2006 Ruling 2005-0114031R3 - Classification of Austrian Investment Fund

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.

Principal Issues: What is the classification of an Austrian Investment Fund for Canadian tax purposes?

Position: It is a co-ownership of the underlying assets of the investment fund.

Reasons: It is a co-ownership under Austrian law.

XXXXXXXXXX 								2005-011403

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Aco")

This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer with respect to the transactions described herein. To the best of your knowledge and that of Aco, none of the issues involved in this ruling request:

a) is in an earlier return of Aco or a related person;

b) is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of Aco or a related person;

c) is under objection by Aco or a related person; or

d) is before the courts.

In this letter, references to the "Act" mean the Income Tax Act, R.S.C. 1985 c.1

(5th Supp.), as amended to the date hereof. Unless otherwise stated, statutory references in this letter are to the Act.

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

Definitions

1. In this letter, unless otherwise expressly stated:

a) "Austrian Tax Treaty" means the Convention Between Canada and the Republic of Austria for the Avoidance of Double Taxation and the Prevention of Fiscal Evasion with Respect to Taxes on Income and on Capital;

b) "Financial Market Authority" means the Austrian Financial Market Authority;

c) "CRA" means Canada Revenue Agency;

d) "Custody Agreement" means the Depotbank Contract entered into on XXXXXXXXXX between the Investment Company and Aco's XXXXXXXXXX branch with respect to the appointment of and duties of Aco as custodian for the Funds and other Investment Funds;

e) "Fund A" means the XXXXXXXXXX, an Austrian Publikumsfond established under the Investment Funds Act;

f) "Fund B" means the XXXXXXXXXX, an Austrian Spezialfond established under the Investment Funds Act;

g) "Fund Provisions" means the General Fund Provisions of XXXXXXXXXX, which govern the legal relationship between the Unitholders and Investment Company in respect of Fund B;

h) "Funds" means Fund A and Fund B collectively;

i) "Income Tax Regulations" means the Income Tax Regulations, C.R.C., c. 945, as amended to the date hereof;

j) "Investment Company" means the XXXXXXXXXX;

k) "Investment Fund" means a fund that is governed and regulated by the Investment Funds Act and the Financial Market Authority;

l) "Investment Funds Act" means the Austrian Investment Fund Act of 1993 [Investmentfondsgesetz 1993];

m) "Tax Treaty" means a "tax treaty" as defined in subsection 248(1);

n) "Unit" means a unit of account, representing one undivided share in the assets of an Investment Fund; and

o) "Unitholder" means a person who holds Units of an Investment Fund.

Facts

2. Aco and the Investment Company are not residents of Canada for purposes of the Act.

3. The Funds are Investment Funds.

4. The Funds are governed by the Investment Funds Act, the Financial Market Authority and the rules for the Funds established by the Investment Company.

5. The Financial Market Authority must approve the rules governing a Publikumsfond established in Austria under the Investment Funds Act. The Financial Market Authority has approved the rules governing Fund A.

6. The Financial Market Authority is not required to approve the rules governing a Spezialfond established in Austria under the Investment Funds Act.

7. The Financial Markets Authority may revoke the authorization of an Investment Fund, including Fund A and Fund B, in specified circumstances.

8. The Investment Company has overall responsibility for the management of the Funds' assets in accordance with the Investment Funds Act, its obligations to the Financial Market Authority and the rules for the Funds.

9. Aco acts as custodian for the Funds pursuant to the Custody Agreement. Aco became the custodian for Fund A effective XXXXXXXXXX. Aco became the custodian for Fund B effective XXXXXXXXXX. The Financial Market Authority, in accordance with the Investment Funds Act, has approved the appointment of Aco as custodian for the Funds.

10. Aco is responsible for those duties mandated for it by the Investment Funds Act, those agreed to in the Custody Agreement, and the interests of the Unitholders. Aco's duties in respect of the Funds are:

a. The safekeeping of the Funds' securities;

b. Upon instructions from the Investment Company, the payment of security purchase prices or other investment items, the payment for derivative contracts, the delivery of securities or other investment instruments and the payment for repurchased Units;

c. The payment of distributions to Unitholders; and

d. The calculation of the value of each of the Funds and the issue and redemption prices of the Units in accordance with any legal requirements and any provisions governing the operation of the Funds.

11. Aco has no other material duties with respect to the operation of the Funds.

12. Pursuant to § 1(2) of the Investment Funds Act, the Units of Fund B may be held by no more than ten Unitholders, each of whom must be known to the Investment Company and may not be a natural person.

13. All investors in Fund B are currently residents of Austria for purposes of the Austrian Tax Treaty; however, persons resident in other countries are also eligible to be investors in Fund B.

14. The number of investors in Fund A is only limited by the number of unit certificates issued.

15. Aco does not know the residence of the Unitholders of Fund A.

16. § 1(1) of the Investment Funds Act provides that "an investment fund is a portfolio of assets ... which is divided into equal units evidenced by securities, jointly owned by the unit-holders and established in accordance with the provisions of this Federal Act." § 5(1) of the Investment Funds Act provides that "The unit certificates are securities; they evidence co-ownership of the assets of the investment fund and the rights of the unit-holders in relations to the investment fund management company and the custodian bank."

17. Fund B is governed by the Investment Funds Act, as confirmed by § 1(1) of the Fund Provisions, which states "The Investment Company shall be subject to the rules of the Austrian Investment Fund Act of 1993". § 2(1) of the Fund Provisions states, "Joint ownership of the assets belonging to the investment fund is divided up into equal joint ownership units." § 2(3) of the Fund Provisions states "every acquirer of a unit certificate shall acquire, in the amount of the joint ownership units vested therein, joint ownership in the total assets of the fund."

18. Fund A has provisions similar to those of Fund B described in paragraph 17.

19. § 13 of the Investment Funds Act requires an annual distribution of the income of an Investment Fund to its Unitholders unless the rules establishing the Investment Fund specifically provide for the retention of income. In any event, an Investment Fund annually must distribute enough income to satisfy the estimated Austrian tax liability of its Unitholders.

20. For purposes of Austria's income tax laws, Investment Funds are not separate legal entities and under no circumstances are they themselves subject to Austrian income tax. § 40 of the Investment Funds Act provides that Austrian income tax on the annual income of an Investment Fund is taxable to the Unitholders.

21. An investor in an Investment Fund is required to include in income for Austrian tax purposes any distribution (including a deemed distribution) made by the Investment Fund, in the year in which the distribution is made. If no distribution has been made within four months of the financial year-end of the Investment Fund, there will be a deemed distribution to the extent that income or capital gains from the prior financial year have not yet been distributed.

22. The source and character of income or losses and capital gains or capital losses received by an Investment Fund flows through to the Unitholders of the Investment Fund for Austrian income tax purposes.

23. The Units of the Funds may be either redeemed or sold by their Unitholders subject to the Investment Funds Act, the rules of the Financial Market Authority and the rules of the Funds.

24. As at XXXXXXXXXX, Fund A had no investments in Canada.

25. The Funds' only investments in Canada currently are securities listed on the stock exchanges set out in section 3200 of the Income Tax Regulations. The Funds are not prohibited from investing in unlisted securities.

Proposed Transactions

26. The Funds will continue to qualify as Investment Funds.

27. The Funds will make investments in Canadian securities. The securities may or may not be listed on the stock exchanges set out in section 3200 of the Income Tax Regulations.

28. Aco will be responsible for the safekeeping of any assets of the Funds held in Canada and executing any related transactions at the direction of the Investment Company.

29. Aco will not have material duties in connection with the Funds other than those set out in paragraph 10.

30. New Unitholders of the Funds may or may not be residents of Austria.

Purpose of the Proposed Transactions

31. The purpose of the proposed transactions is to allow the Funds to invest in Canadian securities as permitted by the Investment Funds Act and the rules of each of the Funds, thereby achieving the investment objectives of the Funds on behalf of their Unitholders. In relation to the Funds' Canadian investments, Aco must meet its obligations under the Custody Agreement and under the applicable laws. Those obligations are summarized in paragraph 10.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, and subject to the comments set out below, our rulings are as follows:

A. For purposes of the Act, each Unitholder in the Funds will hold a proportionate, indivisible interest in each asset of Fund A or Fund B, as appropriate.

B. For purposes of Part XIII of the Act, any amount paid or credited by a person resident in Canada to Aco on an investment of either Fund A or Fund B will be an amount paid or credited to each Unitholder in proportion to the Unitholder's ownership of the assets of either Fund A or Fund B, as appropriate.

C. For greater certainty, subsection 215(3) will apply to Aco in respect of any amount paid or credited by a person resident in Canada to Aco on an investment of either Fund A or Fund B.

D. For purposes of applying Part XIII to each Unitholder, the character, source and timing of any amount paid or credited by a person resident in Canada in respect of the assets of either of the Funds will not be affected by the fact that an Investment Fund has been used as the mechanism by which each Unitholder owns its proportionate share of those assets.

E. Each Unitholder that is a resident of a country for purposes of that country's Tax Treaty with Canada shall be entitled to the benefits of that Tax Treaty in respect of the Unitholders' proportionate share of income from the assets of either Fund A or Fund B, as appropriate. Each such Unitholder shall be entitled to treaty benefits to the extent that the Unitholder would be so entitled if the Unitholder were to have invested in the assets without having used an Investment Fund as the mechanism by which the Unitholder owns its proportionate share of those assets.

Comments

The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 and are binding on the CRA with respect to investments acquired before XXXXXXXXXX. The rulings given are also conditional on the fact that as of the date of this letter, the tax effect of any earlier transaction of a similar nature is not under discussion between Aco or a related person and the CRA, or in dispute or under assessment or proposed assessment.

Nothing in this letter should be construed as implying that the CRA has considered, examined, agreed to or ruled on whether any Unitholder is a resident of any country with which Canada has entered into a Tax Treaty or the manner in which any article of a Tax Treaty applies to any Unitholder. Additionally, nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions other than those specifically set out in the Rulings Given.

Yours truly,

XXXXXXXXXX
Manager
For Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch