2001 Ruling 2001-0087263 - QLP NEW SEPARATE PARTNERSHIP

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: Will the establishment of a separate and distinct partnership, the units of which will not qualify as a qualified limited partnership, affect the rulings provided in our ruling1999-000857?

Position: No.

Reasons: The establishment of a separate and distinct partnership should not affect the taxation of the qualified limited partnership.

XXXXXXXXXX 2001-008726

XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter dated XXXXXXXXXX wherein you requested an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).

Unless otherwise stated, all references to a statute are to the Income Tax Act (Canada) R.S.C. 1985 (5th Supp.), c.1, as amended, (the "Act"), and all terms and conditions used herein that are defined in the Act have the meaning given in such definition.

Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:

Definitions

1. In this letter:

(a) "Aco" means XXXXXXXXXX;

(b) "Bco" means XXXXXXXXXX.;

(c) "BLP" means XXXXXXXXXX;

(d) "Cco" means the XXXXXXXXXX;

(e) "Dco" means XXXXXXXXXX;

(f) "General Partner" has the meaning set out in paragraph 6;

(g) "Investees" has the meaning set out in paragraph 7;

(h) "Limited Partner" means an investor who has executed a subscription agreement, acquired Units and has been accepted by the General Partner, and whose name has been entered in the register of Limited Partners;

(i) "Limited Partnership Act" means the Limited Partnerships Act, R.S.O. 1990 c. L-16;

(j) "Mutual Fund Units" means units of a mutual fund which are listed on the XXXXXXXXXX Stock Exchange;

(k) "Non-QLP Partnership" has the meaning set out in paragraph 9;

(l) "Non-QLP Partnership Agreement" has the meaning set out in paragraph 10;

(m) "Partnership" means XXXXXXXXXX;

(n) "Partnerships Act" means the Partnerships Act, R.S.O. 1990 c. P-5;

(o) "QLP" means a "qualified limited partnership", as defined in subsection 5000(7) of the Regulations;

(p) "Regulations" means the Income Tax Regulations; and

(q) "Unit" means a unit of the Partnership.

Facts

2. Aco and the Partnership obtained an advance income tax ruling dated XXXXXXXXXX, 2000, as amended by ruling dated XXXXXXXXXX, 2000, relating to QLP status of the Partnership (hereinafter collectively referred to as the "Ruling Letters").

3. Aco is a corporation incorporated under the laws of Canada, is a taxable Canadian corporation and is wholly-owned by Cco, a public corporation. The expressions "taxable Canadian corporation" and "public corporation" have the meaning assigned by subsection 89(1) of the Act.

4. Bco is a corporation incorporated under the laws of XXXXXXXXXX, is a taxable Canadian corporation and is a wholly-owned subsidiary of Aco.

5. Dco is a corporation incorporated under the laws of XXXXXXXXXX, is a taxable Canadian corporation and is a wholly-owned subsidiary of Aco.

6. The Partnership was formed under the laws of the province of XXXXXXXXXX which filed a declaration under the Limited Partnership Act. The general partner of the Partnership (the "General Partner") is itself a limited partnership formed under the laws of XXXXXXXXXX with Bco as general partner, and Dco together with a number of other persons as limited partners, of that limited partnership.

7. The Partnership is a QLP and was organized for the purposes of investing primarily in equity securities of corporations, most of which will be private taxable Canadian corporations ("Investees"). The fact that certain aspects of the Partnership comply with subsection 5000(7) of the Regulations was confirmed in the Rulings Letters. In the event that the Partnership does not have its contributed capital invested in equity securities and bridge securities, any surplus contributed capital will be invested in Canadian money market instruments.

8. The Limited Partners of the Partnership include persons who are exempt from tax under Part I of the Act and who are subject to the foreign property limitations contained in Part XI of the Act. However, the fact that the Partnership is a QLP, the interest of a Limited Partner in such QLP is prescribed not to be foreign property under paragraph 5000(1.1)(c) of the Regulations.

9. Aco has identified an investment that is not listed in subparagraph 5000(7)(f) of the definition of the term QLP and which therefore is not a permitted investment for the Partnership. The investment consists of Mutual Fund Units. The Mutual Fund Units are prescribed to be qualified investments for registered retirement savings plans, registered retirement income funds and deferred profit sharing plans under paragraph 4900(1)(d) of the Regulations. The cost amount of the foreign property held by the trust does not exceed the relevant foreign property limit. Accordingly, pursuant to paragraph 5000(1)(a) of the Regulations, the Mutual Fund Units would not constitute "foreign property" for purposes of Part XI of the Act. Notwithstanding the fact that the Mutual Fund Units do not constitute foreign property, an interest in a partnership that is not a QLP would be considered foreign property by virtue of paragraph 206(1)(i) of the Act.

Proposed Transactions

10. In order to permit the Limited Partners to invest in the Mutual Fund Units, a new limited partnership will be established and registered under the Limited Partnership Act for the purpose of holding investments that include investments not described in subparagraph 5000(7)(f) of the definition of the term QLP (the "Non-QLP Partnership"). The general partner and the limited partners of the Non-QLP Partnership will be the same as those of the Partnership.

11. Under a draft limited partnership agreement dated XXXXXXXXXX pursuant to which the Non-QLP Partnership will be formed (the "Non-QLP Partnership Agreement"), initially 100% of Net Profit (as such term is defined in the Non-QLP Partnership Agreement) will be allocated to the limited partners of the Non-QLP Partnership ("Non-QLP LPs") in the ratio in which the number of partnership units held by each Non-QLP LP bears to the total number of partnership units held by all Non-QLP LPs at the time of allocation, until the Non-QLP LPs will have received, by way of distributions, amounts which, in the aggregate, are equal to their contributed capital plus XXXXXXXXXX% per annum of their contributed capital (the "Preferential Return"). No such Net Profit shall be allocated to the general partner of the Non-QLP Partnership ("Non-QLP GP") until the Non-QLP LPs receive their contributed capital plus their Preferential Return.

Thereafter, Net Profit, less any Catch-Up Payment (as defined below) payable to the Non-QLP GP will be allocated as to XXXXXXXXXX% to the Non-QLP LPs based on the ratio described above, and as to XXXXXXXXXX% to the Non-QLP GP. Before Net Profits are allocated on an XXXXXXXXXX basis as aforesaid, the Non-QLP GP will first be entitled to receive a "catch-up payment" (the "Catch-Up Payment") equal to XXXXXXXXXX% of the Preferential Return in the relevant period. The net effect of these provisions is that after the Non-QLP LPs receive a return of their contributed capital, the Non-QLP LPs and the Non-QLP GP will receive XXXXXXXXXX% and XXXXXXXXXX% of the Net Profits, respectively, provided that the Non-QLP Partnership generates sufficient income. Net Loss (as such term is defined in the Non-QLP Partnership Agreement) will be allocated in a manner generally consistent with the distribution procedures outlined above.

12. The terms of the Non-QLP Partnership Agreement will largely mirror those of the QLP Partnership Agreement except for the following basic differences:

(a) The Non-QLP Partnership will have different business objectives as it will not be subject to the restrictions and limitations set out in subsection 5000(7) of the Regulations and, in particular, it will not be subject to the investment limitations in the definition of QLP in paragraph 5000(7)(f) of the Regulations. Accordingly, the nature of its permitted investments (e.g., the Mutual Fund Units) will differ from the nature of the permitted investments of the Partnership.

(b) With regard to the allocation of profits and losses described above, the Non-QLP GP will be subject to an additional "claw-back" over and above that described in respect of the General Partner in the Partnership Agreement. Under the additional claw-back, the Non-QLP GP will be required to contribute funds to the Non-QLP Partnership (and such amount shall be distributed to the partners of the Non-QLP Partnership (including the Non-QLP GP) in proportion to their respective commitments) if

(i) the Non-QLP GP has received a profit allocation from the Non-QLP Partnership and, as General Partner, from the Partnership, and

(ii) the Non-QLP LPs have not received distributions from the Non-QLP Partnership and, as Limited Partners, from the Partnership, in an aggregate amount equal to or greater than the amount of their aggregate capital contributions to, and preferred return from, the two partnerships (the "Minimum Partnership Distribution Amount").

However, the amount of such contribution to be made shall not exceed the combined net profit received after payment of taxes thereon by, the Non-QLP GP from the Non-QLP Partnership and, as the General Partner, from the Partnership.

(c) In the event that the Non-QLP LPs received distributions in the aggregate in excess of the Minimum Partnership Distribution Amount, and the General Partner and Non-QLP GP received and retained distributions in excess of XXXXXXXXXX% of the aggregate of the net profits of the Partnership and the Non-QLP Partnership, respectively, over the lives thereof, the Non-QLP GP will be required to make a capital contribution to the Non-QLP Partnership (and such amount will be distributed to the partners of the Non-QLP Partnership (including the Non-QLP GP) in proportion to their respective commitments) equal to 100% of such excess.

(d) The Non-QLP GP will receive an annual management fee, inclusive of GST, from the Non-QLP Partnership, (subject to certain reductions based on management fees paid by the Partnership), amounting to:

(i) initially, XXXXXXXXXX% of the aggregate of the commitments of the Non-QLP LPs until the earlier of (A) XXXXXXXXXX and (B) when XXXXXXXXXX% of the capital has been invested or has been reserved for investments in Investees, operating and organizational expenses of the Non-QLP Partnership;

(ii) thereafter, until XXXXXXXXXX and subject to certain reductions in management fees of QLP, XXXXXXXXXX% of the aggregate cost basis of the investments held by the Non-QLP Partnership, to the extent that such investments have not been written off, less any distributions constituting a return of capital; and

(iii) thereafter, XXXXXXXXXX% of the aggregate cost basis of the investments held by the Non-QLP Partnership, to the extent that such investments have not been written off, less any distributions constituting a return of capital.

13. Pursuant to amended and restated subscription agreements, commitments of capital contributions in respect of the Partnership will be reduced. As a consequence, a reduction will be made in respect of the commitments of the members of the Non-QLP Partnership.

Purpose of the Proposed Transactions

14. The purpose of establishing the Non-QLP Partnership is to enable Aco to offer the Limited Partners the opportunity to invest in the Mutual Fund Units without jeopardizing the status of the Partnership as a QLP.

Additional Information

15. To the best of your knowledge and that of the Partnership, Aco, Bco, Cco and Dco, none of the issues involved in this ruling application is:

(a) relevant to a tax return previously filed by Aco, Bco, Cco or Dco or a related person;

(b) under consideration by a tax services office or taxation centre in connection with a previously filed tax return of Aco, Bco, Cco or Dco or a related person;

(c) under objection by Aco, Bco, Cco or Dco or a related person;

(d) the subject of a ruling previously issued by this Directorate of the Partnership Aco, Bco, Cco or Dco or a related person; or

(e) before the courts or if a judgment has been issued, the time for an appeal to a higher court has not expired.

Ruling Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are carried out as described above, we rule as follows:

A. Provided that the Non-QLP Partnership is organized on the basis outlined above and is a partnership distinct from the Partnership under common law, the activities of the Non-QLP Partnership will not be considered activities of the Partnership for purposes of paragraph (f) of the definition of "qualified limited partnership" in subsection 5000(7) of the Regulations and the activities of the Non-QLP Partnership will not affect the advance income tax rulings provided to the Partnership in the Ruling Letters.

The above ruling, which is based on the Act in its present form and does not take into account any proposed amendments thereto, is given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and is binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

Comment

You have requested a ruling that subsection 245(2) of the Act will not be applied to the proposed transactions described above. Since a "tax benefit" within the meaning assigned by subsection 245(1) of the Act and an "avoidance transaction" within the meaning assigned by subsection 245(3) of the Act, both of which are prerequisites to the application of subsection 245(2) of the Act, have not been identified, we are unable to provide the requested ruling in respect of the proposed transactions.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate