30 November 1997 Ruling 9803733 - TIMING OF ADJUSTMENTS TO PARTNERSHIP ACB.

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. What section of the Act is used to tax income allocated on a monthly basis to a Limited Partner which redeems their Units before the end of the Partnership’s fiscal period?

2. Can a Limited Partner which leaves the Partnership before the Partnership’s year-end, include Partnership income/loss allocated to them in the year of disposition in the computation of their adjusted cost base of their Partnership interest in the year of disposition?

Position:

1. Subsection 96(1) and paragraph 12(1)(l).

2. Yes, if the Limited Partner disposes of all of their interest in the Partnership in that year and receives full payment in that year.

Reasons:

1. At a point in time during the year the Limited Partner is a partner (as required to meet the conditions of the preamble to 96(1)). The Partnership agreement dictates a monthly allocation of the Partnership’s income/loss to partners at the end of each particular month. 96(1)(f) or (g), as the case may be, then applies to include in computing the Limited Partner’s income/loss for the year, their share (as dictated by the Partnership agreement) of the income/loss of the Partnership for that taxation year. This position is consistent with positions taken previously in a ruling (file #3-2170) and in numerous technical opinions (see file #’s 5-9502, 911308, 941590, and 941759).

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2. We adopted this position, in these particular circumstances, in order to avoid double taxation or inadequate taxation. Consistent with comments in Technical News No. 9, under the heading “Calculation of the Adjusted Cost Base of a Partnership Interest”.

At the point in time when a Limited Partner ceases to be a member of the Partnership, paragraph 98.1(1)(a) will apply to deem them to have a residual interest in the Partnership. This will be so because the retired partner only receives payment for their Partnership interest after they have ceased to be a member of the Partnership. If they receive full payment for their Partnership interest in the year of redemption, paragraph 98.1(1)(b) will deem them not to have disposed of their residual interest until the end of that fiscal period. Although, for example, a retired partner would have to report their share of Partnership income allocated to them in the year they retired, 53(1)(e)(i) would not allow them to increase the adjusted cost base of their Partnership interest in respect of this income until the following year. At that point in time, the retired Limited Partner would not have an interest in the Partnership and would not be able to avail themselves of the intended benefit of increasing their adjusted cost base of the Partnership interest. In effect, they would be taxed twice on the same amount, once as income and the second time in the form of a higher capital gain. For this reason, in these circumstances, we adopted our position noted above.

The above position is not extended where a Limited Partner ceases to be a partner during a taxation year and that taxpayer does not receive their redemption proceeds from the Partnership until the following year. In that case, paragraph 98.1(1)(a) will apply to deem them to have a residual interest in the Partnership until the following year (at least until such time as payment in full is received). In the year subsequent to the redemption, 53(1)(e)(i) would allow the retired Limited Partner to increase their adjusted cost base of their Partnership interest by the amount of their share of the Partnership’s income allocated to them in the year of retirement. In this scenario there is no double taxation and no need to provide relief.

XXXXXXXXXX 980373
XXXXXXXXXX

Attention: XXXXXXXXXX

XXXXXXXXXX, 1998

Dear Sirs:

Re: The XXXXXXXXXX Fund
Advance Income Tax Ruling

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the XXXXXXXXXX Fund and the partners thereof, 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

1. The XXXXXXXXXX Fund (the “Partnership”) is a limited partnership. It was formed under the laws of the province of Ontario pursuant to a limited partnership agreement made as of XXXXXXXXXX, amended and restated as of XXXXXXXXXX. The Partnership’s principal activity will be the carrying on of a business in Canada, engaged in speculative trading of commodity futures instruments and currency futures instruments. The Partnership’s fiscal year ends on December 31.

2. XXXXXXXXXX is the general partner (the “General Partner”) of the Partnership. XXXXXXXXXX was incorporated under the laws of the province of Ontario on XXXXXXXXXX, and is wholly-owned XXXXXXXXXX (see paragraph 4, below).

3. XXXXXXXXXX (the “Initial Limited Partner) is the initial limited partner of the Partnership. It acquired its interest in the Partnership for nominal consideration. The Initial Limited Partner was incorporated under the laws of the province of Ontario, and is a wholly-owned subsidiary of XXXXXXXXXX which in turn is also wholly-owned by XXXXXXXXXX.

4. XXXXXXXXXX (“XXXXXXXXXX”) is a partnership that has been retained as the manager of the Partnership, other than in respect of making trading decisions for the Partnership. XXXXXXXXXX has also been retained as the exclusive broker of the Partnership and as the principal distributor of the units of the Partnership (the units of the Partnership, other than the units held by the Initial Limited Partner, are referred to herein as the “Units”). XXXXXXXXXX and its affiliates have been actively engaged in commodity and currency trading, securities brokerage and global investment fund management since XXXXXXXXXX. XXXXXXXXXX is indirectly owned through corporations controlled by XXXXXXXXXX.

5. XXXXXXXXXX (the “Trading Manager”), is a corporation incorporated under the laws of the Province of Ontario and is a wholly-owned subsidiary of XXXXXXXXXX. The Trading Manager will manage the Partnership’s trading activities, pursuant to a trading management agreement made as of XXXXXXXXXX, between the Partnership, XXXXXXXXXX and the Trading Manager.

6. The Partnership agreement provides that the Partnership will not be dissolved or terminated by the transfer of Units (as is contemplated below in paragraph 14), or the redemption of a limited partner’s units (as is contemplated below in paragraphs 15 and 17). The operation of the relevant provincial partnership legislation does not alter this fact.

7. The registered office of the Partnership, the General Partner, and the Trading Manager is located at XXXXXXXXXX. The tax account number of the General Partner is XXXXXXXXXX and its returns are filed at the XXXXXXXXXX tax services office.

8. To the best of your knowledge and that of the taxpayers involved, none of the issues involved in this ruling

i) is in an earlier return of the taxpayer(s) or a related person,

ii) is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer(s) or a related person,

iii) is under objection by the taxpayer(s) or a related person,

iv) is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, and

v) is the subject of a ruling previously issued by the Directorate.

PROPOSED TRANSACTIONS

9. Limited partnership Units will be issued by the Partnership, pursuant to the terms of a prospectus dated XXXXXXXXXX, filed with the Ontario Securities Commission describing the initial offering of Units (the “Initial Offering”). The Units will not be tax shelters and the Partnership will not invest in any tax shelters within the meaning assigned by subsection 237.1 of the Income Tax Act (Canada) (the “Act”). It is a condition of closing of the Initial Offering that an advance income tax ruling be obtained. If the tax ruling is not obtained by the closing date (on or before XXXXXXXXXX), all subscription monies, and interest earned thereon, if any, will be returned to the subscribers within seven business days and the closing will not occur.

10. To become a limited partner (“Limited Partner”) of the Partnership, a subscriber must initially acquire U.S.$XXXXXXXXXX or more worth of Units.

11. Each Unit will entitle the holder thereof to the same rights and obligations as a holder of any other Unit, and no Limited Partner will be entitled to any privilege, priority or preference in relation to any other Limited Partner. During the Initial Offering period, the price per Unit will be U.S. $XXXXXXXXXX.

12. The minimum subscription amount to be raised during the Initial Offering period will be U.S.$XXXXXXXXXX. There is no stated maximum amount to be raised during the Initial Offering period, however the amount is not expected to exceed U.S.$XXXXXXXXXX in aggregate.

13. A subscriber for Units will become a Limited Partner upon the acceptance by the General Partner of the subscription and the recording of the subscriber as a limited partner of the Partnership in the register of limited partners maintained by the General Partner pursuant to the Limited Partnerships Act (Ontario).

14. Units owned by a Limited Partner are transferable, without charge. A transfer will not be effective unless and until it is recorded on the register of limited partners.

15. At or as soon as possible after the closing of the Initial Offering, the interest of Initial Limited Partner will be redeemed by the Partnership in the amount of its capital contribution of U.S.$XXXXXXXXXX.

16. No sales charge will be applicable to the purchase of Units.

17. After the Initial Offering period, Units will be redeemable as of the last business day of each week (a “Valuation Day”), upon notice given to the General Partner. The proceeds of redemption, being the applicable net asset value per Unit (the “Unit Value”) on the relevant Valuation Day, will be paid within ten (10) business days after the relevant Valuation Day. Partners thus requesting that all their Units be redeemed will cease to be partners of the Partnership on that same relevant Valuation Day. To avoid the dilutive effect that shorter term investors would have on the remaining Limited Partners, the redemption price will be the Unit Value less XXXXXXXXXX% for Units redeemed within the first year from purchase, Unit Value less XXXXXXXXXX% for Units redeemed in the second year from purchase and Unit Value less XXXXXXXXXX% for Units redeemed in the third year from purchase. Units redeemed at any time after the third anniversary from purchase will not be subject to any redemption charge. The applicable reduction in redemption price will be retained by the Partnership.

18. The Partnership’s auditors will determine the Partnership’s income and losses in accordance with Canadian generally accepted accounting principles consistently applied.

19. The Partnership’s income and loss (as determined for purposes of the Act) will be allocated as of the end of each month, throughout the fiscal year of the Partnership, to all holders of Units then outstanding. The allocation will be in proportion to the number of Units held by each of them at the relevant time and will result in an allocation being made in respect of Units which have been redeemed during the year. This method of allocation is in accordance with article 6.6 of the Partnership agreement (a copy of which was attached to the final prospectus dated XXXXXXXXXX, which you forwarded to us with your letter dated XXXXXXXXXX).

20. The Partnership will treat its positions in commodity futures instruments and currency futures instruments as inventory, so that all gains and losses from trading in such positions will be recognized for tax purposes as ordinary income and losses.

21. The General Partner has sole discretion in determining whether or not to make distributions of the profits of the Partnership and as to the quantum of such distributions. There is no requirement that the Partnership distribute its profits to the partners. Prior to any wind-up of the Partnership (none of which is contemplated in the near future), and in order to have a long-term uninterrupted investment of capital, the General Partner will reinvest the profits of the Partnership and presently does not intend to make any such distributions of profits to the Limited Partners.

22. The Partnership will furnish unaudited financial statements for the Partnership on a monthly basis (this may be changed to a quarterly basis), to each Limited Partner of record at the particular time. Unaudited semi-annual financial statements and audited annual financial statements will also be so provided.

23. The Partnership shall pursue its activities until XXXXXXXXXX, unless it is dissolved before that date or the term of the Partnership is extended in accordance with the partnership agreement (e.g. extraordinary resolution, or upon dissolution, bankruptcy, etc., of the General Partner).

24. Upon the dissolution of the Partnership, the General Partner will, after payment or provision for the payment of the debts and liabilities of the Partnership and liquidation expenses, distribute on a pro rata basis to the Limited Partners of record on the date of dissolution, XXXXXXXXXX% of the remaining assets of the Partnership and XXXXXXXXXX% of the remaining assets to the General Partner.

PURPOSE OF THE PROPOSED TRANSACTIONS

25. The monthly allocation of the Partnership’s income or loss (as described in paragraph 19 above) is intended to ensure that a proper and equitable allocation of income and loss is made as between holders of Units which have been redeemed during the fiscal year, and holders of Units which are outstanding as at the end of such fiscal year. This is especially the case in recognition of the volatile nature of the speculative trading activities which are intended to be carried out by the Partnership.

RULINGS

26. Provided that the statement of facts, the proposed transactions and the purposes thereof, all as described herein, are accurate and constitute complete disclosure of all of the representations, relevant facts, proposed transactions and the purposes thereof, and all of the proposed transactions are carried out as described above, we confirm the following:

In order to avoid double taxation and/or inadequate taxation, in the context of a Limited Partner who

(1) held their Units as capital property,

(2) ceased to be a member of the Partnership when all of their remaining Units were redeemed during a particular fiscal year of the Partnership (the “Redemption Year”), and

(3) before the end of the Redemption Year, received full payment of all of their rights to receive any property of or from the Partnership in satisfaction of their interest in the Partnership held immediately before the time that they ceased to be a member thereof,

subparagraphs 53(1)(e)(i) and 53(2)(c)(i) of the Act will be applied, as the case may be, so that any portion of the Partnership’s income or loss for tax purposes (computed at the end of the Redemption Year) that is allocated to that Limited Partner, in accordance with paragraph 19, above, and that is attributable to that Limited Partner’s Units redeemed during the Redemption Year, will, in the Redemption Year, be included in calculating the Limited Partner’s adjusted cost base of those Units, and as a consequence, will, in the same year, be included in the calculation of the Limited Partner’s gain or loss on the disposition of such redeemed Units.

For greater certainty, this ruling does not apply where some of the Units owned by a Limited Partner are redeemed in a particular year, and at the end of that year the Limited Partner still owns other Units. In that situation, subparagraphs 53(1)(e)(i) and 53(2)(c)(i) of the Act would apply so that in computing the Limited Partner’s adjusted cost base of their redeemed Units at a particular point in time, only the Partnership’s income or loss for fiscal periods ending before the time the Units were redeemed would be taken into account.

This ruling also does not apply where a Limited Partner ceases to be a member of the Partnership during the Redemption Year, but it is not until the following year that the Limited Partner receives full payment of all of their rights to receive any property of or from the Partnership in satisfaction of their interest in the Partnership held immediately before the time that they ceased to be a member thereof. Where, for example, a Limited Partner has all their Units redeemed in the Redemption Year, but only receives payment for these redeemed Units in the subsequent year (and assuming all their other rights, referred to above are satisfied by that time), paragraph 98.1(1)(a) of the Act would deem them to have a residual interest until final payment is received. Subparagraphs 53(1)(e)(i) and 53(2)(c)(i) of the Act would apply such that the retired Limited Partner’s share of the Partnership’s income or loss, as the case may be, for the Redemption Year would be included in computing the retired Limited Partner’s adjusted cost base of their Units in the year subsequent to the Redemption Year.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R3 issued by Revenue Canada December 30, 1996 and is binding provided the Initial Offering is closed on or before XXXXXXXXXX. This ruling is based on the Act in its present form and does 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, we are not commenting on whether the Units will be capital property to a Limited Partner or be treated on income account. If the Units are acquired or held in the course of carrying on a business of trading or dealing in securities or as part of an adventure in the nature of trade, any disposition of Units will be afforded income treatment.

Yours truly,

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