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:
Clarification requested regarding the income tax consequences of a particular business transaction related to a derivative contract
Position TAKEN:
As this appears to be a proposed transaction, an advance ruling request should be submitted. General information provided.
Reasons FOR POSITION TAKEN:
This can only be determined in the context of an advance income tax ruling.
XXXXXXXXXX 2000-009991
G. Moore
January 9, 2002
Dear XXXXXXXXXX:
Re: ALFA Derivative Contract
This is in reply to your letter of September 4, 2001, regarding the above-mentioned subject.
As we understand it, XXXXXXXXXX, plans to use the ALFA derivative contract to provide start-up capital enabling her to incorporate, complete artistic works and continue marketing. At maturity, corporate net profits will repay an initial investor as well as pay a named registered charitable organization a predetermined donation amount. At the onset, a private venture capital investor gives XXXXXXXXXX a fixed amount of money and names a registered charitable organization. The incorporated entity, XXXXXXXXXX, pursues profits. At maturity of the contract (XXXXXXXXXX months later), the private investor is repaid based on net profits of XXXXXXXXXX. and once repaid in full, any remaining net profits would be paid by the corporation to the registered charity, up to a pre-set amount. No interest will be paid at any time. For every dollar of net profit XXXXXXXXXX earns, half is retained by the corporation, and half goes to the private investor until repaid in full, then to the registered charity until $XXXXXXXXXX has been given. You are asking our opinion on the income tax consequences in the following three scenarios:
Scenario 1
XXXXXXXXXX makes no net profit. The private investor gets no repayment and loses the $XXXXXXXXXX investment. The registered charity is paid nothing.
Scenario 2
XXXXXXXXXX makes some net profit. The private investor is paid back $XXXXXXXXXX and loses $XXXXXXXXXX . The registered charity is paid nothing.
Scenario 3
XXXXXXXXXX makes considerable profit. The private investor is paid back the initial investment of $XXXXXXXXXX and the registered charity is paid $XXXXXXXXXX.
Further to the telephone conversation (Moore/XXXXXXXXXX) of September 18, 2001, you confirmed that the scenarios described in your letter relate to a specific proposed transaction. To the extent that you require confirmation of the tax consequences for any of the proposed transactions described, we bring to your attention Information Circular 70-6R4 dated January 29, 2001. Confirmation with respect to proposed transactions involving specific taxpayers should be the subject of a request for an advance income tax ruling. If you wish to obtain an advance income tax ruling with respect to specific contemplated transactions, a written request for an advance income tax ruling should be submitted in accordance with Information Circular 70-6R4. However, we can provide the following general comments.
It is our view that the nature of the contracts you have described outline the manner in which profits and losses from a particular venture will be allocated or distributed. The income tax consequences or such an allocation/distribution will be determined based upon the legal relationships entered into among the parties as well as the legal entities involved (i.e. partnerships, corporations, or sole proprietorships). To assist you in understanding the income tax consequences of these and other similar issues regarding general business operations we have attached a series of general questions and answers from our internet site "Business Information Service". The URL is indicated on these attachments should you wish to visit this site for this information or to find additional information.
We trust that the foregoing will be useful.
Yours truly,
P. Lynch
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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