2004 Ruling 2002-0151821R3 - Small Business Investment 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: Will units of the trust be a "qualified investment" for trusts governed by RRSPs

Position: Yes, subject to 4900(8) and (9) and 5104(4).

Reasons: The trust will be a Small Business Investment Trust, as defined in subsection 5103(1) of the Regulations.

XXXXXXXXXX 		2002-015182

XXXXXXXXXX, 2004

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX (the "Company") -

This is in reply to your letter of XXXXXXXXXX in which you ask for an advance income tax ruling on behalf of the above-named Company. We also acknowledge the additional information provided with your submissions of XXXXXXXXXX.

This letter is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

We understand that, to the best of your knowledge and that of the Company, none of the issues involved in this ruling request is:

(a) in an earlier return of the Company or a related person;

(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the Company or a related person;

(c) under objection by the Company or a related person;

(d) before the courts; nor

(e) the subject of a ruling previously issued to the Company or a related person by the Income Tax Rulings Directorate.

Definitions

For the purpose of this advance income tax ruling, the following terms have the meanings specified:

(a) "Act" means the Income Tax Act (Canada), as amended to the date hereof.

(b) "Regulation(s)" means the Income Tax Regulations, (Canada) in relation to the Act, as amended to the date hereof.

(c) "CRA" means the Canada Revenue Agency.

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

Facts

1. The Company is a Canadian-controlled private corporation with its head office in XXXXXXXXXX that carries out its activities in the province of XXXXXXXXXX. Its primary activities are the construction and marketing of XXXXXXXXXX.

2. The Business Number of the Company is XXXXXXXXXX. The Company files its tax returns at the XXXXXXXXXX Taxation Centre and deals with the XXXXXXXXXX Tax Services Office.

3. In order to solve the construction financing requirements of the Company, the XXXXXXXXXX (the "Trust") was declared on XXXXXXXXXX under the laws of XXXXXXXXXX, pursuant to a declaration of trust among XXXXXXXXXX as Settlor, XXXXXXXXXX as Trustee and Manager of the Trust, and XXXXXXXXXX as Alternate Trustees. The Trust, Trustee and XXXXXXXXXX Alternate Trustees are residents of Canada. The Trust, Trustee and any Alternate Trustee are, and will continue to be at arm's length with the Company and any corporation related to the Company.

Proposed Transactions

4. Pursuant to an Offering Memorandum ("OM") dated XXXXXXXXXX units of the Trust (the "Units") will be privately offered for sale, at a price of $XXXXXXXXXX per Unit, solely in the province of XXXXXXXXXX. All Units of the Trust will be identical in all respects, and will be sold to trusts governed by registered retirement savings plans ("RRSPs"), as defined in subsection 146(1) of the Act, as well as to individual and corporate investors. No beneficiary or group of beneficiaries of the Trust who do not deal with each other at arm's length will hold more than XXXXXXXXXX% of the Units of the Trust. No employee or shareholder of the Company or of any corporation not at arm's length with the Company will be permitted to hold Units in the Trust.

5. The only undertaking of the Trust will be the investing of its funds. The Trust will not accept deposits. The only investments of the Trust will be in debt obligations of corporations.

6. The Trust will enter into agreements with developers (the "Developers") of XXXXXXXXXX to provide financing for early soft costs and interim hard costs either on a stand-alone or co-lending basis (the "Loans"). Any such Loan made by the Trust will be to a Developer that is an "eligible corporation", as defined in subsection 5100(1) of the Regulations. Any such Loan will be secured solely by a floating charge on the assets of the Developer. Any such Loan will be subordinate to all other debt obligations of the Developer (other than a small business security ("SBS"), as defined in subsection 5100(2) of the Regulations, issued by the Developer, or an unsecured debt obligation owing by the Developer to a shareholder of the Developer or a person related to such a shareholder).

It is anticipated that the Loans will be structured with varying principal amounts, as well as different rates of interest, maturity dates and redemption/retraction features, so as to provide for an adequate net return to the Trust and to ensure compliance with subsection 5103(2) of the Regulations.

7. The Trust will not borrow money except for the purpose of earning income from its investments. The amount of borrowing at any time shall not exceed XXXXXXXXXX per cent of the capital of the Trust at that time.

8. The Trust will, at all times, ensure that the cost amount of SBSs held by it complies with the requirements in subsection 5103(2) of the Regulations.

9. At no time will the cost amount to the Trust of all outstanding Loans exceed $XXXXXXXXXX.

10. At no time will the total assets of a Developer to which a Loan is extended, and all corporations associated with the Developer, exceed $XXXXXXXXXX.

Purpose of the Proposed Transactions

The purpose of the proposed transactions is to ensure that each Unit of the Trust will be a "qualified investment", as defined in subsection 146(1) of the Act, for trusts governed by RRSPs, so as to enable the Units to be offered to a wider potential market.

Rulings 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, we rule as follows:

A. Subject to subsections 4900(8), 4900(9) and 5104(4) of the Regulations, a Unit held by a trust governed by an RRSP will be, by virtue of paragraph 4900(6)(c) of the Regulations, a "qualified investment", as defined in subsection 146(1) of the Act.

Comments

The facts and proposed transactions described above do not disclose any specific details regarding the Loans. Pursuant to paragraph 20(l)(c) of the Act, any deduction for interest paid or payable (as applicable) by a Developer in respect of a Loan provided by the Trust may be limited so that such deduction does not exceed a reasonable amount.

The above ruling, which is based on the Act and Regulations in their present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and is binding on the CRA provided that the proposed transactions are implemented by XXXXXXXXXX.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch