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 Department.
Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle du ministère.
Principal Issues: whether partners are limited partners per 40(3.14)(b)
Position: if trust exercises its discretion, possibly; if not, no
Reasons: trust is discretionary
XXXXXXXXXX 2001-007093
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: XXXXXXXXXX
Advance Income Tax Ruling
We are writing in response to your letter of XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of the above partnership. We acknowledge your subsequent correspondence and telephone conversations, as well as our (XXXXXXXXXX) meeting on XXXXXXXXXX.
To the best of your knowledge, and that of the taxpayers involved, none of the issues contained herein is:
(i) dealt with in an earlier return of the taxpayers or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of one or any of the taxpayers or a related person;
(iii) under objection by one or any of the taxpayers or a related person;
(iv) subject to a ruling previously issued by the Income Tax Rulings Directorate; or
(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.
DEFINITIONS
In this letter, the following terms have the meanings specified:
(a) "Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and all references to a statute are to the Act, unless otherwise indicated;
(b) "Arranging Partner" has the meaning set out in paragraph 23;
(c) "Arranging Partner's Lender" has the meaning set out in paragraph 23;
(d) "Arranging Partner's Lender's Pledge" means a pledge by the Arranging Partner's Lender of the XXXXXXXXXX, as described in paragraph 13, and "Arranging Partners' Lenders' Pledges" means, collectively, each Arranging Partner's Lender's Pledge;
(e) "Bank Facility" means XXXXXXXXXX;
(f) "Beneficiary" means a beneficiary of the Discretionary Trust (other than a Charitable Beneficiary), and "Beneficiaries" means, collectively, the beneficiaries of the Discretionary Trust (other than a Charitable Beneficiary);
(g) "CCRA" means the Canada Customs and Revenue Agency;
(h) XXXXXXXXXX;
(i) "Charitable Beneficiary" means a beneficiary of the Discretionary Trust that is a Charity;
(j) "Charity" has the meaning set out in section 149.1 of the Act;
(k) "Discretionary Trust" has the meaning set out in paragraph 11;
(l) "Eligible Claim" has the meaning set out in paragraph 11;
(m) XXXXXXXXXX;
(n) XXXXXXXXXX;
(o) XXXXXXXXXX;
(p) "General Guarantor Partner" means Newco;
(q) "Guarantor Partnership" has the meaning set out in paragraph 15;
(r) "Initial Trustees" of the Discretionary Trust will consist of XXXXXXXXXX;
(s) "Limited Partnerships Act" means the Limited Partnerships Act XXXXXXXXXX;
(t) "Loan FROM Arranging Partner's Lender" means a loan from an Arranging Partner's Lender, as described in paragraph 23 below;
(u) "Loan TO Arranging Partner's Lender" means a loan to an Arranging Partner's Lender to Guarantor Partnership, as described in paragraph 25 below;
(v) "Major Lenders" means the several financial institutions that will provide the Bank Facility to the Professional Partnership and may lend amounts to Partners and Arranging Partners' Lenders;
(w) "Newco" means a new corporation described in paragraph 10 below; Newco is the General Guarantor Partner;
(x) XXXXXXXXXX;
(y) "PC Partner" means a professional corporation formed under the laws of XXXXXXXXXX which is a Partner of the Professional Partnership;
(z) "Partner" means a partner or former partner of the Professional Partnership (including a PC Partner or former PC Partner);
(aa) "Partner's Covenant" has the meaning set out in paragraph 12 below, and "Partners' Covenants" means, collectively, the Partner's Covenant of each of the Partners;
(bb) "Partnership Act" means the Partnership Act XXXXXXXXXX;
(cc) "XXXXXXXXXX Beneficiary" means, in respect of each Partner, one or more Beneficiaries of the Discretionary Trust XXXXXXXXXX;
(dd) "Principal" means, in respect of a particular Partner that is a PC Partner, an individual XXXXXXXXXX;
(ee) "Professional Partnership" means XXXXXXXXXX, a partnership formed and subsisting under the Partnership Act, or, after the conversion of the partnership to a limited liability partnership under the provisions of the Limited Partnerships Act, XXXXXXXXXX;
(ff) "Professional Partnership Agreement" means the partnership agreement between the Partners defining and governing the interests of the Partners in the Professional Partnership and the mutual rights and obligations of the Partners and providing for the management and governance of the Professional Partnership;
(gg) "Settlor" means the XXXXXXXXXX who settles the Discretionary Trust as described in paragraph 11 below;
(hh) "Trustees" means the trustees of the Discretionary Trust from time to time;
(ii) "Trust Fund" means all monies, securities, property and assets under the control of the Trustees and all capital accretions to and all income from such property; and
(jj) "Trust Indenture" means the trust indenture to be entered into between a XXXXXXXXXX of XXXXXXXXXX, as Settlor, and XXXXXXXXXX, as initial Trustees, establishing the Discretionary Trust, and described in paragraph 11 below.
FACTS
1. XXXXXXXXXX.
2. XXXXXXXXXX.
3. XXXXXXXXXX.
4. XXXXXXXXXX.
5. The Professional Partnership carries on a XXXXXXXXXX. The fiscal period of the Professional Partnership ends on XXXXXXXXXX in each year.
6. The Professional Partnership has approximately XXXXXXXXXX.
7. XXXXXXXXXX.
8. Pursuant to a credit facility entered into between the Professional Partnership and several financial institutions (the "Major Lenders"), the Professional Partnership has obtained a new operating line of credit XXXXXXXXXX will be secured against the property and assets of the Professional Partnership XXXXXXXXXX.
9. XXXXXXXXXX. The Partnership Act provides that a particular partner in a professional partnership will not be liable for negligent acts or omissions unless the negligence is that of the particular partner or that of an employee, agent or representative of the partnership under the particular partner's direct supervision and control. The Partnership Act extinguishes any common law right of contribution that a particular partner may have against other partners in the case of a negligent act or omission on the part of the particular partner or a person under the particular partner's direct supervision and control. The Partnership Act does not limit the liability of partners for other liabilities of the partnership such as trade debts, employee costs, bank borrowings and other indebtedness and does not extinguish any common law right of contribution for such obligations. XXXXXXXXXX.
PROPOSED TRANSACTIONS
10. XXXXXXXXXX will subscribe for one common share in the capital of Newco for cash consideration of $XXXXXXXXXX.
The Discretionary Trust
11.
(a) Pursuant to the Trust Indenture, the Settlor will establish a trust to be known as XXXXXXXXXX (the "Discretionary Trust"). The Settlor will settle upon the Initial Trustees, in trust, XXXXXXXXXX Canadian gold coin and $XXXXXXXXXX in cash.
(b) The Beneficiaries of the Discretionary Trust will include, among others, Partners, Principals and spouses and relatives of the foregoing. In exercising their discretion, but without in any way fettering the same, the Trustees will be entitled to consider and take into account any XXXXXXXXXX Beneficiaries XXXXXXXXXX.
(c) The Trust Fund will consist of the assets described above in paragraph 11(a), the limited partnership interest in the Guarantor Partnership (described in paragraphs 15, 20, 21and 22 below), the Partners' Covenants (described in paragraph 12 below), and any payments made to the Discretionary Trust pursuant to any of the Partners' Covenants. In addition, the Trust Fund may include any payments made to the Discretionary Trust pursuant to the Arranging Partners' Lenders' Pledges (described in paragraph 13 below).
(d) The Trust Indenture will provide in part as follows:
(i) The Trustees may, at any time and from time to time upon the occurrence of an "Eligible Claim" in respect of one or more Partners or Principals, consider, and if thought fit, in their sole and absolute discretion, pay to or for the benefit of any one or more of the Beneficiaries to the exclusion of the other or others of the Beneficiaries, such amount or amounts or the whole of the capital or income of the Trust Fund in such proportion or proportions and in such manner as the Trustees in their sole and absolute discretion may determine, subject to the limitations set forth in paragraph 11(d)(iv) below. The Trustees shall have no obligation to make any payment out of the Trust Fund at any time to any one or more of the Beneficiaries, and no Beneficiary will have any right to require any payment from the Trust Fund. The Trust Indenture will permit a Beneficiary to give notice to the Trustees of an Eligible Claim in respect of one or more Partners, but will not permit any Beneficiary to make a claim or to require the Trustees to consider any claim.
(ii) The Trustees will have the right, but not the obligation, to participate in the defence or settlement negotiations in respect of any action or claim which may give rise to an Eligible Claim in respect of one or more Partners.
(iii) An "Eligible Claim" in respect of a Partner or Principal will be defined as a claim or potential claim (A) against the Partner, the Principal, or the Partnership for a debt, obligation or liability incurred by the Partnership, the Partner or the Principal in the ordinary course of the business of the Partnership or in respect of anything done for the preservation of the business or property of the Partnership, and (B) in respect of which, for whatever reason, the Partner's or the Principal's liability is not, or may not be, limited by the Partnership Act. Any obligation incurred by a Partner or Principal in order to settle such a claim made or threatened against the Partner or such Principal will be deemed to be an "Eligible Claim" in respect of the Partner or Principal, but will not permit any Beneficiary to make a claim or to require the Trustee to consider any claim.
(iv) There will be limitations on the amount the Trustees may determine to pay to a Beneficiary or Beneficiaries in respect of an Eligible Claim in respect of one or more Partners or Principals arising from a particular matter or claim, as follows:
i) XXXXXXXXXX
ii) XXXXXXXXXX
XXXXXXXXXX
(e) XXXXXXXXXX Principal.
(f) If the Trustees exercise their discretion and determine to make a payment to one or more Beneficiaries in respect of an Eligible Claim in respect of any Partner or Principal, they will be authorized to require each other Partner to pay to the Discretionary Trust, pursuant to the Partners' Covenants, such amount or amounts as shall be calculated by the Trustees in their sole and absolute discretion (which calculation shall be binding on all the Partners, Principals and Beneficiaries), pro rata in accordance with the Partners' Covenants (as set out in paragraph 12(f) below), so that the Trustees will have sufficient funds to make any payment that they may determine to make in respect of such Eligible Claim.
(g) The Trustees will be permitted to call on the Partners' Covenants to fund the reasonable costs and expenses incurred by the Trustees in relation to the administration and execution of the trusts under the Discretionary Trust (including those described in paragraph 11(d)(iv) above).
(h) There will be a prohibition against the Trustees distributing, delivering, assigning, otherwise transferring or granting security against, any Partner's Covenants or any rights or benefits thereunder to any person other than the Partner that gave such Partner's Covenant.
(i) There will be a restriction against any distribution of any income or capital of the Discretionary Trust to any Beneficiary other than a Charitable Beneficiary, save and except for possible payments to Beneficiaries as described in paragraph 11(d) above, and the return of a Partner's Covenant to the Partner that gave such Partner's Covenant. The Charitable Beneficiary will be the sole reversionary beneficiary of the Discretionary Trust.
(j) The Trust Indenture will provide for the replacement of Trustees on resignation, incapacity, bankruptcy, death and other events. XXXXXXXXXX It will also provide that a majority decision of Trustees on any matter will be binding on all Trustees.
11. Each Partner will execute under seal and deliver to the Trustees a covenant to pay (which, in the case of a PC Partner, will include a joinder as co-covenantor by the Principal in respect of such PC Partner) (a "Partner's Covenant") to and in favour of the Discretionary Trust, in consideration for the delivery by the other Partners of their respective Partners' Covenants. Under each Partner's Covenant:
(a) The particular Partner will unconditionally and irrevocably covenant in favour of the Trustees to make due and punctual payment to the Trustees of his, her or its pro rata share of any payments that the Trustees, in their sole and absolute discretion, determine to make pursuant to the terms of the Trust Indenture to a Beneficiary or Beneficiaries in respect of any Eligible Claim in respect of a Partner or Principal.
(b) The Partner will unconditionally and irrevocably covenant in favour of the Trustees to pay his, her or its pro rata share of the costs and expenses incurred by the Trustees in relation to any Eligible Claim in respect of a Partner or Principal.
(c) There will be limitations on the liability of a Partner in respect of any Eligible Claim. XXXXXXXXXX.
(d) The Trustees will be entitled to make a demand upon a Partner to pay his, her or its pro rata share of the amount of his, her or its liability at any time and from time to time between the time notice of an Eligible Claim in respect of one or more Partners or Principals is given to the Trustees and the time of settlement or other disposition thereof.
(e) A Partner will be required to make payment to the Trustees of the amount of his or her liability forthwith after any such demand provided that the Trustees shall have made demand for payment on all other Partners under their respective Partners' Covenants.
(f) XXXXXXXXXX.
13.(a) Each Partner's Covenant will be guaranteed by the particular Arranging Partner's Lender. Each Arranging Partner's Lender will grant to the Discretionary Trust a XXXXXXXXXX pledge of the XXXXXXXXXX (the "Arranging Partner's Lenders Pledge") to secure the Arranging Partner's Lender's guarantee of the Partner's Covenant given by the particular Arranging Partner in respect of the Arranging Partner's Lender.
(b) As set out in paragraph 25(b), each Arranging Partner's Lender will grant a XXXXXXXXXX pledge of the Loan FROM Arranging Partner's Lender (and the promissory note evidencing the Loan FROM Arranging Partner's Lender) to secure any Loan TO Arranging Partner's Lender that is made to finance the Loan FROM Arranging Partner's Lender.
(c) A XXXXXXXXXX pledge of the Loan FROM Arranging Partner's Lender (and the promissory note evidencing the Loan FROM Arranging Partner's Lender) may be given by an Arranging Partner's Lender to secure any arrangement other than a Loan TO Arranging Partner's Lender that is made to enable that Arranging Partner's Lender to make the Loan FROM Arranging Partner's Lender.
(d) If a Partner fails to make payment under the Partner's Covenant of that Partner when called upon by the Trustees of the Discretionary Trust, the Trustees will be entitled to enforce the Arranging Partner's Lender's Pledge against that Loan FROM Arranging Partner's Lender. The recourse of the Discretionary Trust under the guarantee by the Arranging Partner's Lender will be limited to realizing on the Arranging Partner's Lender's Pledge.
Financing the Professional Partnership
14. The Professional Partnership will continue as a limited liability partnership under the Partnership Act. The name of the Professional Partnership will be changed to XXXXXXXXXX.
15. Pursuant to a partnership agreement entered into between Newco, as the General Guarantor Partner and the Discretionary Trust, as the initial limited partner of Guarantor Partnership, Newco and the Discretionary Trust will form a limited partnership under the Limited Partnerships Act to be called XXXXXXXXXX (the "Guarantor Partnership"). On formation of the Guarantor Partnership, Newco, qua General Partner of the Guarantor Partnership, and the Discretionary Trust, qua limited partner of the Guarantor Partnership, will each contribute $XXXXXXXXXX in cash to the Guarantor Partnership.
16. Pursuant to a credit facility entered into between the Professional Partnership and the Major Lenders, the Professional Partnership will obtain a XXXXXXXXXX operating line of credit XXXXXXXXXX.
17. XXXXXXXXXX.
18. XXXXXXXXXX.
19. XXXXXXXXXX.
20. The Guarantor Partnership will guarantee repayment of the principal amount of and interest on XXXXXXXXXX will be secured with a XXXXXXXXXX In consideration for obtaining the XXXXXXXXXX, the Professional Partnership will pay an annual guarantee fee to the Guarantor Partnership.
21. XXXXXXXXXX.
22. The Guarantor Partnership will invest the total amount of the proceeds from each Loan FROM Arranging Partner's Lender (described in paragraph 23 below) XXXXXXXXXX.
Funding the Guarantor Partnership
23. Each Partner (the "Arranging Partner") will arrange for a Lender (the "Arranging Partner's Lender"), that will lend money (the "Loan FROM Arranging Partner's Lender") to the Guarantor Partnership. XXXXXXXXXX. The Loans FROM Arranging Partners' Lender will be term loans that will bear interest at XXXXXXXXXX% per annum over the bank's prime rate.
24. The Guarantor Partnership will issue promissory notes to each Arranging Partner's Lender evidencing each Loan FROM Arranging Partner's Lender.
25. An Arranging Partner's Lender may raise the money for its Loan FROM Arranging Partner's Lender by borrowing the funds from, inter alia, a Major Lender. If Arranging Partner's Lender borrows money (the "Loan TO Arranging Partner's Lender") to lend to the Guarantor Partnership, the Loan TO Arranging Partner's Lender will be:
(a) a demand loan, bearing interest at not less than the prime rate, and
(b) evidenced by a promissory note, which will be secured by a XXXXXXXXXX pledge of the Loan FROM Arranging Partner's Lender (and the promissory note evidencing the Loan FROM Arranging Partner's Lender).
26. Correspondence has been sent to all Partners which specifically states: "The Trustees are not obligated to pay anything in respect of an eligible claim".
27. All necessary amendments will be made to the Professional Partnership Agreement to reflect the Proposed Transactions.
PURPOSE OF THE PROPOSED TRANSACTIONS
28. The purposes of the Proposed Transactions are:
a. to permit Partners to avail themselves of the limitation of liability contained in the Partnership Act;
b. to empower the Trustees of the Discretionary Trust, if they so choose, to make a payment to a Beneficiary in respect of an Eligible Claim, in light of the extinguishment of a Partner's common law right of contribution under the limited liability provisions of the Partnership Act;
c. to arrange for the financing of the business of the Professional Partnership on a basis which is unified, deals with all lenders to the Professional Partnership on a comprehensive basis, increases the amount of borrowing available to the Professional Partnership and reduces the cost of borrowing; and
d. to allow Partners to reduce their equity investments in the Professional Partnership.
RULINGS
(A) The Proposed Transactions will not, in and of themselves, cause paragraph 40(3.14)(b) of the Act to apply to a Partner.
(B) At the time when the Trustees of the Discretionary Trust have exercised their discretion, as described in paragraph 10(d)(i) above, and have decided to provide an amount to a Partner, Principal or any XXXXXXXXXX Beneficiary XXXXXXXXXX, that Partner will be entitled to an amount or benefit as described in 96(2.2)(d) of the Act.
(C) Paragraph 40(3.14)(a) of the Act will not apply to a Partner.
CAVEAT
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 (the "Circular") issued by the CCRA on January 29, 2001, and are binding provided the proposed transactions are completed on or before XXXXXXXXXX.
These rulings are based on the Act and the Partnership Act in their present forms and do not take into account the effect of any amendments to the Act or the Partnership Act.
OPINION
At the time when the Trustees of the Discretionary Trust have exercised their discretion, as described in paragraph 10(d)(i) above, and have decided to provide an amount to a Partner, Principal or any Preferred Beneficiary designated by that Partner, and a particular Arranging Partner's Lender is required to make a payment to the Discretionary Trust in connection with a guarantee of that Partner's Covenant provided by the Arranging Partner's Lender in respect of that Partner, that Partner may be entitled to an amount or benefit as described in 96(2.2)(d) of the Act if that Partner or Principal in respect of that Partner does not, at any time,
(a) have a loan receivable from the Arranging Partner's Lender in respect of that Partner,
(b) have an outstanding guarantee of the Loan TO Arranging Partner's Lender in respect of that Partner, or
(c) otherwise have an obligation to reimburse or indemnify the Arranging Partner's Lender in respect of that Partner,
in an amount not less than the amount paid to the Discretionary Trust in connection with such guarantee.
The foregoing comments are given in accordance with the practice referred to in paragraph 22 of IC-70-6R4 and are not binding on the CCRA.
Nothing in this letter should be construed as implying that CCRA has agreed to or accepted:
(i) the GST implications of any of the proposed transactions; and
(ii) any other tax consequences arising from the facts or proposed transactions described herein, other than those specifically confirmed in the rulings given.
Yours truly,
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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