Section 115.2

The activities of a limited partnership (“Foreign LP), governed by foreign or provincial law are lending to borrowers that are resident in and outside Canada. The general partner (“GP”) has delegated all its functions regarding the investment activities of Foreign LP to an affiliate (the “Manager”), which is also a taxable Canadian corporation. All the limited partners are non-residents or partnerships other than Canadian partnerships. None is affiliated with any of GP, the Manager, or any person or partnership described in s. 115.2(2)(c)(ii)(A) or (B). Their only connection to Canada is their investment in Foreign LP.

CRA stated:

[A]ny ancillary services provided by the Manager in Canada that may fall outside the scope of “qualified [sic] investment services” in subsection 115.2(1), but that are administrative in nature and not an income generating activity would generally not be determinative on their own of the location where the business of Foreign LP is carried on. Therefore, where a non-resident limited partner is not considered to be carrying on business in Canada, by reason of the application of subsection 115.2(2) or otherwise, the non-resident limited partner will not be considered to be carrying on a business in Canada solely by reason of the Manager performing administrative functions in Canada.

Finally, the fact that GP, a corporation resident in Canada, performs administrative functions in Canada would not generally, in and by itself, cause Foreign LP or its limited partners to be carrying on business in Canada for the purposes of the Act where, once subsection 115.2(2) has been applied to disregard the activities conducted on behalf of Foreign LP by the Manager, the remaining activities of Foreign LP would not amount to carrying on business in Canada for the purposes of the Act.

The activities of a limited partnership (“Foreign LP), governed by foreign or provincial law are lending to borrowers that are resident in and outside Canada. The general partner (“GP”) has delegated all its functions regarding the investment activities of Foreign LP to an affiliate (the “Manager”), which is also a taxable Canadian corporation. All the limited partners are non-residents or partnerships other than Canadian partnerships. None is affiliated with any of GP, the Manager, or any person or partnership described in s. 115.2(2)(c)(ii)(A) or (B). Their only connection to Canada is their investment in Foreign LP.

CRA stated:

The making of loans by the Manager on behalf of Foreign LP would generally qualify as “designated investment services” as defined in subsection 115.2(1). The definition “qualified investment” in subsection 115.2(1) includes “indebtedness,” and there is no indication that an acquisition, holding and disposition of a debt acquired on original issue through the services of a Canadian service provider are meant to be excluded from the application of subsection 115.2(2).

Structure

Each of Aco and Bco (who are unrelated Canadian residents) each holds 50% of the shares of Canco, which wholly owns the Canadian-resident Manager. A non-resident wholly-owned subsidiary of Aco (the Taxpayer) will, along with other non-residents subscribe for LP units of a newly-formed LP (New Fund LP) with a newly-incorporated subsidiary of Canco (New Canada GP) as the general partner. Taxpayer and the other non-resident investors also are unrelated to the Manager and any sub-advisor, or to any person or partnership, other than New Fund LP or Project LPs, described in s. 115.2(2)(c)(ii)(A) or 115.2(2)(c)(ii)(B) in respect of the Manager or such sub-advisor). Interests in New Fund LP will only be marketed to non-resident investors.

Project Investments by New Fund LP or Project LP

New Fund LP may invest in Project Investments (i.e., private credit investments in Canadians or non-residents, including specialty mezzanine and other debt instruments) directly, but will usually form a subsidiary “Project LP” (of which New Canada GP is the general partner) to make the investment. Each Project Investments will be “indebtedness” and a “qualified investment.”

NPP Subsidiary

An unlimited liability company subsidiary (“NPP Subsidiary”) of New Fund LP or of a Project LP will acquire “Net Profit Participations” from entities that are financed with a Project Investment, and will pay corporate income tax on any income generated from Net Profit Participations.

Manager functions

New Canada GP, New Fund LP and any Project LP will enter into one or more Management Agreements with the Manager whereby New Canada GP, on behalf of the Partnerships, will appoint the Manager to act as its investment advisor and debt financing underwriter and servicer, and New Canada GP will delegate all of its functions with respect to New Fund LP, Project LPs, and other Subsidiary Entities, including approving Project Investments and approving dispositions. In addition to making investment decisions, the Manager will manage the day-to-day operations of the Partnerships and arrange for the provision of marketing services.

Ruling

S. 115.2(2) will apply to the Taxpayer such that the provision by the Manager of the above services, and the acquisition, holding, and disposition through the services of the Manager of (i) Project Investments by Project LPs, and (ii) shares of NPP Subsidiary by New Fund LP or Project LPs will not cause the Taxpayer to be carrying on a business in Canada for the purposes of ss. 115(1) and 150(1) and Part XIV.