Income Tax Technical News, No. 34, 27 April 2006 under "Delaware Revised Uniform Partnership Act"

Partnerships formed under the DRUPA or DRULPA normally would be considered to be partnerships for purposes of the Act.

[W]here a corporation has borrowed to repurchase shares, the deductibility of the interest is related to the amount of the debt required to “fill the hole.” In the income trust conversion context, by inserting a holding corporation and having that corporation acquire the operating company shares, there is an acquisition of property for an income earning purpose and when the two corporations merge, a link is established between the acquisition of the operating company shares that disappear on the merger and the assets formerly held by that corporation that are now in the new operating corporation.

The CRA considers that paragraph 21 of IT-533 applies to the notes issued in the income trust conversion context. Thus, absent any issue concerning the reasonableness of the interest rate, in these and similar circumstances, the CRA permits the deduction of all interest paid or payable, without any restriction relating to the “fill the hole” concept

CRA has accepted that a trust was not engaged in a separate non-qualifying undertaking in situations where trustees did not form the majority of the board of directors of a subsidiary corporation and did not control the activities or decisions of the corporation.

Guarantees provided by mutual fund trusts in respect of the debt of an entity that is not wholly-owned by the trust, or of the debt of an entity in which a wholly-owned subsidiary has an interest, would have to be closely scrutinized in light of all the circumstances to determine whether it gave rise to a separate undertaking.

The Kruco case.

Discussion of Toronto Blue Jays Baseball Club v. Ontario Minister of Finance, case.

Would an income trust (that is not engaged in the business of lending money or guaranteeing loans) still satisfy s. 132(6)(b)(i) after having guaranteed a debt of a corporation held indirectly by a limited partnership or a debt of the limited partnership, for example, where it has guaranteed the obligations of a corporation wholly owned by a majority-owned limited partnership? CRA responded:

The agreement to provide a guarantee is an undertaking. If the guarantee stands on its own as a service to third parties [citing Melford], it would not qualify for purposes of that subparagraph. In determining whether the provision of the guarantee is part of the core undertaking [citing inter alia Beauport, Lount and Northern Telecom] of the trust, the CRA considers the degree of integration between the guarantee and the core investment undertaking. As subparagraph 132(6)(b)(i) provides that the “only” undertaking of the trust must be the investing of its funds in property as specified therein, the degree of integration between the guarantee and the investing of funds is subject to a high standard.

… [T]he payment of a fee by the subsidiary with respect to th[e] guarantee might taint the trust.

In … 2004-006822, the CRA was satisfied that the guarantee described therein would not disqualify the mutual fund trust under subparagraph 132(6)(b)(i), even though it was provided to a corporation which was not wholly owned by the trust because the particular facts indicated that the guarantee formed part of the core investment undertaking of the trust. Guarantees provided by a mutual fund trust in respect of the debt of an entity not wholly owned by the trust, or of the debt of an entity in which a wholly owned subsidiary has an interest, would have to be closely scrutinized in light of all the relevant circumstances.

Where the guarantee is structured in such a way that third parties benefit from such service, the mutual fund status might be lost where the resulting service or benefit conferred on third parties constitutes an undertaking which does not mesh completely with the investing of its funds.

CRA noted also that in published rulings, the mutual fund trustees did not constitute a majority of the directors of the boards of corporate subsidiaries and did not control the decisions of those boards.