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: A limited partnership has been formed to secure funds to assist in the reopening of a XXXXXXXXXX mine in XXXXXXXXXX . The partnership will enter into a joint venture agreement with the mine operator whereby the partnership will receive a share of the net gross revenue derived from the production of the mine. Under the terms of the joint venture, the partnership will make a contribution to a reclamation trust for which it is a co-beneficiary with the mine operator and the Province of XXXXXXXXXX. A put/call agreement will be entered into between the partnership and the parent company (a public company) of the mine operator, to allow the units of the partnership to be acquired by the parent company for cash or common shares of the parent. The main issues relating to the ruling are:
1) Will the partnership be entitled to deduct, from income, the amount contributed to the reclamation trust?
2) Does the existence of the call right, in and of itself, result in a reduction of the at-risk amount under paragraph 96(2.2)(d) of the Act?
3) Does the existence of the put right, in and of itself, result in a reduction of the at-risk amount under paragraph 96(2.2)(d) of the Act?
Position: 1) yes, provided that the reclamation trust is a qualified environmental trust; 2) and 3) the existence of put and call rights will not, in and of themselves, result in a reduction of the at-risk amount of the limited partners.
Reasons: 1) meets the conditions under paragraph 20(1)(ss); 2) call right is at the discretion of the parent company and the exercise price does not exceed the fair market value of the units of the partnership; and 3) the maximum price of the put right does not exceed the fair market value of the units of the partnership.
XXXXXXXXXX 2003-005030
XXXXXXXXXX, 2003
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Partnership")
XXXXXXXXXX . ("Xco")
We are writing in response to your letters of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of Xco, the above-noted Partnership, and the persons who will become members of the Partnership.
To the best of your knowledge, Xco, the general partner of the Partnership, and the other persons described herein, none of the issues contained in this ruling request is:
(i) dealt with in an earlier return of Xco, any prospective member of the Partnership or a related person;
(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of Xco, any prospective member of the Partnership or a related person;
(iii) under objection or appeal by Xco, any prospective member of the Partnership or a related person; or
(iv) before the courts or, if a judgement has been issued, the time limit for appeal to a higher court has expired.
Except as otherwise noted, all statutory references in this letter are to the Income Tax Act (Canada), R.S.C. 1985 c.1 (5th Supp.), as amended (hereinafter referred to as the "Act").
Except as otherwise noted, all dollar amounts described herein are to the Canadian dollar.
DEFINITIONS
In this letter, the following terms have the meanings specified:
XXXXXXXXXX
"Call Period" means the period from and including XXXXXXXXXX to and including XXXXXXXXXX;
XXXXXXXXXX
"General Partner" means XXXXXXXXXX;
"General Partner Principals" means the individuals resident in Canada who will be the holders of all of the issued shares in the capital of the General Partner;
"Guarantee" means the agreement to be entered into amongst Xco, Parentco and the Province on or before XXXXXXXXXX;
"Initial Limited Partner" means XXXXXXXXXX, as agent;
"Joint Venture" means the joint venture of Xco and the Partnership to be formed to reopen the Mine as described in paragraph 24;
"Joint Venture Agreement" means the agreement to be entered into between the Partnership and Xco forming the Joint Venture;
"Limited Partners" mean the limited partners of the Partnership to be identified once the Partnership is funded;
"Mine" means the XXXXXXXXXX mine known as XXXXXXXXXX;
"Mine Assets" means all tangible and intangible goods, chattels, improvements or other items of the Mine, XXXXXXXXXX;
"Mines Act" means the XXXXXXXXXX Act (XXXXXXXXXX);
"Mining Permit" means XXXXXXXXXX;
"Partnership" means the XXXXXXXXXX;
"Partnership Agreement" means the Limited Partnership Agreement to be entered into on or prior to XXXXXXXXXX, between the General Partner and the Initial Limited Partner;
"private corporation" has the meaning assigned by subsection 89(1) of the Act;
"Province" means Her Majesty the Queen in Right of the Province of XXXXXXXXXX represented by XXXXXXXXXX;
"public corporation has the meaning assigned under subsection 89(1) of the Act;
"Put Period" means the period from and including XXXXXXXXXX to and including XXXXXXXXXX subject to the condition described in subparagraph 40(g) below;
"Put/Call Agreement" means the agreement to be entered into between Parentco and the Limited Partners on or prior to XXXXXXXXXX;
"Parentco" means XXXXXXXXXX;
"Reclamation Agreement" means the agreement entered into between the Province and Xco XXXXXXXXXX relating to the performance of specified Reclamation Obligations XXXXXXXXXX;
"Reclamation Obligations" means all reclamation obligations imposed or which may be imposed with respect to the Mine pursuant to the Mining Permit, the Reclamation Agreement, the Mines Act and any other applicable legislation;
"Reclamation Trust" means the trust to be established, pursuant to the Mines Act, for the sole purpose of funding the Reclamation Obligations;
"Reclamation Trust Indenture" means the indenture to be entered into among Xco, the Partnership, the Trustee, and the Province on or prior to XXXXXXXXXX, for the securing of the Reclamation Obligations;
"XXXXXXXXXX Agreement" means the XXXXXXXXXX Agreement entered into amongst the Province, Xco and XXXXXXXXXX pursuant to the Reclamation Agreement;
"taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act;
"tax shelter" has the meaning assigned by section 237.1 of the Act;
"Trustee" means the XXXXXXXXXX or another corporation resident in Canada that is licensed under the laws of Canada to carry on in Canada the business of offering to the public its services as trustee;
"Units" means the units in the Partnership to be issued to the Limited Partners in consideration for their contributions;
"Xco" means XXXXXXXXXX.
Our understanding of the relevant facts, proposed transactions and the purpose of the proposed transactions is as follows:
FACTS
1. Xco is a taxable Canadian corporation, the principal business of which is the exploration and mining of minerals.
2. Parentco is a taxable Canadian corporation and a public corporation. Parentco owns all of the issued shares of Xco.
3. Parentco's shares are listed on the XXXXXXXXXX.
4. The interest in the Mine is held by Parentco through its ownership of all of the shares of Xco. XXXXXXXXXX.
5. Xco owns the Mine and its authority to operate the Mine is subject to the terms and conditions imposed by the Province pursuant to the Mining Permit and the Reclamation Agreement, including the requirement to maintain adequate security for the Reclamation Obligations.
6. XXXXXXXXXX.
7. XXXXXXXXXX.
8. XXXXXXXXXX.
9. XXXXXXXXXX.
10. The Province is not currently requiring either Xco or Parentco to carry out any material reclamation works on the Mine. In addition, neither Xco nor Parentco are in default of any material Reclamation Obligations relating to the Mine.
PROPOSED TRANSACTIONS
11. The Partnership was formed to carry out the business of XXXXXXXXXX operating the Mine through the participation in the Joint Venture as described in paragraphs 24 to 34 below.
12. The Partnership is registered as a tax shelter under identification number XXXXXXXXXX.
13. The General Partner is a private corporation and taxable Canadian corporation.
14. The General Partner will be governed by a board of directors consisting of individuals with mining, financial and commercial expertise. The directors of the General Partner and the General Partner Principals deal with each other, Xco, Parentco and the Limited Partners at arm's length within the meaning of section 251 of the Act.
15. The General Partner will be solely responsible for carrying on the business of the Partnership and managing the business and affairs of the Partnership, as well as its daily operating activities.
16. Under the terms of the Partnership Agreement, and subject to paragraph 17 below, for each fiscal period of the Partnership, the Partnership's income, non-capital losses, capital gains and net capital losses, as the case may be, will be allocated as XXXXXXXXXX% to the Limited Partners, allocated among them on a unit pro rata basis, and XXXXXXXXXX% to the General Partner.
17. The General Partner will be entitled to receive a full reimbursement of expenses, plus a priority entitlement to income and cash of the Partnership equal to XXXXXXXXXX% of the gross issue proceeds of the Partnership from the sale of Units during the fiscal year of the Partnership ending XXXXXXXXXX, and to $XXXXXXXXXX for each fiscal year thereafter.
18. The Partnership Agreement will provide that all distributions of cash from the Partnership will be made on the same basis as described in paragraphs 16 and 17 above.
19. The Partnership will offer its Units for sale by way of a Subscription Agreement to accredited investors (as defined by applicable securities laws) resident in XXXXXXXXXX and to investors in XXXXXXXXXX purchasing, as principal, units having an acquisition cost of $XXXXXXXXXX or more pursuant to registration and prospectus exemptions under applicable securities legislation.
20. No person in whom there is an interest that is a " tax shelter investment" may subscribe for Units of the Partnership. It is expected that the offering of the Units will be completed on or before XXXXXXXXXX.
21. The Subscription Agreement will contain the following statement:
THE RULING OBTAINED FROM THE CANADA REVENUE AGENCY CONTAINS CAVEATS. THE RULING MAY BE VIEWED ON REQUEST PROVIDED THAT THE REQUESTING PARTY EXECUTES A CONFIDENTIALITY AGREEMENT.
22. Upon acceptance of the subscriptions for the Units, the Partnership will redeem the unit of the Partnership acquired by the Initial Limited Partner and make payment therefore in the amount of $XXXXXXXXXX.
23. The XXXXXXXXXX will provide a credit facility to prospective Limited Partners on an individual eligibility and full recourse basis. The financing will not be a limited recourse amount within the meaning of subsection 143.2(1) of the Act or deemed to be a limited recourse amount by subsections 143.2 (7) or (8) of the Act.
24. The Partnership will enter into and participate in a joint venture with Xco to XXXXXXXXXX monitor the operation of the Mine.
25. The Joint Venture will be a single purpose, venture created for the sole purpose of conducting all activities necessary to XXXXXXXXXX share production and/or production revenue generated from the operation of the Mine.
26. The Joint Venture will commence upon the effective date of the execution of the Joint Venture Agreement and will terminate, subject to early termination in event of a change of control, bankruptcy XXXXXXXXXX years from the date of completion of the XXXXXXXXXX of the Mine.
27. The Joint Venture Agreement will set out the necessary expenditures, which will be incurred to XXXXXXXXXX production at the Mine, these expenditures include:
(a) hiring and training qualified personnel, including negotiation of XXXXXXXXXX contracts, if applicable;
(b) preparing, inspecting, upgrading and repairing all equipment needed to resume production at the Mine including the XXXXXXXXXX equipment;
(c) purchasing any additional machinery and equipment as required;
(d) XXXXXXXXXX;
(e) securing transportation and processing services for the XXXXXXXXXX; and
(f) the formation and funding of the Reclamation Trust, as described in paragraphs 35 and 36 below, in order to satisfy the Reclamation Obligations, as required by the Province under the terms of the Mining Permit, in accordance with the Mines Act.
28. Xco will, pursuant to the terms of the Joint Venture Agreement, agree to make available to the Joint Venture, the use of its existing interest in the Mine and all related mining equipment and machinery and to fund all expenses (currently estimated to be $XXXXXXXXXX) required to XXXXXXXXXX Mine other than the contribution payable to the Reclamation Trust.
29. Xco will not, as the result of entering into the Joint Venture Agreement, transfer (or otherwise dispose of) any legal or beneficial ownership interest in either the Mine, the related mining equipment or any other property, to either the Joint Venture or the Partnership.
30. The Partnership will dedicate cash to the Joint Venture and agree to satisfy the Reclamation Obligations of up to approximately $XXXXXXXXXX, by making a contribution to the Reclamation Trust. XXXXXXXXXX.
31. Xco will be the initial operator of the Joint Venture and will have the exclusive authority to make all decisions relating to day-to-day operations. Major decisions relating to the Joint Venture will be decided by majority decision of a Joint Venture management committee composed of equal numbers of representatives of Xco and the Partnership. The Partnership representative will have the casting vote in respect of all major decisions until the completion of XXXXXXXXXX of the Mine.
32. The Joint Venture Agreement provides that, for the duration of the term of the Joint Venture:
(a) the Partnership will be entitled to a XXXXXXXXXX share (estimated to be between XXXXXXXXXX% and XXXXXXXXXX%, depending on the total cash contribution of the Partnership to the Reclamation Trust) of the net gross revenue of the production of the Mine for the duration of the term of the Joint Venture Agreement; and
(b) Xco will be entitled to the share of the net gross revenue of the production of the Mine not allocated to the Partnership.
33. The net gross revenue of the Joint Venture will equal the proceeds from the sale of production from the Mine less expenses incurred in respect of such production, for XXXXXXXXXX.
34. The Joint Venture Agreement provides that the operator of the Joint Venture (Xco) will provide an indemnity (on typical or standard industry terms) to the non-operator (the Partnership) in respect of any liability resulting from any acts or omissions of the operator in respect of the Mine. The provision of the indemnity is consistent with normal commercial practice for the operation of a mine in the circumstances substantially similar to those described herein.
35. The Province, Xco, the Trustee and the Partnership will enter into the Reclamation Trust Indenture which will contain the following provisions:
(a) The Reclamation Trust will be formed for the sole purpose of securing the Reclamation Obligations relating to the operation of the Mine.
(b) The beneficiaries of the Reclamation Trust will be Xco, the Province and the Partnership.
(c) During the term of the Reclamation Trust, the Trustee will only make payments of income or capital from the Trust to be used for the purpose of funding the Reclamation Obligations.
(d) The Trustee will not make any payments out of the Reclamation Trust without the authorization of the Province.
(e) In the event that Xco should fail to fulfill any of the Reclamation Obligations, the Province will be entitled to demand payment from the Trust in order to fund such Reclamation Obligations.
(f) The Reclamation Trust cannot borrow any funds;
(g) The Reclamation Trust can only hold property described in paragraphs (a), (b) or (f) of the definition of "qualified investments" in section 204 of the Act.
36. The Reclamation Trust will only come into existence in XXXXXXXXXX at the time of the first contribution to it of money described in paragraph 37 below. Such money contribution is property as described in paragraph (a) of the definition of "qualified investments" in section 204 of the Act.
37. Following the establishment of the Joint Venture, the Partnership will make a cash contribution to the Reclamation Trust of up to approximately $XXXXXXXXXX. XXXXXXXXXX.
38. Immediately after the contribution by the Partnership to the Reclamation Trust, Xco will obtain from the Province written confirmation that the contribution will constitute acceptable security for the Reclamation Obligations under the terms of the Mining Permit and Reclamation Agreement XXXXXXXXXX.
39. The Reclamation Trust will remain in existence until the Reclamation Obligations have been fulfilled and the Mine has been reclaimed to the satisfaction of the Province or until substitute security for the Reclamation Obligations satisfactory to the Province is put in place.
40. Parentco and the Limited Partners will enter into a Put/Call Agreement which will contain the following essential terms:
(a) Parentco will have the right, but not the obligation, to acquire (the "Call Right") all of the issued and outstanding Units from the Limited Partners.
(b) The exercise price (the "Call Price") under the Call Right is equal to XXXXXXXXXX% of the contributions made by the Partnership to the Reclamation Trust, XXXXXXXXXX valued at the 10 day weighted average closing price by volume as quoted on the XXXXXXXXXX (the "10 Day Average Price") for the period ending on the day immediately prior to Parentco's election to exercise the Call Right.
(c) The Call Right will be exercisable in the absolute discretion of Parentco's board of directors during the Call Period.
(d) Parentco's board of directors are subject to statutory obligations under applicable corporate law to act in the best interests of Parentco and not to issue Parentco shares until such shares are fully paid by receipt by Parentco of the full consideration for the shares in cash or property valued at no greater than fair market value. Accordingly, Parentco will not exercise the Call Right in circumstances where the Call Price is greater than Parentco's directors' bona fide assessment of the fair market value to Parentco, of the Units.
(e) The Limited Partners will have the right, but not the obligation (the " Put" Right"), to require Parentco to purchase all, but not less than all of the Units for consideration equal to the fair market value of the Units at the time the Put Right is exercised, as determined by an independent valuator (selected by Parentco and the Limited Partners) using such valuation methods as are appropriate. The Put Right can only be exercised with the consent of Limited Partners independent of Parentco representing at least XXXXXXXXXX% of all issued Units. Once the XXXXXXXXXX% threshold is met, all Limited Partners will be required to exercise the Put Right.
(f) The Put Right will be exercisable during the Put Period except where the exception set out in (g) below applies.
(g) The Put Right will be exercisable immediately in the event of an alternate transaction ("Alternate Transaction") which is defined as either:
(i) a material default by Xco under the terms of the Joint Venture Agreement; or
(ii) a takeover bid amalgamation, arrangement, merger or similar transaction involving a change of control of Parentco or Xco in the manner to be set out in the Joint Venture Agreement.
(a) In the event that the Put Right becomes exercisable pursuant to subparagraph 40(g) above, Parentco will have a pre-emptive right to exercise the Call Right. The exercise of the Call Right will be on the terms and subject to all of the conditions described in subparagraphs 40(b) to 40(d) above.
41. Payment by Parentco for the Units upon the exercise of the Call Right or the Put Right can be made at the sole discretion of Parentco in the form of cash or, subject to receiving approval of the XXXXXXXXXX.
42. XXXXXXXXXX.
43. XXXXXXXXXX.
44. XXXXXXXXXX.
PURPOSE OF PROPOSED TRANSACTIONS
45. The purpose of the proposed transaction is to raise the capital required to XXXXXXXXXX the Mine in the most economic manner and in the manner that satisfies the reclamation requirements of the Province.
RULINGS
Provided that: (a) the facts, proposed transactions and the purpose of the proposed transactions have been fully disclosed and, as described above, are accurate, (b) the Partnership is a valid and subsisting partnership at law for any period of time covered by these rulings, and (c) the proposed transactions are carried out as described above, our rulings are as follows:
A. Provided that the Reclamation Trust as described in paragraphs 35 and 36 is a "qualified environmental trust" as defined in subsection 248(1) of the Act, the contribution by the Partnership to the Reclamation Trust as described in paragraph 37 will be deductible in computing income of the Partnership pursuant to paragraph 20(1)(ss) of the Act.
B. The Call Right, as described in subparagraphs 40(a) to (d) above, will not, in and by itself, result in a reduction of the "at-risk amount" of the Limited Partners as that term is defined in subsection 96(2.2) of the Act.
C. The Put Right, as described in subparagraphs 40(e) to (g) above, will not, in and by itself, result in a reduction of the "at-risk amount" of the Limited Partners as that term is defined in subsection 96(2.2) of the Act.
CAVEAT
These rulings are given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002 and are binding on the Canada Revenue Agency ("CRA") provided the proposed transactions are entered into before XXXXXXXXXX. These rulings are based on the Act in its present form and do not take into account the effect of any proposed amendments thereto. Except as expressly stated, these rulings do not imply acceptance, approval or confirmation of any income tax implications of the facts or proposed transactions.
Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:
(a) the reasonableness of any expenditure referred to in this letter;
(b) whether or not any persons referred to in these rulings are related or otherwise deal with each other at arm's length;
(c) the fair market value of any property referred to in this letter;
(d) the indemnity described in paragraph 34 above will not result in a reduction in the at-risk amount (as defined in subsection 96(2.2)) of the Limited Partners;
(e) the GST implications of any of the proposed transactions; or
(f) any other tax consequences of the proposed transactions or of related transactions or events that are not described herein
Yours truly,
XXXXXXXXXX
for Director
Business and Partnerships Division
Income Tax Rulings Directorate
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