2003 Ruling 2003-0001003 - XXXXXXXXXX

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues: Whether subsection 115.2(2) of the Income Tax Act would apply to the Funds described in the ruling letter?

Position: Yes.

Reasons: All the conditions set out in that subsection are met.

XXXXXXXXXX 2003-000100

XXXXXXXXXX, 2003

Dear XXXXXXXXXX:

Re: XXXXXXXXXX ("A Co")
XXXXXXXXXX ("LP") (collectively the "Funds")
XXXXXXXXXX ("Canadian Advisor")
Advance Income Tax Ruling

We are writing in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-referenced taxpayers. We also acknowledge the information provided in subsequent correspondence and during our various telephone conversations in connection with your request (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayers involved, none of the issues involved with this Ruling request:

(i) is in an earlier return of the taxpayers or a related person;

(ii) is being considered by a Tax Services Office or a Taxation Centre in connection with a previously filed tax return of the taxpayers or a related person;

(iii) is under objection by the taxpayers or a related person;

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

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

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended (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.

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

Definitions

In this letter, the following terms have the meanings specified:

(a) "A Co" means XXXXXXXXXX;

(b) "B Co" means XXXXXXXXXX;

(c) "Bank" means XXXXXXXXXX;

(d) "Canadian Advisor" means XXXXXXXXXX;

(e) "Canadian investors" has the meaning set out in subsection 115.2(1);

(f) "Canadian service provider" has the meaning set out in subsection 115.2(1);

(g) "Designated Entity" has the meaning set out in paragraph 115.2(3)(b);

(h) "International" means XXXXXXXXXX;

(i) "Investment Advisory Agreement" has the meaning set out in paragraph 41 herein;

(j) "LP" means XXXXXXXXXX;

(k) "Manager" means XXXXXXXXXX;

(l) "Partners" means XXXXXXXXXX;

(m) "Portfolios" has the meaning set out in paragraph 39 herein;

(n) "Qualified Investments" has the meaning set out in subsection 115.2(1);

(o) "Swap No. 1" has the meaning set out in paragraph 31 herein;

(p) "Swap No. 2" has the meaning set out in paragraph 32 herein; and

(q) "Trust" means a XXXXXXXXXX business trust.

Facts

The Funds

1. The Funds are, and at all relevant times will be, non-residents of Canada for the purposes of the Act.

2. The objective of each of the Funds is to provide returns on capital through a diverse group of trading strategies, pursuant to which they trade a broad range of equity and debt securities, commodities, derivatives and other financial instruments. Greater detail regarding the Funds' investment programs and the specific types of investments that are expected to form part of the investment programs is set out below under the heading "Investment Programs of the Funds".

3. The Funds have no presence or operations in Canada.

4. As of the date hereof, the Funds have not, directly or through any agent, filed any document with a public authority in Canada in accordance with the securities legislation of Canada or of any province in order to permit the distribution of interests in the Funds to persons resident in Canada.

5. As of the date hereof, the Funds have not, directly or through any agent, directed any promotion of investments in themselves to residents of Canada, nor have the Funds sold any investment in themselves to residents of Canada.

Manager

6. Manager is, and at all relevant times will be, a non-resident of Canada for the purposes of the Act. Manager is controlled by XXXXXXXXXX, a non-resident of Canada.

7. Under the terms of the Limited Liability Company Agreement of A Co, Manager is responsible for the management and control of A Co and the investment of its assets. Manager is responsible for all aspects of A Co's operations, and will perform these services itself or subcontract the performance of these services to other service providers.

8. Under the terms of an agreement with LP, Manager is responsible for the investment of LP's assets.

9. To the extent Manager subcontracts any responsibilities to other entities, it manages, coordinates and oversees the service providers and the provision and performance of their services. It has the authority to replace service providers at its discretion.

Canadian Advisor

10. Canadian Advisor is, at all relevant times, a resident of Canada for the purposes of the Act and will carry on business for the purposes of the Act.

11. Canadian Advisor will be registered as an advisor in the categories of investment counsel and portfolio manager and as a limited market dealer under the Securities Act (XXXXXXXXXX).

12. All the issued and outstanding shares of Canadian Advisor are owned by a wholly-owned subsidiary of Manager.

A Co

13. A Co is, and at all relevant times will be, a non-resident of Canada for the purposes of the Act.

14. A Co carries on the business of providing returns on capital through a diverse group of trading strategies, pursuant to which it trades a broad range of equity and debt securities, commodities, derivatives and other financial instruments.

15. As of the date hereof, all of the issued and outstanding interests in A Co are owned by Partners, Manager, B Co and Trust as to XXXXXXXXXX%, respectively.

16. A Co, Partners, Manager, Canadian Advisor and B Co are affiliated, within the meaning of section 251.1, with one another.

17. For U.S. tax purposes, the subscription agreement of A Co requires that investors in A Co represent that they are U.S. residents.

LP

18. The partners of LP are, and at all relevant times will be, non-residents of Canada for the purposes of the Act.

19. LP carries on the business of providing returns on capital through a diverse group of trading strategies, pursuant to which it trades a broad range of equity and debt securities, commodities, derivatives and other financial instruments.

20. A Co holds a XXXXXXXXXX% interest in LP as a limited partner.

21. Manager holds a XXXXXXXXXX% interest in LP as a limited partner.

22. XXXXXXXXXX, a XXXXXXXXXX corporation that is not affiliated with A Co, holds a XXXXXXXXXX% interest in LP as a general partner.

Partners

23. Partners is, and at all relevant times will be, a non-resident of Canada for the purposes of the Act.

24. Partners invests substantially all of its capital in A Co.

25. Although the marketing of interests in Partners is not targeted toward Canadian investors, one or more members of Partners are, or may be in the future, resident in Canada. Based on representations and warranties pertaining to residence made by the investors in Partners in their subscription agreements, Canadian residents form less than 10% of the investors in Partners.

26. Investments in Partners are widely held such that the total of the fair market value of investments in Partners that are beneficially owned by persons or partnerships (other than a Designated Entity) that are affiliated with Canadian Advisor does not and will not exceed 25% of the fair market value of all investments in Partners.

B Co

27. B Co is, and at all relevant times will be, a non-resident of Canada for the purposes of the Act.

28. B Co invests substantially all of its capital in A Co.

29. None of the members of B Co is resident in Canada for the purposes of the Act.

International

30. International is, and at all relevant times will be, a non-resident of Canada for the purposes of the Act.

31. International's primary asset consists of a swap contract ("Swap No. 1") with Bank entered into on XXXXXXXXXX, the terms of which provide International with the economic equivalent of the return on a XXXXXXXXXX% investment in A Co. Swap No. 1 is not conditional upon Bank entering into an arrangement with Trust or any other entity described in 32 below.

32. Bank, while under no obligation to do so, has entered into a second swap contract ("Swap No. 2") with Trust, the terms of which are similar to the terms of Swap No. 1.

33. International is controlled by XXXXXXXXXX, a XXXXXXXXXX corporation that is not affiliated with Manager, Canadian Advisor, Partners, A Co, B Co, LP or Bank.

34. The shareholders of International include investors who are resident in the U.S. and exempt from U.S. taxation, and investors who are resident in various jurisdictions outside the U.S., including Canada for the purposes of the Act.

35. Based on a review of the shareholder register of International, as of XXXXXXXXXX, less than 10% of investors in International were resident in Canada. Collectively, these investors represented less than 10% of International's assets under management.

36. Interests in International are widely held such that the total of the fair market value of investments in International that are beneficially owned by persons and partnerships affiliated with Canadian Advisor do not exceed 25% of the fair market value of all investments in International.

Trust

37. Trust is, and at all relevant times will be, a non-resident of Canada for the purposes of the Act. All the trustees of Trust are non-residents of Canada.

38. No beneficiary of Trust nor any trustee of Trust is related to or affiliated with any of the entities (other than Trust) described herein.

Proposed Transactions

The following transactions and operating arrangements are proposed:

Canadian Advisor

39. Canadian Advisor will be appointed to act as investment advisor to each Fund with respect to the portion of the Funds' capital allocated to Canadian investments and certain specified non-Canadian investments (the "Portfolios").

40. It is anticipated that at the outset of the operations of Canadian Advisor, each Fund will devote XXXXXXXXXX% or less of its capital to the Portfolios. However, the percentage of capital allocated to the Portfolios will fluctuate over time, based on the Fund's assessments of potential risk-adjusted returns in different markets, countries, industry sectors and product categories.

41. Under the terms of an investment advisory agreement (the "Investment Advisory Agreement"), Canadian Advisor will be authorized to make, at its discretion and on an active basis, all day-to-day investment and trading decisions in respect of the Portfolios of each Fund.

42. Canadian Advisor will perform the following services in respect of each Fund:

(a) providing discretionary investment management and advice with respect to the Portfolios of each Fund;

(b) ordering and executing purchases and sales of investments on behalf of the Fund, through public markets or otherwise;

(c) exercising certain rights incidental to the ownership of the investments of the Fund on behalf of the Fund such as voting, conversion and exchange;

(d) entering into and executing agreements with respect to such purchasing and selling and the exercising of such rights;

(e) arranging for the execution of trades in securities for the Fund as originating broker; and

(f) selecting and managing other brokers through whom trades may be executed.

Investment Program of the Funds

43. Under the terms of the Investment Advisory Agreement as described in paragraph 41 above, Canadian Advisor will have the authority to invest the Portfolios of each Fund in its discretion so as to meet the objectives of the Funds, subject to the defined restrictions and limitations set out below, in one or more Qualified Investments only.

44. If a Fund has acquired shares, interests or other investments that comply with paragraph 43 above at the time of acquisition, and these shares, interests or other investments subsequently cease to comply with paragraph 43 above, the Fund shall dispose of at least as many shares, interests or other investments as would allow the Fund to revert to compliance with paragraph 43 above in an orderly fashion at the earliest opportune moment.

Marketing of the Fund and Restrictions on Ownership of Fund Interests

45. No interest in either Fund will be promoted or sold to Canadian investors in respect of the Funds.

46. The Funds will not, directly or through any agent, file any document with a public authority in Canada in accordance with the securities legislation of Canada or of any province in order to permit the distribution of interests in the Fund to persons resident in Canada.

Marketing of Interests in Partners and International

47. Neither Partners nor International will, directly or through any agent, promote investments in itself principally at Canadian investors. However, it is possible that Canadian residents will invest in Partners and International on a private placement basis.

48. Neither Partners nor International will, directly or through any agent, file any document with a public authority in Canada in accordance with the securities legislation of Canada or of any province in order to permit the distribution of interests in themselves to persons resident in Canada.

Purpose of the Proposed Transactions

49. The purpose of the proposed transactions is to enable the Funds to obtain the services offered by Canadian Advisor.

Rulings Requested and Given

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, and provided that the proposed transactions are completed in the manner described above, our Rulings are as follows:

A. Subsection 115.2(2) will apply to each Fund such that the services provided by Canadian Advisor as described in paragraphs 41 and 42 above will not, in and by themselves, cause the Funds to be carrying on business in Canada for the purposes of subsection 115(1) and Part XIV.

B. The provisions of subsection 245(2) will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the ruling given above.

The Rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 and are binding on the Canada Customs and Revenue Agency (the "CCRA") provided that the proposed transactions are completed before XXXXXXXXXX.

These Rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the Rulings provided herein.

Other Comments

Nothing in this Advance Income Tax Ruling should be construed as implying that the CCRA has agreed to or reviewed 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 Ruling should be construed as implying the CCRA has agreed or reviewed the tax consequences resulting from the possible application of:

(a) section 94.1, the proposed amendments to that section or the proposed enactments of sections 94.2 and 94.3 to the Canadian resident investors of Partners and International (with respect to International, in particular, as a result of Swap No. 1 entered into by International and Bank);

(b) section 94 to Trust; or

(c) with the exception of the Canadian Advisor, whether any of the entities described herein are corporations, trusts or partnerships, as the case may be, for Canadian tax purposes.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch