2015-0578671R3 Limited Partnership operating a XXXXXXXXXX

Principal Issues: Whether the limited partnership’s income that is allocated to a corporation owned by two First Nations and that is earned outside the geographic boundaries of the First Nations, will be taken into account in determining if the corporation is exempt from tax under 149(1)(d.5).

Position: Yes.

Reasons: The two First Nations have received determination letters from the CRA that they are exempt from tax under 149(1)(c) as a public body performing a function of government in Canada. The income allocated to the corporation from the Limited Partnership will be earned as a XXXXXXXXXX in the province of XXXXXXXXXX and therefore will not be included in the geographical boundaries restriction by virtue of paragraph 149(1.2)(b).

Author: XXXXXXXXXX
Section: 149(1)(d.5), 149(1.2)

XXXXXXXXXX                                                                                                                         2015-057867

XXXXXXXXXX, 2015

Dear XXXXXXXXXX:

Re:  Advance Income Tax Ruling – XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-named taxpayer.  We acknowledge your additional submission of XXXXXXXXXX as well as various telephone conversations (XXXXXXXXXX).

We understand that, to the best of your knowledge and that of the taxpayer, none of the issues involved in the ruling request are:

(i) in an earlier return of the taxpayer or a related person;

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;

(iii) under objection by the taxpayer or a related person;

(iv) before the courts, or if a judgment has been issued, the time limit for appeal to a higher court has expired; or

(v) the subject of a ruling previously considered by the Directorate to the taxpayer or a related person.

In this letter, unless otherwise stated, all statutory references to a statute are to the provisions of the Income Tax Act (Canada), 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.

Our understanding of the relevant definitions, the facts, proposed transactions and the purposes of the proposed transactions is as follows:

DEFINITIONS 

In this letter, the following terms have the following meanings:

“Aco” means XXXXXXXXXX;

“Band” has the meaning provided under section 2 of the Indian Act;

“Capital Account” means the capital account established, computed, and maintained for each Partner;

“CRA” means the Canada Revenue Agency;

“Determination Letter” means a letter issued by the CRA in which it has determined a First Nation to be a “public body performing a function of government in Canada” within the meaning of paragraph 149(1)(c);

“FN1” means XXXXXXXXXX;

“FN2” means XXXXXXXXXX;

“First Nations” means collectively FN1 and FN2;

XXXXXXXXXX;

“FNco” means XXXXXXXXXX;

“Indian Act” means the Indian Act R.S.C. 1985, c.I-5, as amended;

“General Partner” means XXXXXXXXXX;

“Limited Partner” means a limited partner of XXXXXXXXXX;

“Limited Partnership” means XXXXXXXXXX;

“Limited Partnership Agreement” means the XXXXXXXXXX and XXXXXXXXXX dated XXXXXXXXXX;

XXXXXXXXXX;

“Partner” means any Limited Partner or General Partner, and “Partners” means all of them;

“Percentage Interest” of a Partner at any time means a fraction expressed as a percentage, the numerator of which is the amount in dollars of the Capital Account of such Partner at that time and the denominator of which is the aggregate amount in dollars of the Capital Accounts of all Partners at the time;

“Members” means members of the First Nations who are Indians as defined in section 2 of the Indian Act;

“Reserves” means the reserve lands of the First Nations for purposes of the Indian Act further described in paragraphs 3 and 5 below;

“Units” means an interest in the Limited Partnership.

FACTS

1. FNco’s mailing address is XXXXXXXXXX.  FNco’s business number is XXXXXXXXXX and it is served by the XXXXXXXXXX Tax Services Office and it files any tax documentation with the XXXXXXXXXX Tax Centre.

2. FN1 is a Band and has received a Determination Letter from CRA’s XXXXXXXXXX Tax Services Office dated XXXXXXXXXX, which stated it is considered to be a “public body performing a function of government in Canada” for the purposes of paragraph 149(1)(c), for the reasons set out in the Determination Letter.

3. FN1’s Reserve is the XXXXXXXXXX, located XXXXXXXXXX.

4. FN2 is a Band and has received a Determination Letter from CRA’s XXXXXXXXXX Tax Services Office dated XXXXXXXXXX, which stated it is considered to be a public body performing a function of government in Canada for the purposes of paragraph 149(1)(c), for the reasons set out in the Determination Letter.

5. FN2’s Reserve is the XXXXXXXXXX, which is XXXXXXXXXX.

6. The authorized and issued share capital of FNco consists of an unlimited number of common shares of which XXXXXXXXXX common shares are outstanding.  FN1 and FN2 XXXXXXXXXX own XXXXXXXXXX common share in the capital of FNco.  No other person or entity holds any shares of FNco.

7. The property of FNco consists of a limited partnership interest in the Limited Partnership and common shares of General Partner.

8. The Limited Partnership has issued XXXXXXXXXX to General Partner and XXXXXXXXXX limited partnership units to each of Aco and FNco.  In order to finance the business of the Limited Partnership, further limited partnership units will be issued for XXXXXXXXXX of capital contributed by the Limited Partners.  It is expected that Aco and FNco will be the only Limited Partners of the Limited Partnership, and that each of Aco and FNco will contribute XXXXXXXXXX amounts of capital to the Limited Partnership, such that they will XXXXXXXXXX own XXXXXXXXXX% of the Units.

9. General Partner is authorized to issue an unlimited number of common shares, of which XXXXXXXXXX common shares are issued and outstanding.  Aco holds XXXXXXXXXX common shares and FNco holds XXXXXXXXXX common shares in the capital of General Partner, and thus XXXXXXXXXX of Aco and FNco holds XXXXXXXXXX% of the shares of General Partner.

10. FNco has entered into a XXXXXXXXXX with the Limited Partnership (the “Management Services Contract”) pursuant to which it will perform certain services on behalf of the Limited Partnership for a yearly fee of $XXXXXXXXXX, beginning after the commercial operation date. All or substantially all of the services to be provided under the Management Services Contract are expected to be carried on within the geographic boundaries of the Reserves.

PROPOSED TRANSACTIONS

11. The Limited Partnership will construct and operate a XXXXXXXXXX to XXXXXXXXXX, located in XXXXXXXXXX (the “Project”); the XXXXXXXXXX will not be located on the Reserves.  The Project is governed by XXXXXXXXXX.

12. The Project involves the XXXXXXXXXX in the province of XXXXXXXXXX under the regulation of the XXXXXXXXXX.

13. The income and losses of the Limited Partnership, for both accounting and income tax purposes will be allocated, as to XXXXXXXXXX%, to the Limited Partners pro rata to their respective Percentage Interests, and, as to XXXXXXXXXX% to the General Partner.

14. The General Partner will distribute cash from the Limited Partnership that is not needed by the partnership: to meet its operating, maintenance, management, and other expenses of the Limited Partnership attributable to the Project; for the discharge of the Limited Partnership indebtedness; and, as amounts determined by the General Partner, in its discretion, as reserves.  Cash distributions will be made based on the number of Units held by each Limited Partner, with each Unit being entitled to an equal share.

15. The income from the Management Services Contract is payable to FNco after the commercial operation of the Project has occurred.  In each year, the anticipated income from the Project will be substantially larger than the income from the Management Services Contract such that not more than XXXXXXXXXX per cent of FNco’s total income will be from income earned under the Management Services Contract.

16. The Limited Partnership will enter into an agreement with XXXXXXXXXX and certain other lenders (the “Lenders”) for the senior level of financing required for the Project, expected to consist of approximately $XXXXXXXXXX of loans and credit facilities (the “Credit Facility”).  Under the terms of the agreements with the Lenders, FNco and Aco will guarantee the due payment and performance of the Limited Partnership under the Credit Facility.

17. As part of the terms of the Credit Facility and in accordance with the Limited Partnership Agreement, Aco and FNco will XXXXXXXXXX commit to provide XXXXXXXXXX% of the additional financing (the “Equity Contribution”) to the Limited Partnership, with such amount determined by the Lenders in the terms of the Senior Credit Facility.  The Equity Contribution will take the form of a capital contribution by FNco and Aco to the Limited Partnership.

18. XXXXXXXXXX will lend FNco sufficient funds to make the Equity Contribution and to cover up to $XXXXXXXXXX of the third party costs of FNco up to the closing of the Credit Facility (the “Equity Loan”).

19. FNco expects to borrow funds from a lender (the “XXXXXXXXXX Lender”) and such loan is expected to be guaranteed by the XXXXXXXXXX.  The proceeds from the XXXXXXXXXX Lender will be utilized to repay up to XXXXXXXXXX% of the Equity Loan.

PURPOSE OF PROPOSED TRANSACTIONS

20. The purpose of the proposed transactions is to allow the First Nations to participate in the economic benefits derived from the Project.  The Limited Partnership is expected to provide FNco with substantial cash flow over the next XXXXXXXXXX years that will be distributed to FN1 and FN2 and used to fund programs and services provided for the benefit of their Members.

RULINGS GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purposes of the proposed transactions, we rule as follows:

The income allocated to FNco by the Limited Partnership, in respect of the XXXXXXXXXX operated by the Limited Partnership as described in paragraphs 11 and 12 will not, in and of itself, cause FNco to cease to be an entity described in paragraph 149(1)(d.5), by virtue of paragraph 149(1.2)(b).

The above advance income tax ruling, which is based on the Act and its regulations in their 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 70-6R6, “Advance Income Tax Rulings and Technical Interpretations”, dated August 29, 2014, and is binding on the CRA provided that the proposed transactions described above commenced before XXXXXXXXXX.

CAVEATS

Nothing in this letter should be construed as implying that the CRA has reviewed the partnership agreement referred to in the facts or proposed transactions set out above. In particular, this letter does not confirm that:

1. The Limited Partnership Agreement referred to in this letter creates a legal partnership for income tax purposes.

2. The CRA has agreed to or accepted either expressly or implicitly the reasonableness of any allocations of income referred to in this letter.

3. The CRA has agreed to or accepted either expressly or implicitly that the income for a period of FNco from activities carried on outside the geographical boundaries of FN does not exceed XXXXXXXXXX% of its income for the period.

4. The CRA has reviewed or agreed to any tax consequences relating to the Facts and the Proposed Transactions described herein other than those described in the ruling given above.

OPINION

Subsection 197(1) defines a “SIFT partnership” or specified investment flow-through partnership, for any taxation year, as “a partnership other than an excluded subsidiary entity (as defined in subsection 122.1(1)) for the taxation year that meets the following conditions at any time during the taxation year:

(a) the partnership is a Canadian resident partnership;

(b) investments (as defined in subsection 122.1(1)) in the partnership are listed or traded on a stock exchange or other public market; and

(c) the partnership holds one or more non-portfolio properties.

In our view, given that the Limited Partnership Agreement provides for the issuance of an unlimited number of Units, and given the broad interpretation applied by the CRA to the term “public market,” the Limited Partnership could fall under the definition of a SIFT partnership if, at any time, Limited Partnership Units are exchanged or issued to other third party investors.”

This letter is based solely on the facts and proposed transactions described above.  The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

Yours truly,

XXXXXXXXXX
Manager
Non-Profit Organizations and Aboriginal Issues Section
Business and Employment Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

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