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) Will the fact that a general partner has the right to catch-up earnings after the limited partners are paid an initial return and before the balance of the profits is allocated to the limited partners result in the partnership not being a qualified limited partnership? 2) Will the fact that the general partner may be a limited partnership established under the laws of the XXXXXXXXXX cause a problem?
Position: 1) No. 2) No
Reasons: 1) We have accepted that this catch-up does not affect 5000(7) because it is considered an allocation of profits that satisfies (b) of the definition of "qualified limited partnership". 2) There is nothing in the laws explicitly requiring the general partner to be established in Canada.
Re: 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 above-noted taxpayers. We also acknowledge the information provided in your facsimiles of XXXXXXXXXX, and during our various telephone conversations (XXXXXXXXXX).
For purposes of this letter, the following terms are defined as follows:
(a) "Act" means Income Tax Act (Canada);
(b) "Affiliates" has the meaning set out in paragraph 3 below;
(d) "Catch-Up Payment" has the meaning set out in paragraph 10(b) below;
(e) "Corporation" means XXXXXXXXXX;
(f) "General Partner" of the Partnership has the meaning set out in paragraph 4 below;
(g) "Investees" has the meaning set out in paragraph 5 below;
(h) "Limited Partner" means an investor who executes the subscription agreement, acquires Units and has been accepted by the General Partner, and whose name has been entered in the register of limited partners;
(i) "Partnership" means the XXXXXXXXXX;
(j) "Partnership Agreement" means the limited partnership agreement;
(k) "Preferential Return" has the meaning set out in paragraph 10(b) below;
(l) "Regulations" means the Regulations to the Act; and
(m) "Unit" means a unit of the Partnership.
Our understanding of the facts and proposed transactions is as follows:
1. The Corporation is a taxable Canadian corporation incorporated under the laws of Canada. The Corporation is wholly-owned by XXXXXXXXXX ("Parent"), a public corporation. The expressions "taxable Canadian corporation" and "public corporation" have the meaning assigned by subsection 89(1) of the Act.
The Corporation files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.
2. The Corporation will incorporate XXXXXXXXXX under the laws of Canada. XXXXXXXXXX will be a subsidiary wholly-owned corporation of the Corporation and a taxable Canadian corporation. The expression "subsidiary wholly-owned corporation" has the meaning assigned by subsection 248(1) of the Act.
3. The Corporation will incorporate one or more subsidiary wholly-owned corporations ("Affiliates") under the laws of Canada. The Affiliates will also be taxable Canadian corporations.
4. Pursuant to the Partnership Agreement (a draft of which was submitted to us) ("Draft Agreement"), the Partnership will be formed as a limited partnership under the laws of the province of XXXXXXXXXX. The general partner (the "General Partner") will itself be a limited partnership under the laws of XXXXXXXXXX with XXXXXXXXXX, as general partner and one or more Affiliates together with a number of other persons as initial limited partners. These other limited partners will consist of a number of the Corporation's executives who will invest in the Partnership personally or through wholly-owned taxable Canadian corporations incorporated for this purpose.
5. The Partnership will be organized for the purposes of investing primarily in equity and equity-related securities of corporations ("Investees"), most of which will be private taxable Canadian corporations.
The Partnership may also provide bridge financing in order to facilitate the closing of a transaction when there is a high degree of confidence that the bridge securities can be refinanced. In the event that the Partnership does not have its Contributed Capital (as defined in the Partnership Agreement) fully invested in equity securities and bridge securities, any surplus Contributed Capital will be invested in Canadian money market instruments.
All of the above described securities and instruments will be property described in subparagraphs 5000(7)(f)(i), (iv) or (v) of the definition of "qualified limited partnership" in the Regulations.
The Partnership may invest in the above securities and instruments on a parallel basis with one or more additional funds. Parent may invest directly or through one or more of its subsidiary corporations in Units and/or may co-invest on a parallel basis directly or through one or more of its subsidiary corporations.
6. The Partnership will raise capital by the issuance of the Units under an Offering Memorandum (the "Offering").
The initial closing of the Offering will occur as soon as practicable after the date of the ruling letter. The General Partner will establish the Partnership provided that it has raised its minimum capital commitments. Where the maximum offering is not raised at the initial closing, subsequent closings will occur at the discretion of the General Partner, provided that the final closing will occur no later than XXXXXXXXXX after the initial closing.
7. Certain of the Limited Partners of the Partnership are expected to be persons who are exempt from tax under Part I of the Act and who are subject to the foreign property limitations contained in Part XI of the Act.
8. The Partnership seeks to qualify as a "qualified limited partnership" within the meaning of subsection 5000(7) of the Regulations. As such, the Partnership shall at all times limit its activities to the making of investments described in paragraph 5 above.
9. In light of the nature of the investments to be made by the Partnership and given the economic realities of the market place, passive transaction income directly related to the making available of capital, namely commitment fees, standby fees and completion fees may be generated. In addition, the Partnership may guarantee obligations of Investees (and any direct or indirect subsidiary thereof) and earn guarantee fees.
It is contemplated that a commitment fee could be charged in consideration for the conditional or firm undertaking to make capital available to an Investee. Generally, this income would be earned whether or not the financing actually closed and would be structured as a single payment which would become due upon the signing of a commitment letter or as a series of payments, one of which would become due upon the signing of a commitment letter and the other payments would only become due if the Investee chose not to close.
In those circumstances where a closing is delayed beyond a predetermined date, a standby fee could also be charged for making capital available for the extended period. In this case, the fee would be structured as a single payment which would become due upon the firm undertaking to make the capital available in such circumstances; or as a series of payments, one of which could become due upon the firm undertaking to make the capital available and another of which would only become due at the time of closing.
Finally, a completion or closing fee could be charged for the provision of capital if the transaction closed.
10. The Partnership Agreement will provide for capital account allocations as in XXXXXXXXXX of the Draft Agreement, and will provide for termination and liquidation of the Partnership as in XXXXXXXXXX of the Draft Agreement. In general, the Partnership will provide that the income or loss of the Partnership for any period is to be allocated and distributed such that:
(a) short-term investment income earned on "contributed capital" (as defined in the Partnership Agreement and hereinafter referred to as "Contributed Capital") before it is initially invested in equity securities or bridge securities, will be allocated to the General Partner qua, if applicable, Limited Partner and Limited Partners pro rata to their Contributed Capital and such income (together with additional interest and dividend income from securities less such pro rata share of the expenses of the Partnership incurred during the period in which the additional income accrues) will be distributed at least annually; and
(b) initially, 100% of Net Profit (as such term is defined in the Partnership Agreement) will be allocated to the Limited Partners in the ratio in which the number of Units held by each Limited Partner bears to the total number of Units held by all Limited Partners at the time of the allocation, until the Limited Partners will have received by way of distributions, amounts which, in the aggregate, are equal to XXXXXXXXXX% of their Contributed Capital (the "Preferential Return" ); no such Net Profit shall be allocated to the General Partner until the Limited Partners receive their Preferential Return. Thereafter, Net Profit, less any Catch-Up Payment (as defined below) payable to the General Partner, will be allocated as to XXXXXXXXXX% to the Limited Partners based on the ratio described above, and as to XXXXXXXXXX% to the General Partner. To the extent that the Net Profit exceeds the Preferential Return, the General Partner will first be entitled to receive a "catch-up payment" (the "Catch-Up Payment") equal to the lesser of (i) XXXXXXXXXX% of the Net Profit in a prior period in which it received an amount that was less than XXXXXXXXXX% of the Net Profit less the amount actually received, and (ii) the difference between the Net Profit and the Preferential Return in the relevant period. The net effect of such Catch-Up Payment is that the Limited Partners and the General Partner will receive XXXXXXXXXX% and XXXXXXXXXX% of the Net Profits, respectively, provided that the Partnership generates sufficient income. Net Loss (as such term is defined in the Partnership Agreement) will be allocated in a manner generally consistent with the distribution procedures outlined above.
Allocation of income, gains, losses, deductions and credits for tax purposes will be governed by the terms of XXXXXXXXXX of the Draft Agreement.
11. The General Partner will be responsible for managing the Partnership as described in the Partnership Agreement. As such, the General Partner will receive the following annual management fee, computed inclusive of GST, from the Partnership (the "Management Fee"). Such Management Fee will be reduced by XXXXXXXXXX% of (i) any transaction, directors', consulting and closing fees paid to the General Partner by an Investee in connection with the Partnership's investment in such company; and (ii) any break-up fees paid to the General Partner in connection with the Partnership's unconsummated transactions:
(a) initially, XXXXXXXXXX% of Contributed Capital until the earlier of (i) the end of XXXXXXXXXX years after the initial closing of the Partnership, and (ii) when XXXXXXXXXX% of the capital has been invested or has been reserved for the investments in Investees, operating and organization expenses or Management Fees of the Partnership; and
(b) thereafter, if (a)(ii) above applies and until the end of XXXXXXXXXX years after the initial closing of the Partnership, XXXXXXXXXX% of the aggregate cost basis of the investments held by the Partnership, to the extent that such investments have not been written-off; and
(c) thereafter, or if (a)(i) above applies, XXXXXXXXXX% of the aggregate cost basis of the investments held by the Partnership, to the extent that such investments have not been written-off.
12. The fiscal year of the Partnership shall end on XXXXXXXXXX.
13. The term of the Partnership will be XXXXXXXXXX years from the initial closing of the Offering, but may be extended at the discretion of the General Partner for up to XXXXXXXXXX consecutive one-year periods.
Purpose of the Proposed Transactions
14. The purpose of the proposed transactions is to bring together a pool of capital in order to provide equity capital primarily to mid-level taxable Canadian private corporations.
15. To the best of your knowledge and the knowledge of the Corporation, none of the issues involved in this request for an advance income tax ruling:
(a) is in an earlier return of the Corporation or of a person related to the Corporation;
(b) is being considered by a tax services office or tax centre in connection with a previously filed return of the Corporation or of a person related to the Corporation;
(c) is under objection by the Corporation or by a person related to the Corporation;
(d) is before the courts; or
(e) is the subject of a ruling previously issued by the Income Tax Rulings and Interpretations Directorate.
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, we rule as follows:
A. Provided that the Partnership qualifies as a "qualified limited partnership" within the meaning of subsection 5000(7) of the Regulations in all other respects, the receipt of incidental passive transaction fee income as described in 9 above by the Partnership will not, in and of itself, cause the Partnership to contravene paragraph 5000(7)(f) of the Regulations, and neither the payment of the Management Fee by the Partnership to the General Partner as described in 11 above nor the use of the Preferential Return and the payment of the Catch-Up Payment as described in 10(b) above will, together or independently, in and of themselves, cause the Partnership to contravene either paragraph 5000(7)(b) or (c) of the Regulations.
B. Provided that the Management Fee is incurred to earn income and the amount thereof is reasonable in the circumstances, the Management Fee will be deductible in computing the Partnership's income pursuant to section 9 of the Act and will not be considered to be an allocation of the Partnership's income.
The above 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 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.
Furthermore, these rulings are also based on our understanding that the facts and proposals set out above will be in accordance with the final documents and agreements with respect to these facts and proposals.
A material difference between 1) the final wording of one or more of these documents, including the Partnership Agreement, the subscription agreement and the Offering Memorandum, and 2) the facts and proposals as set out above will render the rulings given null and void.
Financial Industries Division
Income Tax Rulings Directorate
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