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.
Principal Issues: Whether the provision of services by a Canadian service provider to partnerships with non-resident members, will, in and by itself, cause such non-resident members to be considered to be carrying on business in Canada for purposes of subsections 115(1) and 150(1) and Part XIV.
Position: No
Reasons: The services provided by the Canadian service provider to the partnerships will satisfy the requirements of subsection 115.2(2) of the Act and will not otherwise cause the non-resident members of the partnerships to be considered to be carrying on business in Canada.
XXXXXXXXXX
2013-051343
XXXXXXXXXX, 2014
Dear XXXXXXXXXX:
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. We also acknowledge the additional information provided to us in your emails and phone calls, the last of which was dated XXXXXXXXXX.
This letter is based solely on the Facts, Proposed Transactions and Additional Information described below. Any documentation submitted in respect of your request does not form part of the Facts, Proposed Transactions and Additional Information, and any references thereto are provided solely for the convenience of the reader.
To the best of your knowledge, and that of the above-noted taxpayer, none of the issues involved in this advance income tax ruling are:
(i) involved in an earlier tax return of the above-noted taxpayer or of a related person;
(ii) being considered by a Tax Services Office or a Taxation Centre in connection with a previously-filed tax return of the above-noted taxpayer or of a related person;
(iii) under objection by the above-noted taxpayer or by a related person;
(iv) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
(v) the subject of a ruling previously considered by the Income Tax Rulings Directorate in connection with the above-noted taxpayer or a related person.
Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this letter (the "Act") and every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act.
Our understanding of the Facts, Proposed Transactions, Purpose of the Proposed Transactions and Additional Information is as follows:
Definitions
The following definitions apply in respect of this advance income tax ruling. Throughout this advance income tax ruling, the singular should be read as plural and vice versa where the circumstances so require.
"affiliated" has the meaning assigned by section 251.1.
"Canada I GP" means XXXXXXXXXX.
"Canada I LP" means XXXXXXXXXX.
"Canada II GP" means XXXXXXXXXX.
"Canada II LP" means XXXXXXXXXX.
"Canada III GP" means XXXXXXXXXX.
"Canada III LP" means XXXXXXXXXX.
"Canadian-controlled private corporation" has the meaning assigned by subsection 125(7).
"Canadian partnership" has the meaning assigned by subsection 102(1).
"Canadian Limited Partner" means a person resident in Canada for the purposes of the Act, or, in the case of a partnership, a Canadian partnership.
"Canadian service provider" has the meaning assigned by subsection 115.2(1).
XXXXXXXXXX.
XXXXXXXXXX.
XXXXXXXXXX.
XXXXXXXXXX.
"Code" means the United States Internal Revenue Code of 1986.
"designated entity" has the meaning assigned by paragraph 115.2(3)(b).
"GPs" means collectively Canada I GP, Canada II GP, Canada III GP, XXXXXXXXXX, US GP, and US II GP.
"Holdco I" means XXXXXXXXXX.
"Holdco II" means XXXXXXXXXX.
"Illiquid Credit Investments" means privately negotiated credit investments that have maturity or other contractual terms in excess of XXXXXXXXXX years, measured at the time of investment, for which there may be no secondary market liquidity or valuation transactions, including asset-backed loans, first lien, second lien and unsecured debt, mezzanine debt for leveraged buyouts and convertible debt, and debtor-in-possession loans.
"Investments" has the meaning set out in paragraph 20 below.
"IRS" means the Internal Revenue Service of the United States.
"Limited Partners" means limited partners of the LPs other than the PrincipalCos.
"LPs" means collectively Canada I LP, Canada II LP, Canada III LP, XXXXXXXXXX, US LP, US II LP and Master LP.
"LP Agreements" means the amended and restated limited partnership agreements of the LPs.
"Management Agreements" means the management agreements between the Manager and each of Canada I GP, Canada I LP, Canada II GP, Canada II LP, Canada III GP, Canada III LP, XXXXXXXXXX, US GP, US LP, US II GP, US II LP, and Master LP, pursuant to which the Manager will provide its services to the LPs as described in paragraph 17 below.
"Manager" means XXXXXXXXXX.
"Master LP" means XXXXXXXXXX.
"Non-US/Non-Canadian Limited Partner" means a person that is neither a resident of Canada or resident of the United States of America and a partnership of such persons.
"PrincipalCo I" means XXXXXXXXXX.
"PrincipalCo II" means XXXXXXXXXX.
"PrincipalCo III" means XXXXXXXXXX.
"PrincipalCos" means PrincipalCo I, PrincipalCo II and PrincipalCo III.
"Proposed Transactions" means the transactions described in paragraphs 19 to 32 below.
"qualified investment" has the meaning assigned by subsection 115.2(1).
"taxable Canadian corporation" has the meaning assigned by subsection 248(1).
"Transaction Fees" has the meaning set out in paragraph 31 below.
"US GP" means XXXXXXXXXX.
"US II GP" means XXXXXXXXXX.
"US Limited Partners" means persons resident in the United States of America and entities that are owned by such persons and treated as fiscally transparent under the Code and paragraph 6 of Article IV of the Canada-United States Income Tax Convention.
"US LP" means XXXXXXXXXX.
"US II LP" means XXXXXXXXXX.
XXXXXXXXXX.
Facts
1. The Manager is a corporation incorporated under the laws of Canada, taxable Canadian corporation and a Canadian-controlled private corporation. The Manager files its corporate income tax returns at the XXXXXXXXXX Tax Centre and deals with the XXXXXXXXXX Tax Services Office. Its business number is XXXXXXXXXX. The Manager's head office is located at XXXXXXXXXX.
2. At all relevant times, the Manager will carry on business in Canada for the purposes of the Act.
3. The Manager provides, among other things, investment advisory and management services to Canadian and non-resident investors, both directly and indirectly through entities managed by the Manager. XXXXXXXXXX.
4. The Manager is currently in the process of soliciting commitments from third party investors for the LPs, which will invest in Illiquid Credit Investments and related securities. It is targeting $XXXXXXXXXX of commitments from investors.
5. The Manager wishes to be able to provide its services to the LPs pursuant to the Management Agreements.
6. Each of Canada I GP, Canada II GP, Canada III GP, Holdco I, Holdco II, and each of the PrincipalCos is a corporation incorporated under the laws of Canada, and is and will be a Canadian-controlled private corporation. All of the shares of Canada I GP, Canada II GP, Canada III GP and PrincipalCo III are owned by Holdco I. All of the shares of PrincipalCo I and PrincipalCo II are owned by Holdco II. Holdco I and Holdco II are affiliated with the Manager within the meaning of subsection 251.1(1). PrincipalCo I, PrincipalCo II and Holdco II will elect to report their Canadian tax results (within the meaning assigned by section 261) in the currency of the United States of America.
7. XXXXXXXXXX.
8. US GP and US II GP are limited liability companies formed under the laws of the State of XXXXXXXXXX. All of the membership interests of US GP and US II GP are owned by Holdco II. US GP and US II GP are not resident in Canada for the purposes of the Act.
9. Canada I LP, Canada II LP, and Canada III LP were formed as limited partnerships under the laws of the Province of XXXXXXXXXX with Canada I GP, Canada II GP, and Canada III GP as respective general partners and various Canadian Limited Partners as limited partners.
10. XXXXXXXXXX.
11. XXXXXXXXXX.
12. Master LP is a partnership formed under the laws of XXXXXXXXXX with XXXXXXXXXX as general partner and XXXXXXXXXX and US LP as the limited partners. XXXXXXXXXX and US LP made initial capital contributions to Master LP.
13. XXXXXXXXXX.
14. US LP was formed as a limited partnership under the laws of the state of XXXXXXXXXX with US GP as general partner and PrincipalCo II as the initial limited partner. The remaining limited partners of US LP will be US Limited Partners.
15. US II LP was formed as a limited partnership under the laws of the state of XXXXXXXXXX with US II GP as general partner and PrincipalCo II as the initial limited partner. The remaining limited partners of US II LP will be US Limited Partners.
16. Pursuant to the terms of the LP Agreements, the respective GPs are responsible for all aspects of the LPs' activities and will make all decisions for the LPs, including the decisions in respect of the purchase and sale of Investments.
17. Each of the GPs and the LPs entered into a Management Agreement with the Manager, pursuant to which the respective GP delegated its decision making authority to the Manager and authorized the Manager to provide investment services to the respective LP, including investment management and advice and investment administration services. The Manager will perform these services itself or may subcontract the performance of certain of these services to other service providers (any service providers that perform services in Canada will be Canadian service providers for purposes of section 115.2). The Manager will:
(a) administer the day-to-day operations of the LPs, including maintaining or arranging for the maintenance of proper and complete books and records in connection with the management and administration of the affairs of the LPs;
(b) arrange for office space and equipment and the necessary executive, clerical and secretarial personnel of the Manager or other service providers involved in the administration of the day-to-day operations of the LPs;
(c) retain and instruct legal, investment banking, tax, valuation, appraisal, engineering, marketing and other professional advisors and consultants on behalf of the LPs in connection with the identification, acquisition, holding or disposition of the Investments or the administration of the day-to-day operations of the LPs, and conduct and coordinate relations on behalf of the LPs with such advisors and consultants;
(d) make or incur and pay certain expenses on behalf of the LPs as the Manager reasonably considers necessary;
(e) prepare reports for the approval and use of the GPs, as and when required in respect of various topics, including allocations and distributions to the partners, operating expenses of the LPs, the financial position of the LPs and the status and value of investments made by the LPs;
(f) arrange for the administration on behalf of the LPs of the payment of distributions from the LPs to the partners and supervise the processing and registration of subscriptions and transfers of interests in the LPs;
(g) at the request of the GPs, arrange for assistance with and co-ordinate the preparation of accounting records and financial statements of the LPs by professionals and other service providers;
(h) act as agent of the LPs in obtaining for the LPs such services as may be required in connection with the identification, acquisition and disposition of the Investments, paying the debts and fulfilling the obligations of the LPs and handling, prosecuting and settling any claims of the LPs;
(i) consider, for the benefit of the LPs, all Investments that come to the attention of the Manager that meet the investment guidelines set out in the LP Agreements;
(j) select the market, dealer or broker and negotiate, where applicable, commissions in connection with the purchase and sale of the Investments;
(k) enter into agreements as agent and on behalf of the LPs and carry out all agreements entered into by the LPs;
(l) arrange insurance on behalf of the LPs;
(m) manage and employ the capital of the LPs in the exercise of the duties of the Manager, including the payment of operating expenses and the investment of capital on the instructions of the GPs;
(n) conduct due diligence in relation to the proposed Investments and report the findings of such due diligence to the GPs and the LPs;
(o) exercise all rights, powers, options, privileges and other powers incidental to ownership of the Investments held by the LPs as may be exercised by any person owning such property or securities in their own right provided that timely notice has been given to the Manager by the appropriate persons of the LPs' assets;
(p) provided that the GPs have properly provided or have caused to be provided to the Manager the proxy materials and unless otherwise notified by the GPs, and further provided that timely notice has been given to the Manager by the appropriate persons of the LPs' assets, determine whether and in what manner to vote, and execute or cause to be executed proxies respecting the voting of, securities held by the LPs at all meeting of holders of such securities;
(q) enter into agreements on behalf of the LPs with other LPs in respect of Investments held by each of them;
(r) borrow funds in the name of the LPs;
(s) manage, administer, conserve, develop, operate, transfer, convey and dispose of any and all assets of the LPs on the instructions of the GPs; and
(t) execute any and all other deeds, documents and instruments and do all acts as may be necessary or desirable to carry out the intent and purpose of the Management Agreements in respect of managing the day-to-day operations and affairs of the LPs and in connection with the identification, acquisition, holding or disposition of the Investments.
18. On XXXXXXXXXX, Canada I LP, Canada II LP, Canada III LP, XXXXXXXXXX, US II LP and Master LP entered into a note purchase agreement with the issuer ("Issuer"), a corporation resident in XXXXXXXXXX that deals at arm's length with the Manager and the LPs, and certain other investors pursuant to which they purchased senior unsecured notes with a XXXXXXXXXX% interest rate at a discount of XXXXXXXXXX%. The terms of the notes are typical for an Illiquid Credit Investment, and include usual representations and covenants of the issuer and events of default. The notes mature on XXXXXXXXXX, subject to an extension at the option of the Issuer until XXXXXXXXXX. The holders of the notes appointed a trust company resident in the United States that deals at arm's length with the Manager and the LPs to act as administrator of the notes. The LPs also purchased XXXXXXXXXX common shares and warrants of the Issuer for $XXXXXXXXXX.
Proposed Transactions
19. XXXXXXXXXX and US LP will invest substantially all of their assets in limited partnership interests of Master LP.
20. The LPs will make investments directly and indirectly in the following investments (collectively, the "Investments"):
(a) Illiquid Credit Investments, generally acquired on original issue;
(b) associated equity and equity-related securities, including common shares, warrants and other securities with equity or equity like features;
(c) illiquid public credit investments; and
(d) credit investments with shorter maturity dates than Illiquid Credit Investments.
21. It is anticipated that the Investments will be issued primarily by persons resident in Canada or the United States and have terms substantially similar to the investments described in paragraph 18 above.
22. The capital commitments of the Limited Partners in each LP may be called over a XXXXXXXXXX year period from the date of the initial subscription, subject to XXXXXXXXXX XXXXXXXXXX-year extensions by a majority of the Limited Partners in the applicable LP, referred to as the "investment period", to fund the acquisition by the LP of the Investments on the advice of the Manager or to pay LP expenses. The investment period of XXXXXXXXXX may be terminated earlier in certain circumstances. Following the investment period, the Limited Partners will generally only be required to invest additional capital in the LPs to (a) satisfy costs, taxes, expenses, liabilities or other obligations of the LPs; (b) complete an Investment in respect of which the LPs have entered into an agreement, term sheet or letter of intent prior to the end of the investment period; or (c) allow the LPs to make a follow-on Investment relating to an existing Investment of the LPs.
23. The term of the LPs will generally be XXXXXXXXXX years, which may be extended for XXXXXXXXXX additional XXXXXXXXXX-year periods in certain circumstances.
24. It is generally anticipated that each of the LPs will acquire its pro rata share of an Investment based on the available capital commitments of the particular LP relative to the available capital commitments of all of the LPs.
25. Each LP will distribute the proceeds of disposition of the Investments (other than short-term investments) and income from the Investments that has not been reinvested by the LPs to the GPs, the PrincipalCos and the Limited Partners based on the relative funded capital commitments and as set forth in the relevant LP Agreements.
26. The GPs may, in their discretion, use proceeds of disposition from the Investments that would otherwise be distributed to the Limited Partners to make additional Investments. Any such amounts would be deemed to have been distributed to the Limited Partners and reinvested in the LPs.
27. The GPs will allocate income, gains, losses and deductions to the partners so that over the term of the LP, the income allocated to each partner is approximately equal to the distributions received by such partner.
28. The LPs may enter into foreign exchange contracts to hedge exposure to foreign currency in respect of the Investments.
29. The LPs' only undertaking will be the investment of their funds in qualified investments.
30. The LPs will pay a fee for the services provided by the Manager pursuant to the Management Agreements which fee will be based on the capital committed or invested by the LPs.
31. The Manager (or an affiliate) may receive certain fees or commissions in respect of an Investment ("Transaction Fees"). If the Manager (or an affiliate) receives any Transaction Fees in respect of an Investment that are not paid or applied to reimburse the Manager for its expenses or expenses incurred by the Manager on behalf of an LP, the fee payable by such LP to the Manager under the Management Agreement shall be reduced by the LP's proportionate share of the Investment.
32. The Manager will be taxable in Canada on its fee for the services and the Transactions Fees described in paragraphs 30 and 31 above.
33. Each of XXXXXXXXXX, US LP, US II LP, and Master LP is a partnership for the purposes of the Act.
34. From and after the initial closing of subscriptions to the LPs, the Limited Partners of XXXXXXXXXX, Master LP, US LP, and US II LP will not be affiliated with the Manager, any other Canadian service provider that provides services to the LPs, or with any person or partnership (other than the LPs) described in clauses 115.2(2)(c)(ii)(A) or (B) in respect of the Manager or other such Canadian service provider.
35. All of the Illiquid Credit Investments, illiquid public credit investments, and credit investments with shorter maturity dates than Illiquid Credit Investments included in the description of the Investments in paragraph 20 above constitute indebtedness of the issuer for the purposes of paragraph (b) of the definition of "qualified investment" in subsection 115.2(1).
Purpose of proposed transaction
36. The Manager believes that the current business and economic environment creates an attractive opportunity in which to invest in Illiquid Credit Investments, and that there is a demand for Illiquid Credit Investments from Canadian and non-resident businesses that is not being adequately addressed by other capital providers. The Manager's principal activity is acting as an investment manager in connection with the investing of funds by arm's length investors, and it is seeking to establish the LPs in the course of that business. The purpose of having the investors invest through the LPs is to simplify the investment process and other dealings with third parties and to conform to internationally recognized arrangements for investing in Illiquid Credit Investments and related securities. The purpose of having the non-residents invest in the Investments through separate partnerships is to enable Canada I LP, Canada II LP and Canada III LP to qualify as Canadian partnerships, and to simplify Canadian and U.S. tax reporting and withholding tax requirements.
Ruling
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant Facts, Proposed Transactions, Purpose of the Proposed Transactions, and Additional Information and provided further that the Proposed Transactions are completed in the manner described above, we rule as follows:
A. Subsection 115.2(2) will apply to the Limited Partners of XXXXXXXXXX, US LP, and US II LP such that the provision by the Manager of the services described in paragraph 17 above to XXXXXXXXXX, US LP, US II LP and Master LP in the course of the Proposed Transactions will not, in and by itself, cause the Limited Partners of XXXXXXXXXX, US LP, and US II LP to be carrying on business in Canada for the purposes of subsections 115(1) and 150(1) and Part XIV.
The above ruling is given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the Canada Revenue Agency (the "CRA") as long as subscription agreements are accepted by or capital commitments of the Limited Partners are made to each of XXXXXXXXXX, US LP, US II LP and Master LP prior to XXXXXXXXXX.
The ruling given is based solely on the Facts, Proposed Transactions, Purpose of the Proposed Transactions and Additional Information described above. Nothing in this ruling letter should be construed as implying that the CRA has agreed to, reviewed or has made any determination in respect of any tax consequences relating to the Facts, Proposed Transactions and Additional Information described herein other than those specifically described in the ruling given above or, without limiting the generality of the foregoing,
- any issues concerning the validity or existence of the LPs or any issues or considerations arising from the LP Agreements;
- any withholding tax considerations as may be relevant for the purposes of the Proposed Transactions;
- availability of the functional currency elections under section 261; and
- the GST implications of any of the Proposed Transactions.
Yours truly,
XXXXXXXXXX
For Director
International Division
Income Tax Rulings Directorate
Legislative and Regulatory Affairs Branch
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