2015 Ruling 2015-0574901R3 - Qualifying environmental trust

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: 1. Whether the proposed Trust meets the definition of a “qualifying environmental trust” as defined in subsection 211.6(1) of the Act.
2. Whether contributions made by the ACo on behalf of ACo L.P. to the Trust will be deductible in computing ACo L.P.'s income pursuant to paragraph 20(1)(ss) of the Act. 3. Whether a debt obligation that meets the definition of a "qualified investment" in paragraph (b) of the definition of that term in section 204 of the Act will be a "prohibited investment" of the Trust for the purpose of the definition of that term in subsection 211.6(1). 4. For the purposes of subsection 107.3(1) of the Act, whether the entire amount of any income or loss of the Trust can reasonably be considered to be ACo L.P.'s share of such income or loss. 5. Whether ACo will be entitled to deduct from its tax otherwise payable under Part I of the Act for a taxation year the amount that can reasonably be considered to be its share of the Part XII.4 tax credit in respect of ACo L.P. in accordance with section 127.41 of the Act.

Position: 1. Yes 2. Yes provided that the Trust continues to qualify as a qualifying environmental trust at the time of the contribution. 3. No 4. Yes 5. Yes

Reasons: Based on the facts presented.

XXXXXXXXXX								2015-057490

Dear XXXXXXXXXX

Re : Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to letters dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of XXXXXXXXXX. We have also received a letter dated XXXXXXXXXX, requesting that XXXXXXXXXX, in its capacity as a trustee as described above, be a party to this advance income tax ruling.

To the best of your knowledge and that of the taxpayers named above, none of the issues involved in this advance income tax ruling is:

• in an earlier return of the taxpayers or any related person;
• being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or any related person;
• under objection by the taxpayers or any related person;
• before the courts; or
• the subject of a ruling previously considered by the Income Tax Rulings Directorate in respect of the taxpayers or any related person.

Unless otherwise stated, all references to a statute are to the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.) as amended to the date of this letter (the “Act”), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified below:

“Abandon” and “Abandonment” have the meaning set out in the definition of “abandon” in the National Energy Board Onshore Pipeline Regulations (Canada);

“Abandonment Charges” means separate and identifiable charges for transportation services with respect to the Pipeline that the NEB will require shippers to pay and that the NEB will require to be contributed by the Company to the Trust pursuant to an NEB Decision, and includes tolls, toll surcharges and any other funds of any nature or kind, which are required to be contributed to the Trust;

“ACo” means XXXXXXXXXX. ACo is a “taxable Canadian corporation” as defined in subsection 89(1). The address of its head office is XXXXXXXXXX. ACo is served by the XXXXXXXXXX Tax Services Office and the XXXXXXXXXX Taxation Center. ACo’s taxation year end is XXXXXXXXXX;

“ACo L.P.” means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX. The address of its head office is XXXXXXXXXX. ACo L.P. is served by the XXXXXXXXXX Tax Services Office and it files its T5013 Partnership Information Return with the XXXXXXXXXX Tax Center. Its fiscal period end is XXXXXXXXXX.

ACo and XXXXXXXXXX respectively own XXXXXXXXXX% and XXXXXXXXXX% of the partnership interest in ACo L.P.

All of the class A units of XXXXXXXXXX are owned by XXXXXXXXXX, a “taxable Canadian corporation” as defined in subsection 89(1). All of the class B units of XXXXXXXXXX, representing a XXXXXXXXXX% limited partner interest, are owned by XXXXXXXXXX, a “taxable Canadian corporation” as defined in subsection 89(1). All of the general partner units of XXXXXXXXXX are owned by ACo.

ACo, XXXXXXXXXX are related corporations for the purposes of the Act.

ACo L.P. is a “Canadian partnership” for the purposes of the Act;

“Agreement” means the trust agreement entered into by ACo on behalf of ACo L.P. and XXXXXXXXXX approved by the NEB on XXXXXXXXXX;

“Beneficiary” or “Beneficiaries” is defined in the Agreement to mean the Person or Persons, including the Company, acting on its own capacity or acting on behalf of a partnership, having Reclamation Obligations in respect of the Site;

“Company” means the person holding the regulatory authorization(s) for the time being to operate the Pipeline whether on its own behalf or on behalf of one or more Persons;

“Contribution” means the initial contribution of Property made by ACo to settle the Fund and all subsequent contributions of Abandonment Charges or other amounts made to the Trust by the Company or by any other person or entity from time to time;

“Deactivation” has the meaning set out in the definition of “deactivate” in the National Energy Board Onshore Pipeline Regulations (Canada);

“Decommissioning” has the meaning set out in the definition of “decommission” in the National Energy Board Onshore Pipeline Regulations (Canada);

“Fund” means (i) all Contributions made to the Trust from time to time, (ii) all interest, returns, gains, dividends, distributions or other proceeds of any investment of any such amounts and of any such proceeds from time to time, and (iii) all other amounts and Property held from time to time by the Trustee, of any nature or kind;

“NEB” means the National Energy Board, established pursuant to the NEB Act, or any successor administrative body having authority to regulate the Company in respect of the operation and abandonment of the Pipeline;

“NEB Act” means the National Energy Board Act (Canada), R.S.C. 1985, c N-7, as amended;

“NEB Decision” means an applicable decision, order, direction or other determination of the NEB relating to Abandonment, Reclamation Obligations or the Trust;

“Orphan Pipeline Fund” means a not-for-profit corporation that will be established pursuant to a statute of the Parliament of Canada and will maintain funds for the purpose of funding the reclamation of abandoned pipelines in Canada, consistent with the NEB’s Reasons for Decision MH-001-2013;

“Person” includes a partnership;

“Pipeline” means XXXXXXXXXX;

“Property” means all tangible and intangible assets and rights of any nature or type and includes without limitation cash and securities within the meaning ascribed to that term for purposes of the Securities Act (XXXXXXXXXX);

“Qualified Investments” means those investments that from time to time are qualified investments for a qualifying environmental trust and that are not encompassed within the definition of “prohibited investment” in subsection 211.6(1); and which as of XXXXXXXXXX include only those types of property described in paragraphs (a), (b), (c), (c.1), (d) and (f) of the definitions of “qualified investment” in section 204; and “Qualified Investment” means any one of them;

“qualifying environmental trust” or “QET” has the meaning assigned to this term by subsection 211.6(1);

“Reclamation Obligations” means

(i) the duty to carry out the physical Abandonment, Decommissioning or Deactivation of the Pipeline, including costs incurred to satisfy any conditions imposed by the NEB in any order or direction approving the Decommissioning or Deactivation of the Pipeline or granting leave to Abandon the Pipeline;

(ii) the duty to develop an Abandonment plan, and to prepare an application for leave to Abandon or for approval of the Deactivation or Decommissioning of the Pipeline; and

(iii) the duty to carry out post-abandonment monitoring and remediation of the Site, where post-abandonment refers to the period of time after a Company has satisfied the conditions of an order or direction issued by the NEB granting leave to Abandon, and all costs incurred and consequent thereon;

“Site” means the location or locations in Canada used for the operation of the Pipeline;

“Statement of Investment Policies and Procedures” or “SIPP” means the Statement of Investment Policies and Procedures adopted by ACo, depicted by the SIPP for affiliates of XXXXXXXXXX including ACo;

“Trust” means the discretionary trust settled under the Agreement for the purpose of reclamation in favour of the one or several Beneficiaries that have Reclamation Obligations with regard to the Site, and also of the Orphan Pipeline Fund, and which is called the “XXXXXXXXXX”. The Trust has a taxation year end of XXXXXXXXXX;

“Trust Expenses” means all fees and expenses that the Trustee is entitled to receive or recover pursuant to XXXXXXXXXX of the Agreement; and all other costs, expenses and charges of any kind whatsoever reasonably incurred by or on behalf of the Trustee in connection with the investment of the Fund and the administration of the Trust in respect of which the Trustee is entitled to be reimbursed in accordance with the express provisions of the Agreement; and

“Trustee” means XXXXXXXXXX, a trust company duly incorporated under the Trust and Loan Companies Act (Canada), registered as a trust company in the Province of XXXXXXXXXX and authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as a trustee, or any other trust company licensed under the Trust and Loan Companies Act (Canada) appointed from time to time under the Agreement to hold the office of trustee.

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

STATEMENT OF FACTS

Background

1. ACo and ACo L.P. are members of the XXXXXXXXXX.

2. ACo, as general partner of ACo L.P., is subject to regulation by the NEB, is characterized as a XXXXXXXXXX Company for regulatory purposes and holds the regulatory authorization to operate the Pipeline. ACo L.P. is a Beneficiary of the Trust.

3. Pursuant to a number of decisions and letters of the NEB, ACo is obligated to fund the future Reclamation Obligations in respect of the Site.

4. The NEB Reasons for Decision MH-001-2013 dated May 2014 (i) accepted a QET as a satisfactory mechanism to set aside funds for pipeline abandonment, (ii) set forth “indicative terms” to be included in trust agreements, and (iii) provided a model trust agreement that could be adopted by regulated entities.

5. The Trust that is established under the Agreement is required to be maintained under an order made by the NEB.

Description of the Agreement

Following is a summary of relevant terms included in the Agreement:

6. Under the provisions of XXXXXXXXXX of the Agreement, the Trust is maintained for the sole purpose of funding the Reclamation Obligations of the Beneficiaries in respect of the Site. The Trustee may make payment to or for the benefit of the appointed Beneficiary, that is, either to the Beneficiary, or to a person or persons named by the NEB to conduct work in the reclaiming of the Site. Furthermore, until the satisfaction of all Reclamation Obligations is achieved, the Fund shall be administered so that all amounts held by or distributed by the Trust shall be used to fund Reclamation Obligations of the Beneficiaries with respect to the Pipeline, to pay taxes imposed on and payable by the Trust and to pay Trust Expenses in accordance with XXXXXXXXXX of the Agreement.

7. Pursuant to XXXXXXXXXX of the Agreement, the Trustee shall at all times be a body corporate:

(i) regulated under the Trust and Loan Companies Act (Canada);

(ii) resident in Canada for the purpose of the Act;

(iii) licensed or otherwise authorized under the laws of Canada and the Province of XXXXXXXXXX to carry on in Canada and the Province of XXXXXXXXXX the business of offering to the public its services as trustee; and

(iv) that has agreed to maintain the situs and mind and management of the trust in the Province of XXXXXXXXXX.

8. Pursuant to XXXXXXXXXX of the Agreement, the Company shall make Contributions to the Trust from time to time for an amount equivalent and at the same frequency of all amounts it collects as Abandonment Charges and may from time to time contribute such other amounts to the Trust as may be required in order to comply with an NEB Decision or which the Company, in its discretion, decides to contribute to the Trust.

9. Pursuant to XXXXXXXXXX of the Agreement, no distributions or payments shall be made from the Fund by the Trustee other than as follows:

(i) to pay Trust Expenses as and when due and payable;

(ii) to pay all taxes imposed on and payable by the Trust;

Further, the Trustee may disburse funds:

(iii) to a Beneficiary for the Reclamation Obligations.

(iv) to a third party designated by the NEB for the purposes of funding the discharge of a Beneficiary's Reclamation Obligations.

10. Pursuant to XXXXXXXXXX of the Agreement, the Company has, on the settlement of the Trust, established and delivered to the Trustee the Statement of the Investment Policies and Procedures to be applicable to the Trust and the Company may, from time to time, amend, modify, supplement or restate the policies and procedures.

In all events and at all times, the Statement of Investment Policies and Procedures shall provide that the Fund may only be invested in Qualified Investments.

11. Pursuant to XXXXXXXXXX of the Agreement, notwithstanding any other provision of the Agreement, the Fund must at all times be invested only in Qualified Investments and the Trustee shall not, and is not authorized at any time to, borrow any funds on behalf of the Trust or to permit the Trust to be in an overdraft position.

12. Pursuant to XXXXXXXXXX of the Agreement, the Company and the Trustee acknowledge that it is intended that the Trust will incur and pay taxes that have been imposed on and are payable by it.

13. Pursuant to XXXXXXXXXX of the Agreement, the Trustee may pay or cause to be paid reasonable fees, costs and expenses incurred in connection with the administration and management of the Trust.

14. Pursuant to XXXXXXXXXX of the Agreement, the Company and the Trustee may at any time, and from time to time, by an agreement in writing, amend or modify in whole or in part, any or all of the provisions of the Agreement. No waiver, amendment or modification will be effective without approval by an NEB Decision.

15. Pursuant to XXXXXXXXXX of the Agreement, if the Trust is terminated pursuant to XXXXXXXXXX of the Agreement and Property remains in the Fund after all Reclamation Obligations of the Beneficiaries has been completed and paid for, then the Trustee, with the approval of the NEB, may distribute the Fund or any part thereof among any of the Beneficiaries and if applicable, the Orphan Pipeline Fund or, where such is the case, a single Beneficiary and the said Orphan Pipeline Fund, selected by the Trustee as the Trustee in its sole discretion sees fit.

16. Pursuant to XXXXXXXXXX of the Agreement, the Trust may not be revoked by the Company, by the Beneficiaries acting as a whole or by the Trustee. Nonetheless, the NEB in the exercise of its statutory authority may direct the termination of the Trust, and order such successive arrangements as are appropriate in view of fulfilling the purpose of the Trust.

17. Pursuant to XXXXXXXXXX of the Agreement, for greater certainty, assets from the Fund may be transferred to another qualifying environmental trust in accordance with the Agreement upon the NEB's direction or order, including any such direction or order that is made part of the NEB’s direction or order approving the sale, assignment, transfer or other disposition of the Pipeline or a portion thereof from a Beneficiary to another person pursuant to paragraphs 74(1)(a), (b) and (c) of the NEB Act.

PROPOSED TRANSACTIONS

18. Commencing in XXXXXXXXXX and in compliance with the relevant decisions, orders and directions of the NEB, ACo, in its capacity as a general partner of and on behalf of ACo L.P., will make contributions to the Trust for the purpose of funding Reclamation Obligations in respect of the Site in accordance with the terms of the Agreement.

19. At all times the Fund will be invested in accordance with the SIPP. The Trust will not borrow money and will only invest in property that is a Qualified Investment.

PURPOSE OF THE PROPOSED TRANSACTIONS

20. The purpose of the proposed transactions is to set aside funds for the sole purpose of funding the reclamation of a “qualifying site”, as that term is defined in subsection 211.6(1), through a mechanism that qualifies as a QET under the Act and that is in compliance with the decisions, orders and directions of the NEB applicable to ACo and ACo L.P.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are carried out as described above, we rule as follows:

A. Provided that the Trust is operated in accordance with the terms of the Agreement, the Trust will constitute a “qualifying environmental trust” as that term is defined in subsection 211.6(1).

B. Amounts contributed to the Trust by ACo, as a general partner of and on behalf of ACo L.P., will be deductible in computing the income of ACo L.P. pursuant to paragraph 20(1)(ss), provided that the Trust continues to qualify as a QET at the time of the contribution.

C. A debt obligation that meets the definition of a “qualified investment” in paragraph (b) of the definition of that term in section 204 will not be a “prohibited investment” of the Trust for the purpose of the definition of that term in subsection 211.6(1).

D. In computing the income, non-capital loss and net capital loss of ACo L.P., for the purposes of applying subsection 107.3(1), the entire amount of any income or loss of the Trust for any taxation year of the Trust that ends in a particular fiscal period of ACo L.P. can reasonably be considered to be ACo L.P.’s share of such income or loss.

E. ACo will be entitled to deduct from its tax otherwise payable under Part I of the Act for a taxation year the amount that can reasonably be considered to be its share of the Part XII.4 tax credit in respect of ACo L.P. in accordance with section 127.41.

OPINION

It is our view that each member of ACo L.P. should be entitled to deduct from its tax otherwise payable under Part I of the Act for a taxation year the amount that can reasonably be considered to be its share of the Part XII.4 tax credit in respect of ACo L.P. in accordance with section 127.41.

In accordance with our comments in Information Circular 70-6R6 dated August 29, 2014, the above opinion is not binding on the Canada Revenue Agency.

COMMENTS

Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:

1. the reasonableness of any expenditure referred to in this letter;

2. the person or persons subject to tax on funds distributed by the Trust;

3. whether the Trust is a valid trust at law;

4. the application of perpetuity legislation to the Trust; and

5. tax consequences arising as a result of the partnership agreement of ACo L.P.

The above advance income tax rulings are based on the Act and Income Tax Regulations in their present form and do not take into account any proposed amendments thereto, which if enacted, could have an effect on the above rulings. The rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R6 Advance Income Tax Rulings dated August 29, 2014, and are binding on the Canada Revenue Agency provided that the proposed transactions are implemented as described above. For greater certainty, these advance income tax rulings are based on the Agreement XXXXXXXXXX approved by the NEB on XXXXXXXXXX. If amendments to the Agreement are made after that time, the rulings provided may not apply unless the amendment is approved by the NEB and a supplemental ruling is issued.

Yours truly,

XXXXXXXXXX
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch