1998 Ruling 9826013 - MUTUAL FUND TRUST

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:

1. Will the units of the common trust fund satisfy the redeemable at demand requirement in paragraph 108(2)(a)(i) of the Act?

2. Will the class of units of the common trust fund be qualified for distribution to the public for the purpose of paragraph 4801(a) of the ITR once an offering memorandum has been filed with the Director of the Securities Commission in XXXXXXXXXX and one or more units of the class have been issued?

3. Will the proposed amendments result in a disposition of any property of the fund or any member's units for the purpose of the definition disposition in section 54 of the Act?

Position: 1. Yes 2. Yes. 3. No.

Reasons:

1. The proposed amendments are in accordance with NP #39. (They give unitholders more flexibility and more certainty w.r.t. units redemptions. The fact that the fund does not have to comply with the NP #39 does not alter this conclusion.

2. An offering memorandum is a similar document in 4803(2) of the ITR.

3. No disposition generally when the rights and obligations attached to the units remain unchanged before and after the proposed transactions.

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Attention: xxxxxxxxxx

XXXXXXXXXX 1998

Dear Sirs:

Re: Common Trust Funds operated by XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers in respect of the income tax consequences arising out of the proposed transactions described below. We also acknowledge receipt of your letters of XXXXXXXXXX.

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

(a) are in an earlier return of the taxpayers or a related person;

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

(c) are under objection by the taxpayers or a related person;

(d) are before the courts; or

(e) are the subject of a ruling previously issued by this Directorate to the taxpayers or a related person.

In this letter, unless otherwise indicated, all statute references are to the Canadian Income Tax Act and Regulations (R.S.C. 1985, 5th Supplement, c,1, as amended) (the 4'Act"), and the following terms have the meanings specified:

a) "Fund" means XXXXXXXXXX;

b) "Funds" means XXXXXXXXXX;

c) “LTCA" means the Loan and Trust Corporations Act (Qntario);

d) "OSA" means the Securities Act (Ontario);

e) “Taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Act; and

f) “Trustee" means XXXXXXXXXX.

The names and addresses of the taxpayers who are parties to this ruling request, as well as the tax services office or tax centre where their returns are filed, are listed in Schedule A.

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

FACTS

1. The Trustee of the Funds is a taxable Canadian corporation incorporated under XXXXXXXXXX and licensed to carry on in Canada the business of offering to the public its services as a trustee.

2. The Trustee operates the Funds known as "common trust funds" ("CTFs") of which .it is the trustee.

3. The Funds were created by the Trustee under the laws of the province of XXXXXXXXXX pursuant to a Plan of Operation dated XXXXXXXXXX. They are regulated in part under the LTCA and in part under the OSA (as well as under comparable legislation in certain other provinces in which the Funds are offered by the Trustee)

4. Each Fund constitutes a separate trust which is an inter vivos trust within the meaning assigned by subsection 108(1) of the Act. The Funds do not qualify as "mutual fund trusts" ("MFTs") within the meaning assigned by subsection 132(6) of the Act. The Funds are resident in Canada. The Funds were not established and are not maintained primarily for the benefit of non-resident persons.

5. In order for the Funds to qualify as CTFs, units of the Funds may only be sold by the Trustee to estates and trusts of which the Trustee is the sole trustee or a co-trustee with one or more other trustees pursuant to the LTCA. The Funds may not generally be offered to estates or trusts of which the Trustee is not a trustee.

6. The Funds are governed by a Plan of Operation in accordance with the requirements under the LTCA for CTFs. The Plan of Operation is in the nature of a declaration of trust and provides a legal framework for the operation of the Funds.

7. The key provisions of the Plan of Operation for each Fund are as follows:

a) Section XXXXXXXXXX of the Plan of Operation provides that “Valuation Date" means the date on which the Trustee shall determine the value of each Fund as provided in section XXXXXXXXXX of the Plan of Operation;

b) Section XXXXXXXXXX of the Plan of Operation provides that only trusts, the monies of which are in the care of the Trustee, may be participants in a Fund;

c) Section XXXXXXXXXX of the Plan of Operation provides that each Fund is divided into units and the units are equal in value without distinction, preference or priority;

d) Section XXXXXXXXXX of the Plan of Operation provides that participants may redeem any number of units of a Fund on any Valuation Date and at no other time at a price equal to the then unit value as determined by the Trustee and the number of units of the Fund shall be reduced accordingly;

e) Section XXXXXXXXXX of the Plan of Operation provides that payment to a participant for units redeemed shall be in cash, but the Trustee has the right to make payment in the form of assets or a combination of cash and assets, provided that the proportion of any asset distributed in kind to a participant does not exceed the proportion that the total amount withdrawn bears to the then value of the Fund and the form of payment to all participants redeeming units as of a particular Valuation Date is the same;

f) Section XXXXXXXXXX of the Plan of Operation provides that requests for redemption must be received by the Trustee at least five business days prior to the applicable Valuation Date;

g) Section XXXXXXXXXX of the Plan of Operation provides that units of a Fund may not be redeemed if the result would be that less than XXXXXXXXXX % of the remaining assets of the Fund would be composed of cash and readily marketable securities;

h) Section XXXXXXXXXX of the Plan of Operation provides that the Trustee must determine the value of a Fund and of its units not less frequently than once each calendar month;

i) Section XXXXXXXXXX of the Plan of Operation provides that the value of a unit as of a Valuation Date is determined by dividing the value of a Fund by the number of units of such Fund then outstanding;

j) Section XXXXXXXXXX of the Plan of Operation provides that the computations necessary to determine the value of a Fund and its units must be made within a period of XXXXXXXXXX business days following each Valuation Date;

k) Section XXXXXXXXXX of the Plan of Operation sets out certain general investment restrictions, including the following:

i) The investment of a Fund in guaranteed investment certificates of any trust company, debentures of any loan company, or bonds of or guaranteed by any municipal corporation shall not exceed in each case XXXXXXXXXX % of the book value of a Fund;

ii) The total investment of a Fund in stocks or bonds or other obligations of, or guaranteed by any one person, other than the obligations referred to in (i) above, shall not exceed XXXXXXXXXX % of the book value of the Fund,

iii) The limitations described in (i) and (ii) above shall not apply to investments in obligations of or guaranteed by the government of Canada or any province of Canada, or evidences of indebtedness issued by a Canadian chartered bank which are cashable on demand;

iv) The total number of shares held by a Fund or the Funds in any one class of shares or stock of any one corporation shall not exceed XXXXXXXXXX % of the number of such shares outstanding; and

v) Not less than XXXXXXXXXX % of the book value of a Fund is required to be maintained in cash and readily marketable securities;

l) Section XXXXXXXXXX of the Plan of Operation provides that in addition to the general limitations otherwise applicable, the Trustee shall invest and reinvest the monies of each Fund in accordance with the provisions of the Schedule attached to the Plan of Operation for each Fund;

m) Section XXXXXXXXXX of the Plan of Operation provides that where any security held in a Fund has become an ineligible investment for that Fund and that state of ineligibility has continued for six months, no further admissions or withdrawals are permitted from the Fund until after the security has again become eligible or has been eliminated from the Fund;

n) Section XXXXXXXXXX of the Plan of Operation provides that the Trustee may amend the Plan of Operation from time to time with the approval of such persons whose approval is required by law; and

o) Schedules XXXXXXXXXX of the Plan of Operation provide, respectively, for certain of the Funds. In addition to setting out specific investment limitations applicable to the particular Fund, each Schedule provides that investments held in the Fund shall be restricted to investments, which are, by the laws common to the provinces of the participants of the Fund from time to time, authorized for the investment of funds held by a trustee.

8. In issuing units of the Funds to trusts and estates of which the Trustee is the sole trustee or a co-trustee, the Trustee and the Funds qualify for and may rely upon two prospectus exemptions available under paragraphs 72(1)(d) and 73(1)(a) of the OSA and comparable exemptions under the securities legislation in certain other provinces (the "sophisticated purchaser" prospectus exemption and the "private mutual fund" prospectus exemption respectively).

9. The Funds are not subject to the provisions of National Policy No. 39 since the units of the Funds are not offered by prospectus.

PROPOSED TRANSACTIONS

10. In May 1998, the Ontario Government introduced into the legislature Bill 25. If passed, Bill 25 will, among other things, adopt a "prudent investor" rule (in place of the existing "legal list" of investments) and will expressly allow trusts and estates to invest in mutual funds. Six of the other provinces have already adopted one or both of these rules or similar rules. Given the trend in this area, it is anticipated that the remaining barriers to investment by trusts and estates in mutual funds which still exist in some of the provinces will be eliminated over the next few years. Accordingly, compliance by the Funds with the CTF legislation outside of Ontario is also becoming less of a concern.

11. In light of Bill 25, the Trustee intends to continue the Funds and eventually to expand participation in the Funds by also offering the Funds to trusts and estates of which the Trustee is not a trustee. Once any units of a Fund are held by a trust or estate of which the Trustee is not a trustee, the Funds will cease to qualify as CTFs under the LTCA since for a trust to qualify as a CTF, units may generally be held only by estates and trusts of which the Trustee is a sole trustee or a co-trustee. However, given the Bill 25 changes, there will no longer be a need to comply with the CTF definition in the LTCA. As a result, it is intended that the Funds qualify as MFTs under subsection 132(6) of the Act so that the Funds remain viable and be competitive from an income tax viewpoint with other trusts which qualify as such for purposes of the Act.

12. More particularly, it is proposed that the Plan of Operation for each Fund will be amended as follows:

a) Section XXXXXXXXXX of the Plan of Operation will be amended to define "Valuation Date" as each business day that the Trustee is open for business in XXXXXXXXXX other than Saturday or Sunday;

b) Section XXXXXXXXXX of the Plan of Operation will be amended to delete the current provision in its entirety and to replace it with a provision requiring that any payment to a participant for units redeemed must be paid within five business days following the particular Valuation Date. Section XXXXXXXXXX will also provide that units may be redeemed for property other than cash only with the prior written consent of the participant whose units are being redeemed and only if the property is valued at an amount equal to the amount at which it was valued for purposes of determining the redemption price;

c) Section XXXXXXXXXX of the Plan of Operation will be amended to delete the requirement that requests for redemption be received by the Trustee at least five business days prior to the applicable Valuation Date. Instead, Section XXXXXXXXXX will allow a participant to redeem units as of a Valuation Date at the value per unit on that day if the written redemption request is received by the Trustee on that day at or before 4:00 p.m. For any written redemption request received after that time the participant will receive the unit value determined on the next Valuation Date;

d) Section XXXXXXXXXX of the Plan of Operation will be deleted;

e) Section XXXXXXXXXX of the Plan of Operation will be amended to require the Trustee to determine the value of each Fund and of the units thereof on each Valuation Date;

f) Section XXXXXXXXXX of the Plan of Operation will be deleted;

g) Section XXXXXXXXXX of the Plan of Operation will be amended to delete the current provision in its entirety and to replace it with a provision requiring that not less than XXXXXXXXXX% of the value of a Fund shall be maintained in cash and readily marketable securities;

h) Section XXXXXXXXXX of the Plan of Operation will be amended to delete the current provision in its entirety and to replace it with a provision requiring the Trustee to sell or otherwise dispose of any ineligible investment within three months of its becoming ineligible; and

i) A number of other minor changes of a "clean-up" or "housekeeping" nature may also be made to the Plan of Operation at the same time as the above amendments.

13. The amendments to the Plan of Operation will be filed with Ontario's Superintendent of Deposit Institutions and with the corresponding regulatory authorities in the other provinces where this is required. There is no requirement for obtaining the Superintendent's or any other person's approval thereof.

14. The Trustee has received a legal opinion from a law firm that the proposed amendments to the Plan of Operation would not result in the Funds ceasing to qualify as CTFs under the LTCA and has received similar legal opinions from counsel in the other provinces where qualification of the Funds as CTFs remains a concern.

15. The Trustee will advertise the Funds and its services as trustee for estates and trusts in newspapers of general and regular paid circulations in XXXXXXXXXX and elsewhere. The advertisement will refer to the securities of the Funds which are offered for sale to trusts and estates of which the Trustee is the sole trustee or a co-trustee. By advertising, the Trustee will increase public awareness of the Funds as an investment vehicle aimed exclusively at trusts and estates.. This will lay the groundwork for offering units of the Funds to estates and trusts of which the Trustee is not a trustee. In this way, the Trustee will be better prepared for the changes which will result from the enactment in Ontario of Bill 25.

16. Once the Trustee advertises the Funds, it must prepare and file an offering memorandum in accordance with XXXXXXXXXX, the Trustee will be required to resort to the sophisticated purchaser prospectus exemption described above because the private mutual fund prospectus exemption upon which the Trustee would otherwise rely in respect of CTFs will no longer be available as a result of a prohibition against "general solicitation" in the securities legislation of this province. The Trustee will also prepare and file an offering memorandum in accordance with the applicable securities legislation of the other provinces when it utilizes the sophisticated purchaser prospectus exemption provided for therein. The offering memorandum will be drafted to meet the most stringent requirements imposed by any of the affected provinces in order to ensure nationwide compliance, making it quite similar in the level of disclosure to a prospectus. Such an offering memorandum is not required by law to be accepted by the securities regulators in any of the applicable provinces.

17. In XXXXXXXXXX, the units of a Fund will be distributed to the public under the offering memorandum in respect of the Fund which will be so filed, and such distribution will be lawful and will be made under the specific terms, conditions and requirements described in the offering memorandum. A copy of the offering memorandum will be provided by the Trustee (as trustee of a Fund) to the purchaser, i.e. to itself and any joint trustee (as trustees of the estate or trust purchasing units in the Fund) pursuant to the exemptions described in paragraph 16 above, Until Bill 25 is enacted, units of the Funds will continue to be distributed solely to estates and trusts of which the Trustee is the sole trustee or a co-trustee. Following the enactment of the amendments provided for in Bill 25 (and depending on the status of similar amendments in certain of the other provinces) units of the Funds will also be offered to estates and trusts of which the Trustee is not a trustee. The offering memorandum will be provided by the Trustee as trustee of a Fund to the trustee of any such estate or trust which purchases units in a Fund in reliance on the exemptions described in paragraph 16 above.

18. The offering memorandum referred to in paragraphs 16 and 17 above will include the following information:

a) Name and date of formation of the Funds;
b) Fees and expenses;
c) Participants;
d) Description of units;
e) Valuation of the Funds and units;
f) Risks of investing;
g) Types of investments and limitations;
h) Investment objectives and strategies;
i) Purchase of units;
j) Redemption or transfer of units;
k) Distribution of income and capital gains;
1) Income tax considerations;
m) Management and administration of the Funds;
n) Reporting and fiscal year;
o) Amendment of plan and termination of trust;
p) Material contracts;
q) Custodian, registrar and transfer agent;
r) Auditors;
s) Participant's contractual right of action; and
t) Certificate.

19. Currently, at least XXXXXXXXXX estates and trusts (of which the Trustee is the sole trustee or a co-trustee) each hold at least XXXXXXXXX)( units having an aggregate fair market value of not less than $XXXXXXXXXX and it is anticipated that this will continue to be the case.

PURPOSES OF THE PROPOSED TRANSACTIONS

20. The purposes of the proposed transactions are (1) to increase public awareness of the Funds through advertising; (2) to ensure that the Funds will qualify as '4unit trusts" under subsection 108(2) of the Act and as MFTs under subsection 132(6) of the Act so that the Funds remain viable and competitive; and (3) to enable the Funds to expand their sales to trusts and estates of which the Trustee is not a trustee once Bill 25 is passed.

RULINGS GIVEN

Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purposes thereof and the proposed transactions are carried out as described herein, our advance income tax rulings are as follows:

A. Each Fund will satisfy the requirements in subparagraph 108(2)(a)(i) of the Act after the completion of the proposed transactions.

B. Once an offering memorandum has been filed with the Director of the Securities Commission in XXXXXXXXXX and one or more units of a class of a Fund have been issued pursuant to, and in accordance with, the terms, conditions and requirements described in the offering memorandum, that class of units of the Fund will be qualified for distribution to the public for the purpose of paragraph 4801(a) of the Income Tax Regulations.

C. The proposed amendments to each Fund's Plan of Operation described in paragraph 12 above will not, in and by themselves, result in a disposition of any property in each Fund or any participant's units in each Fund for the purpose of the definition of 44disposition" in section 54 of the Act.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and are binding on Revenue Canada provided that an offering memorandum for the Funds, as described in paragraphs 16 and 17 above, is filed with the Director of the Securities Commission in XXXXXXXXXX and one or more units of a class have been issued pursuant to, and in accordance with, the requirements of the offering memorandum within six months of the date of this letter.

COMMENTS

Nothing in this letter should be construed as implying that Revenue Canada has agreed to or accepted any tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.

Yours truly,

for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings and
Interpretations Directorate
Policy and Legislation Branch