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:
1) Can a unit trust invest in a limited partnership?
2) What is the meaning of "investing business"?
3) For purposes of subparagraph 108(2)(b)(iii) of the Income Tax Act (the "Act"), is a limited partnership looked through?
4) For purposes of subparagraph 108(2)(b)(iv) of the Act, is a limited partnership looked through?
5) Can a unit trust be more than 10% invested in a single limited partnership?
6) Does a limited partnership have to abide by the 10% limitation in subparagraph 108(2)(b)(v) of the Act?
7) May a unit trust lend more than 10% of its property to a single limited partnership?
8) Do the answers change if a unit trust invests in a general partnership instead?
Position:
1) Yes.
2) N/A.
3) Yes, unless the interest in the limited partnership is a marketable security.
4) Yes, unless the interest in the limited partnership is a marketable security.
5) Depends on circumstances.
6) No.
7) Depends on circumstances.
8) #1 and #2 differ.
Reasons:
1) Section 253.1 of the Act.
2) Section 253.1.
3) Partnership case law. Marketable securities are treated as separate investment under subparagraph 108(2)(b)(iii).
4) Partnership case law. Marketable securities treated consistently with treatment given under subparagraph 108(2)(b)(iii).
5) Look through the limited partnership.
6) Subparagraph 108(2)(b)(v) applies to the unit trust not the limited partnership.
7) If the loan qualifies as a security, the term "debtor" is broad enough to encompass a limited partnership.
8) Section 253.1 does not apply.
XXXXXXXXXX 2001-009567
T. Cook
March 17, 2003
Dear XXXXXXXXXX:
Re: A Unit Trust Investing in a Limited Partnership
This letter is in reply to your letter of July 30, 2001, in which you posed a number of questions concerning investments by mutual fund trusts, and in particular with respect to the requirements that must be met in order to qualify as a unit trust under subsection 108(2) of the Income Tax Act (the "Act"). We apologize for the delay in responding. Given the number of questions you have asked, we set out the questions and our comments in order below.
Question #1
Can a trust qualify as a unit trust if it invests in a limited partnership and the undertakings of the limited partnership are restricted to those listed in subparagraph 108(2)(b)(ii) of the Act?
Subsection 132(6) of the Act defines "mutual fund trust". One of the requirements for qualifying as a mutual fund trust is that the trust be a unit trust. Subsection 108(2) of the Act defines "unit trust" for purposes of the Act. A trust is a unit trust if, at that particular time, it was an inter vivos trust, the interest of each beneficiary was described by reference to units of the trust, and the trust met the conditions described in any of paragraphs 108(2)(a), 108(2)(b), or 108(2)(c) of the Act.
To satisfy the conditions of paragraph 108(2)(b) of the Act, the unit trust must meet the requirements contained in subparagraphs 108(2)(b)(i) to 108(2)(b)(vi) of the Act. Subparagraph 108(2)(b)(ii) requires that throughout the relevant period, the trust's only undertakings were:
? The investing of funds in property (other than real property or an interest in real property);
? The acquiring, holding, maintaining, improving, leasing or managing of any real property or an interest in real property, that is capital property of the trust; or
? Any combination of the above-listed activities.
Subparagraph 108(2)(b)(ii) must be read in conjunction with section 253.1 of the Act. Section 253.1 provides that, for purposes of subparagraph 108(2)(b)(ii) and other specified provisions, where a trust holds an interest as a member of a partnership and by operation of law, its liability as a member of the partnership is limited, the member shall not, solely because of its acquisition and holding of that interest, be considered to carry on any business or activity of the partnership. The other subparagraphs of paragraph 108(2)(b) are not specified provisions. The technical notes accompanying section 253.1 state that:
This amendment is limited in its application to ensuring that the mere acquiring and holding of a limited partnership interest by a trust or corporation will not jeopardize the classification of the trust or corporation under those income tax provisions that require the trust or corporation to limit its undertakings to investing.
Pursuant to section 253.1 of the Act, a unit trust that simply holds an interest in a limited partnership is not considered to carry on any business or activity of the limited partnership. Therefore, the mere ownership of an interest in a limited partnership will not jeopardize the qualification of a trust as a unit trust under subparagraph 108(2)(b)(ii). This holds true even if the nature of the business or activities carried on by the limited partnership, considered separately, would not satisfy subparagraph 108(2)(b)(ii).
Question #2
The Canada Customs and Revenue Agency (the "CCRA") has previously commented that units of a limited partnership could not be owned by a unit trust where the business carried on by the limited partnership was not an investing business. What constitutes an investing business?
The comments to which you refer (e.g., technical interpretation #9606285) were made by the CCRA prior to the introduction of section 253.1. As a result of the introduction of section 253.1, the question of whether a particular limited partnership carries on an investing business is now moot for purposes of subparagraph 108(2)(b)(ii).
Question #3
Would an interest in a limited partnership be included in determining whether the trust has met the requirements of subparagraph 108(2)(b)(iii), assuming that the property held by the limited partnership is of the types listed in the subparagraph?
Subparagraph 108(2)(b)(iii) requires that at least 80% of the property held by a unit trust consist of any combination of property types listed in clauses 108(2)(b)(iii)(A) to (G) of the Act. As you have noted, these clauses do not specifically refer to limited partnership interests. It is our view that generally the Act looks through a limited partnership to the assets held by the limited partnership in determining whether the 80% test has been met. That is, if a trust becomes a limited partner in a limited partnership and that limited partnership is fully invested in assets described in clauses 108(2)(b)(iii)(A) to (G), the full amount of the trust's interest in the limited partnership would be included in determining whether the trust had met the requirements of subparagraph 108(2)(b)(iii). Where not all the property held by the limited partnership is described in clauses 108(2)(b)(iii)(A) to (G), the portion of the limited partnership interest that is so described would be included in determining whether the 80% test has been met.
This approach is consistent with that taken by the Tax Court in Klein v. The Queen, 2001 DTC 443, [2001] 3 CTC 2200 (T.C.C.). A taxpayer had made a loan to a partnership and one of the issues was whether the loan was owed to the taxpayer by the partners of the partnership for purposes of determining the taxpayer's business investment loss under paragraph 39(1)(c) of the Act. Based on the applicable partnership law, the Tax Court looked through the partnership and found that the partners owed the debt to the taxpayer for purposes of paragraph 39(1)(c).
There is one favourable exception to this approach. Where a limited partner's interest in a limited partnership is also a "marketable security" for purposes of clause 108(2)(b)(iii)(E), we would accept that the interest of the limited partner is itself a property described in subparagraph 108(2)(b)(iii) for purposes of determining whether the 80% test has been met.
This accords with the policy intention set out in a letter dated May 6, 1998 from the Minister of Finance, which stated, "I agree that limited partnership units listed on a stock exchange should be treated like shares listed on a stock exchange." Whether an interest in a particular limited partnership is a marketable security is a question of fact that will depend on the specifics of the instant situation.
Question #4
Would income received from a limited partnership be included in determining whether a trust has met the requirements of subparagraph 108(2)(b)(iv), assuming that the income was earned from the types of property listed in subparagraph 108(2)(b)(iii)?
Subparagraph 108(2)(b)(iv) imposes a test requiring that at least 95% of the income of a unit trust to be derived from, or from the disposition of, investments described in subparagraph 108(2)(b)(iii). As you have pointed out, paragraph 96(1)(f) of the Act generally provides that income of a partnership retains its character in the hands of the partner for purposes of computing the partner's income for the taxation year. Even though the purpose of paragraph 108(2)(b) is to determine whether a particular trust qualifies as a unit trust, not to calculate the trust's income for the taxation year, we agree (by analogy and based on case law) that the income received by a unit trust from its interest as a limited partner of a limited partnership would generally form part of the 95% test under subparagraph 108(2)(b)(iv) to the extent that the income flowed out from the limited partnership is derived from, or from the disposition of, property described in subparagraph 108(2)(b)(iii).
Again, there is a favourable exception. If the interest as a limited partner held by the trust also independently qualifies as a marketable security, we would accept that any income derived from, or from the disposition of, the limited partnership interest will itself count toward meeting the 95% of income test imposed by subparagraph 108(2)(b)(iv) irrespective of the nature of the income earned by the limited partnership. The limited partnership interest is being held by the trust as a marketable security in its own right.
Question #5
Is a unit trust precluded by subparagraph 108(2)(b)(v) from having more than 10% of its property in the form of an interest in a single limited partnership?
Under subparagraph 108(2)(b)(v), no more than 10% of the property of a unit trust can consist of bonds, securities or shares in the capital stock of any one corporation or debtor other than Her Majesty in right of Canada or a province or a Canadian municipality. It is our view that subparagraph 108(2)(b)(v) does not restrict the percentage of a unit trust's property that can be invested in a limited partnership per se because the interest of a limited partner in a limited partnership would not be in respect of "any one corporation or debtor".
However, in accordance with our analysis above, it is our view that a limited partnership would be looked through in determining whether more than 10% of the trust's property consists of bonds, securities or shares in the capital stock of any one corporation or debtor other than Her Majesty in right of Canada or a province or a Canadian municipality. This is the case even if the interest in the limited partnership qualifies as a marketable security for purposes of subparagraph 108(2)(b)(ii). For example, if 15% of the property of a trust were invested in an interest in a limited partnership whose sole asset was shares in the capital stock of one corporation, the trust would not meet the requirements of subparagraph 108(2)(b)(v). For purposes of that provision, 15% of the property of the trust would consist of shares in the capital stock of one corporation.
Question #6
Does a limited partnership in which a unit trust invests have to abide by the limitation in subparagraph 108(2)(b)(v)?
It is the unit trust, not the limited partnership, which must abide by the limitation set out in paragraph 108(2)(b)(v). Consequently, it is our view that subparagraph 108(2)(b)(v) does not limit the investment activities of a limited partnership. This is the case regardless of whether the interest in the limited partnership qualifies as a marketable security or not. However, as noted above, the limited partnership would be looked through in determining whether the trust meets the requirements of subparagraph 108(2)(b)(v).
Question #7
Is a unit trust precluded by subparagraph 108(2)(b)(v) from loaning in excess of 10% of its property to a single limited partnership?
Where a loan qualifies as a security for purposes of subparagraph 108(2)(b)(v), it is our view that the trust would probably no longer meet the requirements of the subparagraph if it loaned more than 10% of its property to a single limited partnership. In the absence of a specific example demonstrating otherwise, we would expect that a limited partnership would be a "debtor" for purposes of the provision in instances where a limited partner has lent money to the limited partnership. Consider subsection 12(1) of the Limited Partnerships Act R.S.O. 1990, c. L. 16, which provides that, subject to some restrictions, "a limited partner may loan money to and transact other business with the limited partnership" and may participate, along with other general creditors, in any resulting claims against the limited partnership in a prorated share of the assets of the limited partnership. This suggests that for particular purposes, a "debtor/creditor" relationship can be established between a limited partner and the limited partnership.
Additionally, subsection 10(1) of Ontario's Partnership Act, R.S.O. 1990, c. P.5 provides, in part, that every partner is jointly liable "for all debts and obligations of the firm[.]" This provision shows that even though a partnership is not a separate legal entity and its debts are the debts of its partners (see Klein above), the debts are also considered debts of the firm (or partnership) under partnership law. This further supports the view that for particular purposes, a partnership may be considered a "debtor". The fact that a particular partnership is a limited partnership does not alter this conclusion, as section 8 of the Limited Partnerships Act provides that subject to certain restrictions, a general partner in a limited partnership has "all the rights and powers and is subject to all the restrictions and liabilities of a partner in a partnership without limited partners[.]" Therefore, subsection 10(1) of the Partnership Act sets out the law applicable to the general partners of a limited partnership.
We would also note that where subparagraph 108(2)(b)(v) applies to a loan made to a limited partnership, subparagraph 108(2)(b)(v) would also still be applied on a look-through basis (as discussed in Question #5) to the assets held by the limited partnership. In that case, the 10% limit would be applied twice - once to determine whether the loan to the limited partnership makes up more than 10% of the trust's property, and once to determine whether looking through the limited partnership results in more than 10% of the trust's property consisting of bonds, securities or shares in the capital stock of any one corporation or debtor other than Her Majesty in right of Canada or a province or a Canadian municipality.
Question #8
Do the answers to the above questions change if a unit trust invests in a general partnership instead of a limited partnership?
If a unit trust were to invest in a general partnership rather than a limited partnership, our comments regarding Questions 1 and 2 would differ because section 253.1 would not apply. In the case of a general partnership, our view is that subparagraph 108(2)(b)(ii) applies as it would had the partner carried on the undertaking directly. Our comments in response to the other questions would not change.
We trust that these comments are of assistance to you. As stated in paragraph 22 of Information Circular 70-6R5, the opinion expressed in this letter is not a ruling and consequently is not binding on the CCRA.
Yours truly,
Jim Wilson
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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