any of the Mutual Funds (the "Sales Commissions"). The Partnership will pay the fee in cash. XXXXXXXXXX will not offer to pay such amounts while the Partnership has the distribution right but may offer or continue to offer other incentives.

14. XXXXXXXXXX will pay to the Partnership the following fees in return for its services in arranging for the distribution of such securities of the Mutual Funds:

(a) XXXXXXXXXX;

(b) a fee equal to the amount of any contingent deferred sales charges received by XXXXXXXXXX on the redemption of Distributed Securities (as described in paragraph 6 above).

Fees payable to the Partnership will represent fair market value compensation for the services to be provided by the Partnership at the time the Distribution Agreement is entered into and will continue to be paid notwithstanding the expiry or termination of the Partnership’s right to arrange for distribution of securities of the Mutual Funds.

XXXXXXXXXX

15. Any proceeds of the offering not immediately required by the Partnership to pay Sales Commissions, the cost of issuing units of the Partnership and its other operating expenses will be invested by XXXXXXXXXX, as investment adviser to the Partnership, in short term investments pending application of such proceeds to the payment of Sales Commissions and other expenses. The Partnership will pay XXXXXXXXXX an investment management fee at the rate of XXXXXXXXXX% per annum of the average market value of the assets of the Partnership invested by XXXXXXXXXX (other than investments in Mutual Funds).

16. If for any reason the Partnership is unable to carry out its obligations (which may occur if the Partnership is unable to pay Sales Commissions on all deferred sales charge securities of the Mutual Funds sold during the term of its appointment as exclusive distributor) XXXXXXXXXX may terminate the Partnership's exclusive right to arrange for the distribution of deferred sales charge securities of the Mutual Funds. XXXXXXXXXX may arrange or may grant others the right to arrange for the distribution of deferred sales charge securities of the Mutual Funds, provided that if such termination occurs prior to XXXXXXXXXX, the Partnership shall nonetheless have the non-exclusive right to pay Sales Commissions in priority to any other person, to the extent that its fee and investment income for any period ending on or before XXXXXXXXXX exceeds its operating expenses for such period. For the purposes of the calculation, operating expenses exclude Sales Commissions and costs of the issue of the Partnership's units and includes all financing and related costs.

17. The Partnership does not expect to borrow money and the Partnership Agreement will not authorize the Partnership to borrow money. Rather, it is expected that its expenses will be paid out of Partnership capital and/or fee and investment income. None of the partners of the Partnership will borrow any amount which is a “limited recourse amount” within the meaning of draft section 143.2 of the Act for the purpose of financing its capital contributions to the Partnership.

18. Under the Partnership Agreement, any portion of the partners’ capital together with the net fee and investment income earned by the Partnership to XXXXXXXXXX not expended by the Partnership prior to the termination of the Partnership's distribution right will be returned to the partners of the Partnership pro rata forthwith after XXXXXXXXXX.

19. Commencing with the year XXXXXXXXXX, the Partnership will distribute at least annually to the partners of the Partnership within 60 days of the last day of the period all of their respective pro rata share of the amount ("Distributable Cash") by which the fee and investment income of the Partnership during the period and the amount of any reserves retained at the end of the previous period exceed the expenses (excluding the Sales Commissions, if any) of the Partnership for such period and any reserves established by the General Partner for the current period. XXXXXXXXXX

20. The fiscal year-end of the Partnership will be XXXXXXXXXX.

21. The Partnership's annual financial statements, as reported on by the auditors, will account for Sales Commissions paid on Distributed Securities by amortizing the commissions on a XXXXXXXXXX year straight line basis against monthly distribution fee income and redemption fee income earned. Such statements will be prepared in accordance with generally accepted accounting principles, including the matching principle.

22. The General Partner is entitled to XXXXXXXXXX% of the net income or loss of the Partnership. The balance of the net income or loss shall be allocated XXXXXXXXXX,. The General Partner is entitled to be reimbursed for expenses incurred on behalf of the Partnership and to receive a fee equal to XXXXXXXXXX% of the amount reimbursed. All services provided by the General Partner and its associates and affiliates will be charged for at rates not exceeding those at which such services are available from independent parties dealing at arm's length.

23. The Partnership will be dissolved on XXXXXXXXXX or the date on which no Distributed Securities remain outstanding, whichever is the earlier.

24. XXXXXXXXXX shall have the right to add further mutual fund trusts XXXXXXXXXX (“Additional Funds”), in respect of which the Partnership’s distribution right extends, provided XXXXXXXXXX causes each such Additional Fund to become a party to the Distribution Agreement as fully and effectually as if it had been an original signatory. Each Additional Fund shall be deemed to be a Mutual Fund within the meaning of the Distribution Agreement.

25. It is proposed that after the Partnership distribution right has been terminated XXXXXXXXXX will recommence to pay sales commissions.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is for XXXXXXXXXX to invest in the Partnership XXXXXXXXXX will not incur Sales Commissions XXXXXXXXXX, in order to reduce the amount of expenses incurred by XXXXXXXXXX which are deductible by XXXXXXXXXX in computing its income under the Act for XXXXXXXXXX taxation year. This will enable XXXXXXXXXX to deduct the amount of certain non-capital losses of XXXXXXXXXX in computing XXXXXXXXXX taxable income for its XXXXXXXXXX taxation year.

Rulings Given

Provided that the above statements of facts, proposed transactions and purpose of the proposed transactions are accurate and constitute complete disclosure thereof, that the proposed transactions are carried out as set forth herein and that the Partnership is a Partnership at law, the following rulings are given:

A. The sales commissions which will be paid or payable by the Partnership to registered dealers and brokers on the distribution of Distributed Securities as described in paragraph 13 above will be deductible by the Partnership in computing its taxable income or loss in the same manner as is done by the Partnership for financial reporting purposes as described in paragraph 21 above;

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

These rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on Revenue Canada, Taxation provided that the proposed transactions described herein are completed by XXXXXXXXXX.

Our rulings are based on the Act in its present form and do not take into consideration any proposed amendments thereto. Except as expressly stated, our rulings do not imply acceptance or confirmation of any tax implications of the facts or proposed transactions. In particular, nothing 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

If the provisions of draft section 18.1 of the Act are enacted as proposed in Bill C-28, it is our opinion that:

(a) the Partnership will be able to deduct such part of the Sales Commissions payable by it in a taxation year as is determined in accordance with subsection 18.1(4);

(b) subsection 18.1(6) will not apply to XXXXXXXXXX as a result of entering into the Distribution Agreement and the payment of fees to the Partnership thereunder.

(c) the tax treatment to the Partnership of Sales Commissions incurred by it will not affect the tax treatment to XXXXXXXXXX of sales commisions incurred by it as described in paragraph 25.

The opinions expressed above are provided in accordance with paragraph 22 of Information Circular 70-6R3. Such opinions do not constitute advance income tax rulings and are not binding on Revenue Canada, Taxation.

Yours truly,

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