Subsection 115.2(1) - Definitions
Designated investment service
Administrative Policy
2014 Ruling 2013-0513431R3 - Application of section 115.2
underline;">: Illiquid investments of LPs. The Manager, which is a Canadian-controlled corporation providing investment advisory and management services to Canadian and non-resident investors, will solicit and receive subscriptions from third party investors in the LPs, which will invest in privately-negotiated illiquid longer-dated credit investments of US and Canadian issuers including debtor-in-possession loans, generally on original issue, illiquid public credit investments, related equity instruments and some shorter term credit investmetns.
LPs
The LPs comprise (a) three LPs which will have exclusively Canadian-resident partners, (b) XXX, (c) two US partnerships (US LP and US II LP) which will have LLC general partners and US-resident Limited Partners and (d) another partnership (Master LP) whose LP units for the most part will be the only investment of US LP and XXX and which will have only non-resident partners. "[T]he Limited Partners of XXX, Master LP, US LP, and US II LP will not be affiliated with the Manager...or with any person or partnership (other than the LPs) described in clauses 115.2(2)(c)(ii)(A) or (B) in respect of the Manager... ."
Management Agreement
The LPs and their GPs entered into a Management Agreement with the Manager, pursuant to which the respective GP delegated its decision making authority to the Manager and authorized the Manager to provide investment services to the respective LPs, including investment management and advice and a detailed list of administration services.
Ruling
: "Subsection 115.2(2) will apply to the Limited Partners of XXX, US LP, and US II LP such that the provision by the Manager of the services described...above to XXX, US LP, US II LP and Master LP...will not, in and by itself, cause the Limited Partners...to be carrying on business in Canada... ."
2007 Ruling 2007-0224751R3
underline;">: Management Agreement. Canadian-resident "Manager" will enter into the "Management Agreement" with the affiliated CBCA GP of two newly-formed LPs (Foreign LP and Canadian LP) pursuant to which the GP will delegate all its functions with respect to Foreign LP, including approving Investments and approving dispositions and the Manager will earn fees.
Original issue mezzanine debt
The LPs will invest primarily in "Mezzanine Debt" (i.e., privately placed debt of private companies that is typically subordinated to bank and institutional indebtedness and bears fixed or floating interest at a rate above traditional commercial lending rates, typically with a portion of the interest being paid currently and a portion being deferred) generally acquired on original issue, and related securities of persons resident in Canada and the United States. The Foreign LP's investments will be restricted to Mezzanine Debt and other qualified investments.
Foreign LP partners
None of the limited partner investors in Foreign LP will be related to, or affiliated with, any of the GP, the Manager or the Manager's indirect Canadian parent (Canco) and they will be non-residents. Canco will provide services of investment management employees to the Manager.
Ruling
that s. 115.2(2) will apply to the non-resident partners of Foreign LP.
Subsection 115.2(2) - Not carrying on business in Canada
Paragraph 115.2(2)(b)
Subparagraph 115.2(2)(b)(i)
Clause 115.2(2)(b)(i)(B)
Administrative Policy
18 November 2014 TEI Roundtable, Q. E.6
Forco, which is wholly-owned by Canco (which, in turn, is a (widely-held) "designated entity" in respect of the affiliated Canadian service provider), was formed more than one year ago and has satisfied the promotion test in s. 115.2(2)(b)(i)(A) and the public filings test in s. 115.2(2)(b)(ii). Would the mere issuance by Forco of treasury shares to Canco preclude the availability of the safe harbor even though Forco does not offer securities for sale to Canadians in Canada? CRA responded:
Forco's issuance of shares…would result in Forco being considered to have "sold an investment in itself"… . As such, the issuance of treasury shares by Forco to Canco…would, to the extent the shares remain outstanding and Canco remains a "Canadian investor"…prevent Forco from benefiting from the availability of the safe harbour rule in subsection 115.2(2).
This is consistent…[with] the 1999 Budget Supplementary Information as follows: "This will ensure that no incentive is created to serve Canadian investors from offshore, thereby displacing the domestic Canadian fund industry" [w]hereas, the hypothetical scenario… is…equivalent to Canco's investment needs being serviced offshore through Forco.
Paragraph 115.2(2)(c)
Administrative Policy
2014 Ruling 2013-0513431R3 - Application of section 115.2
provided by a Canadian manager in respect of partnership investments. CRA has ruled that the safe harbour applied in respect of investment management and administration services provided by the Canadain Manager to the "master" (i.e., bottom) partnership in a two-tier limited partnership structure, so that it applied to an unaffiliated US limited partner in an upper-tier "feeder" limited partnership. See detailed summary above.