2015-0573201R3 Qualifying environmental trust

Principal Issues: 1. Whether the proposed Trust meets the definition of a “qualifying environmental trust” as defined in subsection 211.6(1) of the Act. 2. Whether contributions made by the ACo on behalf of ACo L.P. to the Trust will be deductible in computing ACo L.P.'s income pursuant to paragraph 20(1)(ss) of the Act. 3. Whether a debt obligation that meets the definition of a "qualified investment" in paragraph (b) of the definition of that term in section 204 of the Act will be a "prohibited investment" of the Trust for the purpose of the definition of that term in subsection 211.6(1). 4. For the purposes of subsection 107.3(1) of the Act, whether the entire amount of any income or loss of the Trust can reasonably be considered to be ACo L.P.'s share of such income or loss.

Position: 1. Yes 2. Yes provided that the Trust continues to qualify as a qualifying environmental trust at the time of the contribution. 3. No 4. Yes

Reasons: Based on the facts presented

Author: XXXXXXXXXX
Section: 20(1)(ss), 107.3(1), 211.6

XXXXXXXXXX                                                                 2015-057320

XXXXXXXXXX, 2015

Dear XXXXXXXXXX

Re : Advance Income Tax Ruling
XXXXXXXXXX

This is in reply to a letter dated XXXXXXXXXX, requesting an advance income tax ruling on behalf of XXXXXXXXXX. We have also received a letter dated XXXXXXXXXX, requesting that XXXXXXXXXX, in its capacity as a trustee as described above, be a party to this advance income tax ruling.

To the best of your knowledge and that of the taxpayers named above, none of the issues involved in this advance income tax ruling is:

*     in an earlier return of the taxpayers or any related person; being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or any related person;

*     under objection by the taxpayers or any related person;

*     before the courts; or

*     the subject of a ruling previously considered by the Income Tax Rulings Directorate in respect of the taxpayers or any related person.

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

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified below:

“Abandon” and “Abandonment” have the meaning set out in the definition of “abandon” in the National Energy Board Onshore Pipeline Regulations (Canada), as amended from time to time;

“ACo” means XXXXXXXXXX on behalf of, XXXXXXXXXX. ACo is a “taxable Canadian corporation” as defined in subsection 89(1). The address of ACo’s head office is XXXXXXXXXX. ACo is served by the XXXXXXXXXX Tax Services Office and it files its T2 Corporation Income Tax Return with the XXXXXXXXXX Tax Center. Its taxation year end is XXXXXXXXXX.

XXXXXXXXXX GP1 and GP2 own XXXXXXXXXX percent of the issued and outstanding shares in the share capital of ACo;

“ACo L.P.” means XXXXXXXXXX, a limited partnership formed under the laws of the Province of XXXXXXXXXX. The address of its head office is XXXXXXXXXX. ACo L.P. is served by the XXXXXXXXXX Tax Services Office and it files its T5013 Partnership Information Return with the XXXXXXXXXX Tax Center. Its fiscal period end is XXXXXXXXXX.

ACo L.P.’s general partners are GP1 and GP2 and its limited partner is LP. ACo L.P.’s general partners each own a XXXXXXXXXX% interest in ACo L.P. and LP owns a XXXXXXXXXX% interest in ACo L.P.

ACo L.P. is a “Canadian partnership” for the purposes of the Act;

“Agreement” means the trust agreement entered into by ACo, XXXXXXXXXX, and XXXXXXXXXX approved by the NEB on XXXXXXXXXX;

“Annual Contribution Amount” means, in respect of any calendar year, an amount equivalent to the aggregate of all amounts collected through an abandonment surcharge in such calendar year to pay for the Reclamation Obligations of the Beneficiaries in respect of the Pipeline and any amount ordered by the NEB;

“Beneficiary” or “Beneficiaries” is defined in the Agreement to mean a Person, acting in its own capacity or acting on behalf of a partnership, that has Reclamation Obligations in respect of the Site, including the Company and ACo L.P.;

“Company” means the person holding the regulatory authorization(s) to operate the Pipeline at the relevant time, whether on its own behalf or on behalf of one or more Persons, and for greater certainty, the initial Company shall be ACo;

“Deactivation” has the meaning set out in the definition of “deactivate” in the National Energy Board Onshore Pipeline Regulations (Canada), as amended from time to time;

“Decommissioning” has the meaning set out in the definition of “decommission” in the National Energy Board Onshore Pipeline Regulations (Canada), as amended from time to time;

“Fund” means the Settlement Property and all other assets that are now or which at any time during the continuance of the Trust may be contributed, assigned, transferred or appointed to the Trustee to be held upon the trusts hereof, together with all interest or return from investing such assets, and all other assets which may at any time be substituted therefor, but excluding all amounts that have been paid or disbursed therefrom (whether out of capital or income) pursuant to the provisions of the Agreement;

“GP1” means XXXXXXXXXX. GP1 is a “taxable Canadian corporation” as defined in subsection 89(1). The address of its head office is XXXXXXXXXX. GP1 is served by the XXXXXXXXXX Tax Services Office and it files its T2 Corporation Income Tax Return with the XXXXXXXXXX Tax Center. Its taxation year end is XXXXXXXXXX;

“GP2” means XXXXXXXXXX. GP2 is a wholly-owned subsidiary of XXXXXXXXXX. GP2 is a “taxable Canadian corporation” as defined in subsection 89(1). The address of its head office is XXXXXXXXXX. GP2 is served by the XXXXXXXXXX Tax Services Office and it files its T2 Corporation Income Tax Return with the XXXXXXXXXX Tax Center. Its taxation year end is XXXXXXXXXX;

“LP” means XXXXXXXXXX. Each of GP1 and GP2 own XXXXXXXXXX percent of the issued and outstanding shares in the share capital of LP. LP is a “taxable Canadian corporation” as defined in subsection 89(1). The address of its head office is XXXXXXXXXX. LP is served by the XXXXXXXXXX Tax Services Office and it files its T2 Corporation Income Tax Return with the XXXXXXXXXX Tax Center. Its taxation year end is XXXXXXXXXX;

“NEB” means the National Energy Board, a tribunal established under the National Energy Board Act, R.S.C. 1985, c.N-7, as amended, or any successor administrative body having authority to regulate the Company in respect of the operation and abandonment of the Pipeline;

“Orphan Pipeline Fund” means a not-for-profit corporation that will be established pursuant to a statute of the Parliament of Canada and will maintain funds for the purpose of funding the reclamation of abandoned pipelines in Canada, consistent with the NEB’s Reasons for Decision MH-001-2013;

“Person” includes a partnership;

“Pipeline” XXXXXXXXXX

XXXXXXXXXX

The XXXXXXXXXX is owned and operated pursuant to the authority granted under NEB Certificate of Public Convenience and Necessity XXXXXXXXXX;

“Qualified Investments” means all or any of those investments that from time to time are qualified investments for a qualifying environmental trust, and for greater certainty, such qualified investments on the date hereof include only those types of property described in paragraphs (a), (b), (c) (c.1), (d) and (f) of the definition of “qualified investment” in section 204 that are not encompassed within the definition of “prohibited investment” in subsection 211.6(1);

“qualifying environmental trust” or “QET” has the meaning assigned to this term in subsection 211.6(1);

“Reclamation Obligations” means:

(i)   the duty to carry out the physical Abandonment, Decommissioning or Deactivation of the Pipeline, including costs incurred to satisfy any conditions imposed by the NEB, in any order or direction approving the Decommissioning or Deactivation of the Pipeline or for granting leave to Abandon the Pipeline;

(ii)  the duty to develop an Abandonment plan, and to prepare an application for leave to Abandon or for approval of the Deactivation or Decommissioning of the Pipeline; and

(iii) the duty to carry out post-abandonment monitoring and remediation of the Site, where post-abandonment refers to the period of time after a Company has satisfied the conditions of an order or direction issued by the NEB granting leave to Abandon,

and all costs incurred and consequent thereon;

“Settlement Property” means the amount of $XXXXXXXXXX given and transferred to the Trustee by the Settlor to settle the Trust;

“Settlor” means ACo;

“Site” means any location or locations in Canada used for the operation of the Pipeline;

“Statement of Investment Policies and Procedures” means a written statement of investment policies and procedures approved by the Company in respect of the Fund’s portfolio of investments;

“Trust” means the discretionary trust settled under the Agreement for the purpose of reclamation in favour of the one or several Beneficiaries that have Reclamation Obligations with regard to the Site, and also of the Orphan Pipeline Fund, and which is called the “XXXXXXXXXX”. The Trust has a taxation year end of XXXXXXXXXX; and

“Trustee” means XXXXXXXXXX or any successor Trustee pursuant to sections XXXXXXXXXX of the Agreement. The Trustee (i) is a trust company that is licensed under the Trust and Loan Companies Act (Canada) (S.C. 1991, c.45), (ii) is a corporation resident in Canada for the purposes of the Act and (iii) is authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as a trustee.

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

STATEMENT OF FACTS

Background

1.    Pursuant to the terms of the partnership agreement of ACo L.P., ACo L.P. is the beneficial owner of the Pipeline.

2.    ACo is subject to regulation by the NEB, is characterized as a XXXXXXXXXX Company for regulatory purposes and holds the regulatory authorization to operate the Pipeline for and on behalf of ACo L.P. XXXXXXXXXX

3.    In May 2014, the NEB issued the MH-001-2013 Reasons for Decisions – Set-aside and collection mechanisms (Pipeline Abandonment - Financial Issues) (the “SAM/COM Decision”), which required certain NEB-regulated pipeline companies to have a set-aside mechanism in place by January 1, 2015, and to begin accumulating funds to pay for pipeline reclamation.

4.    In the SAM/COM Decision, the NEB specifically supported the use of a QET as a mechanism to set aside monies to fund future abandonment costs. The NEB required that all trust agreements expressly set out the intention to form a “qualifying environmental trust” pursuant to subsection 211.6(1) for the purpose of funding future abandonment costs.

5.    As directed by the NEB in the Order XXXXXXXXXX, ACo:

(a)   made a set-aside mechanism filing on XXXXXXXXXX containing: (i) a draft of the Agreement and (ii) a proposal that XXXXXXXXXX be the initial trustee of the Trust;

(b)   filed the Statement of Investment Policies and Procedures with the NEB on XXXXXXXXXX; and

(c)   made a collection mechanism filing on XXXXXXXXXX, consistent with the SAM/COM Decision, setting out, inter alia the Annual Contribution Amount in respect of the Pipeline.

6.    The Trust that is established under the Agreement is required to be maintained under an order made by the NEB.

Description of the Agreement

For the purpose of this letter, a summary of the relevant terms of the Agreement includes the following:

7.    Pursuant to XXXXXXXXXX of the Agreement, it is the express intention of the parties to the Agreement that the Trust will constitute a QET for the duration of the Trust. The Agreement shall be read and interpreted in light of, and consistently with, the definition of “qualifying environment trust”, and the Company and the Trustee shall not take any actions which would jeopardize the status of this Trust as a QET, and shall cause any party succeeding to the interests thereof to covenant to do the same.

8.    As described in the preamble of the Agreement, the Trust is maintained for the sole purpose of funding the Reclamation Obligations in respect of the Site.

9.    Pursuant to XXXXXXXXXX of the Agreement, the Trust shall be irrevocable and the Settlor, Company and Beneficiaries are divested of any power whatsoever to revoke the Trust or to modify its terms or to amend the Agreement in any respect, except in accordance with XXXXXXXXXX of the Agreement.

10.   Pursuant to XXXXXXXXXX of the Agreement, the parties to the Agreement acknowledge that the Company shall contribute the Annual Contribution Amount to the Trust as directed by the NEB.

11.   Pursuant to XXXXXXXXXX of the Agreement, the Fund is held by the Trustee on trust for one or several Beneficiaries, the Trustee having a power to appoint at discretion, from among the Beneficiaries of the Fund responding at the time of payment to the then existing Reclamation Obligations. The Trustee may make payment to or for the benefit of the appointed Beneficiary, that is, either to the Beneficiary, or to a person or persons named by the NEB to conduct work in the reclaiming of the Site. Before making any discretionary payment the Trustee must receive the approval of the NEB, which approval will cover both the reclamation need being addressed and that person or those persons that are instructed to carry out the reclamation.

12.   Pursuant to XXXXXXXXXX of the Agreement, if property remains in the Fund after all Reclamation Obligations of the Beneficiaries are discharged, then the Trustee, with the approval of the NEB, may distribute the Fund or any part thereof among any of the Beneficiaries and the Orphan Pipeline Fund, or, where such is the case, a single Beneficiary and the said Orphan Pipeline Fund, as the Trustee in its sole discretion sees fit.

13.   Pursuant to XXXXXXXXXX of the Agreement, the residence, situs, mind and management of the Trust shall be located in the Province of XXXXXXXXXX and the head office of the Trust shall be located at XXXXXXXXXX, or such other place or places in XXXXXXXXXX as the Trustee may from time to time designate.

14.   Pursuant to XXXXXXXXXX of the Agreement, no Person shall be appointed or hold office as Trustee at any time unless such Person is, at such time, (i) licensed under the Trust and Loan Companies Act (Canada); (ii) a corporation resident in Canada for purposes of the Act; (iii) authorized under the laws of Canada or a province to carry on in Canada the business of offering to the public its services as a trustee; and (iv) satisfies the requirements of XXXXXXXXXX of the Agreement.

Pursuant to XXXXXXXXXX of the Agreement, the Trustee shall invest the Fund in, and maintain the Fund invested in, Qualified Investments in accordance with a Statement of Investment Policies and Procedures received by the Trustee from time to time.

15.   Pursuant to XXXXXXXXXX of the Agreement, except as otherwise expressly provided in the Agreement, the Trustee may only make distributions from the Fund for the sole purpose of funding the discharge of the Reclamation Obligations of the Beneficiaries of the Trust. For greater certainty, access to the Fund, including the precise amount of the Fund to be released for payment of amounts required to satisfy the Reclamation Obligations of the Beneficiaries, is subject to the NEB’s written approval.

16.   Pursuant to XXXXXXXXXX of the Agreement, the Trustee may release monies from the Fund to a Beneficiary to pay for the Reclamation Obligations upon satisfaction of the conditions set out therein.

17.   Pursuant to XXXXXXXXXX of the Agreement, the Trustee may release funds that are held in accordance with the Agreement to any third party for the purposes of funding the discharge of the Reclamation Obligations of a Beneficiary upon satisfaction of the conditions set out therein.

18.   Pursuant to XXXXXXXXXX of the Agreement, except as otherwise expressly provided in the Agreement, the Trustee shall only draw on the Fund for the purpose of paying or reimbursing payment of the costs incurred to discharge Reclamation Obligations as and when required by XXXXXXXXXX of the Agreement and, then, only in accordance with the applicable direction or order from the NEB.

19.   Pursuant to XXXXXXXXXX of the Agreement, the Trustee may appoint or retain such legal counsel, accountants, financial advisors, appraisers or other experts or advisors as may be reasonably required for the purpose of discharging its duties or exercising its powers hereunder. The Trustee may pay out of the Fund reasonable remuneration for all services performed for it by such advisors in the discharge of its duties or exercise of its powers hereunder without taxation for costs or fees of any counsel, solicitor or attorney, including solicitor fees on a solicitor and own client basis. The Trustee, for the purposes of this section, shall in no circumstances appoint the Company, or a Beneficiary, or any affiliates of either.

20.   Pursuant to XXXXXXXXXX of the Agreement, the Trustee shall not, at any time, loan funds to, or borrow any funds for or on behalf of, the Trust.

21.   Pursuant to XXXXXXXXXX of the Agreement:

(a)   The Trustee shall be paid out of the Fund, as compensation for acting as Trustee, the fees, reimbursement and other compensation in the amount and manner as determined by the Company and the Trustee.

(b)   Such remuneration and all reasonable expenses, disbursements and advances incurred or made by the Trustee in the administration of its duties hereunder shall be paid from the Fund.

(c)   The Trustee, and every delegate of the Trustee is to ensure that every expense item about to be incurred in the discharge of a Trustee duty or the exercise of a Trustee power is necessarily incurred and is demonstratively reasonable in cost, the intent of such prudence being to maximize the Fund resources that are available for Reclamation Obligations.

22.   Pursuant to XXXXXXXXXX of the Agreement, in the event the Trust created under the Agreement becomes liable to or subject to any fees or other amounts due to the Trustee pursuant to XXXXXXXXXX of the Agreement, the Trustee shall be expressly authorized and entitled to draw from the Fund to pay such fees or other expenses without prior approval or instruction of the NEB.

23.   Pursuant to XXXXXXXXXX of the Agreement, the Trustee shall be entitled to make payment of all applicable taxes payable by the Trust out of the Fund to the appropriate taxing authority without prior approval or instruction of the NEB.

24.   Pursuant to XXXXXXXXXX of the Agreement, the Trustee may, by agreement with the Company, amend the terms of the Trust, including the terms and schedules of the Agreement. No amendment to the terms of the Trust or the terms of the Agreement will be binding or effective unless the NEB approves the amendment.

25.   Pursuant to XXXXXXXXXX of the Agreement, the Trust and the schedules incorporated thereto may not be revoked by the Company, Beneficiaries or any of them, or the Trustee, except that the NEB in its total discretion may direct a termination of the Trust, and order such successive arrangements as are appropriate.

26.   Pursuant to XXXXXXXXXX of the Agreement, for greater certainty, assets from the Fund may be transferred to another QET for the purpose of funding Reclamation Obligations in accordance with the Agreement upon the NEB’s direction or order, including any such direction or order that is made part of the NEB’s direction or order approving the sale, assignment, transfer or other disposition of the Pipeline or a portion thereof from a Beneficiary to another person pursuant to paragraphs 74(1)(a), (b) and (c) of the NEB Act.

27.   Pursuant XXXXXXXXXX of the Agreement, the Company and the Trustee represent that they are, respectively, a resident of Canada within the meaning of the Act.

PROPOSED TRANSACTIONS

28.   Commencing in XXXXXXXXXX and in compliance with the relevant decisions, orders and directions of the NEB, ACo, XXXXXXXXXX on behalf of ACo L.P., will make contributions to the Trust for the purpose of funding Reclamation Obligations in respect of the Site in accordance with the terms of the Agreement.

29.   At all times the Fund will be invested in accordance with the Statement of Investment Policies and Procedures. The Trust will not borrow money and will only invest in property that is a Qualified Investment.

PURPOSE OF THE PROPOSED TRANSACTIONS

30.   The purpose of the proposed transactions is to set aside funds for the sole purpose of funding the reclamation of a “qualifying site”, as that term is defined in subsection 211.6(1), through a mechanism that qualifies as a QET under the Act and that is in compliance with the decisions, orders and directions of the NEB applicable to ACo and ACo L.P.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all 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 Trust is operated in accordance with the terms of the Agreement, the Trust will constitute a “qualifying environmental trust” as that term is defined in subsection 211.6(1).

B.    Amounts contributed to the Trust by ACo, XXXXXXXXXX on behalf of ACo L.P., will be deductible in computing the income of ACo L.P. pursuant to paragraph 20(1)(ss), provided that the Trust continues to qualify as a QET at the time of the contribution.

C.    A debt obligation that meets the definition of a “qualified investment” in paragraph (b) of the definition of that term in section 204 will not be a “prohibited investment” of the Trust for the purpose of the definition of that term in subsection 211.6(1).

D.    In computing the income, non-capital loss and net capital loss of ACo L.P., for the purposes of applying subsection 107.3(1), the entire amount of any income or loss of the Trust for any taxation year of the Trust that ends in a particular fiscal period of ACo L.P. can reasonably be considered to be ACo L.P.’s share of such income or loss.

OPINION

It is our view that each member of ACo L.P. should be entitled to deduct from its tax otherwise payable under Part I of the Act for a taxation year the amount that can reasonably be considered to be its share of the Part XII.4 tax credit in respect of ACo L.P. in accordance with section 127.41.

In accordance with our comments in Information Circular 70-6R6 dated August 29, 2014, the above opinion is not binding on the Canada Revenue Agency.

COMMENTS

Nothing in this advance income tax ruling should be construed as implying that we are ruling on any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. In particular, nothing in this letter should be construed as implying that the Canada Revenue Agency has agreed to or reviewed:

1.    the reasonableness of any expenditure referred to in this letter;

2.    the person or persons subject to tax on funds distributed by the Trust;

3.    whether the Trust is a valid trust at law;

4.    the application of perpetuity legislation to the Trust; and

5.    tax consequences arising as a result of the partnership agreement of ACo L.P.

The above advance income tax rulings are based on the Act and Income Tax Regulations in their present form and do not take into account any proposed amendments thereto, which if enacted, could have an effect on the above rulings. The rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R6 Advance Income Tax Rulings dated August 29, 2014, and are binding on the Canada Revenue Agency provided that the proposed transactions are implemented as described above.

For greater certainty, these advance income tax rulings are based on the Agreement XXXXXXXXXX approved by the NEB on XXXXXXXXXX. If amendments to the Agreement are made after that time, the rulings provided may not apply unless the amendment is approved by the NEB and a supplemental ruling is issued.

Yours truly,

XXXXXXXXXX
Manager
Resources Section
Reorganizations Division
Income Tax Rulings Directorate
Legislative Policy & Regulatory Affairs Branch

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