1999 Ruling 9917313 - XXXXXXXXXX

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 ISSUE:

This ruling request involves the establishment of a Fund which is designed to track the performance of shares included in an established Index. The units of the Fund will be issued pursuant to the terms of a prospectus XXXXXXXXXX. By acquiring units in the Fund investors will be able, with a modest investment, to achieve portfolio diversification in shares that are included in the Index.

Rulings requested are: 1) will the Fund be a mutual fund trust as defined in subsection 132(6); 2) will subsections 104(6) and (13) apply to certain amounts made payable to the unitholders; and 3) will subsection 245(2) apply to the proposed transactions?

Position TAKEN:

1) Yes - provided certain prescribed conditions are met.

2) Yes
3) No

Reasons FOR POSITION TAKEN:

The proposed transactions and requested rulings are very similar to those contained in 951026 and 3-2589.

XXXXXXXXXX 3-991731

Attention: XXXXXXXXXX

XXXXXXXXXX, 1999

Dear Sirs/Mesdames:

Re: Advance Income Tax Ruling
XXXXXXXXXX
XXXXXXXXXX

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 and your subsequent correspondence of XXXXXXXXXX in respect of the income tax consequences arising out of the proposed transactions described below.

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

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

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

(c) under objection by the taxpayers or related persons;

(d) before the courts; or

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

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

"XCo" means XXXXXXXXXX.

"DCo" means XXXXXXXXXX.

"Fund" means the XXXXXXXXXX.

"Index" means XXXXXXXXXX.

XXXXXXXXXX

XCo deals with the XXXXXXXXXX and files its return with the XXXXXXXXXX. The Fund does not yet have a tax account number but will deal with the XXXXXXXXXX and will file its return with the XXXXXXXXXX.

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

FACTS AND PROPOSED TRANSACTIONS

1. XCo is a taxable Canadian corporation within the meaning of the Act and carries on the business in Canada of providing investment management services XXXXXXXXXX.

2. It is proposed that the Fund be established as an inter vivos trust created under the laws of XXXXXXXXXX by way of declaration of trust (the "Declaration of Trust"). The trustee of the Fund will be XCo. Under the Declaration of Trust, the trustee of the Fund is responsible for overseeing the affairs of the Fund and has full, absolute and exclusive power, control and authority over the assets of the Fund, subject only to the specific limitations contained in the Declaration of Trust.

3. The Fund proposes to issue units of beneficial interest ("Units") that will be distributed to the public by way of prospectus filed with applicable securities regulators in Canada. Each Unit will rank equally with all other outstanding Units, no Unit will have any preference or priority over any other and all Units outstanding will participate pro rata in all distributions made by the Fund and in the net assets of the Fund in the event of its termination XXXXXXXXXX.

4. The Declaration of Trust will contain restrictions to ensure that not more than 50% of the Units outstanding at any time shall be held or beneficially owned, directly or indirectly, by persons who are non-residents of Canada for the purposes of the Act.

5. The Declaration of Trust will provide that the sole undertaking of the Fund will be the investment of its assets in the manner as hereinafter described.

6. The Fund will limit its investments to

XXXXXXXXXX

7.

XXXXXXXXXX

8.

XXXXXXXXXX

9.

XXXXXXXXXX

10.

XXXXXXXXXX

11. A Unitholder may redeem Units for XXXXXXXXXX held by the Fund XXXXXXXXXX; however, in order to so redeem Units for XXXXXXXXXX, a Unitholder must tender for redemption a minimum number of Units as specified in the Declaration of Trust. The Fund may, at its discretion, charge an administrative fee on the redemption of Units for XXXXXXXXXX in order to offset the expenses incurred by the Fund in effecting the redemption. A Unitholder may also redeem Units at any time for a cash redemption price equal to XXXXXXXXXX% of the XXXXXXXXXX price for Units XXXXXXXXXX on the day on which the unitholder's redemption request was received by the Fund.

12. In the case of both a redemption of Units for XXXXXXXXXX and a redemption of Units for cash, the Units will be redeemed at the demand of the Unitholder, and the Fund will make payment to the redeeming Unitholder on the third trading day after the day on which the redemption request was received by the Fund in accordance with the Declaration of Trust.

XXXXXXXXXX

13. The Fund expects to earn income from its investing activities including dividends XXXXXXXXXX, income in respect of securities lending activities of the Fund (as described in 23 below) and interest income XXXXXXXXXX.

14. The Fund will incur a variety of costs and expenses in connection with its investment undertaking. These include:

XXXXXXXXXX

15. Income earned by the Fund from its investing activities first will be used by the Fund to pay the expenses of the Fund and the balance of such income will be invested by the Fund XXXXXXXXXX. The net income of the Fund (XXXXXXXXXX) will be distributed in cash XXXXXXXXXX in the year to Unitholders in accordance with the Declaration of Trust.

16. The Declaration of Trust defines net realized capital gains of the Fund for a taxation year as the amount, if any, by which the aggregate capital gains of the Fund in the year exceeds the aggregate of the capital losses of the Fund in the year and one and one-third of net capital losses (as defined in the Act) for prior years which the Fund is permitted by the Act to deduct in computing its taxable income for the year. If the Fund has net realized capital gains for a taxation year of the Fund that would give rise to a tax liability in excess of the capital gains refund of the Fund for the year, such net realized capital gains will be payable by the Fund to Unitholders by the end of that year for purposes of the Act to Unitholders of record on the date selected by the trustee in accordance with the Declaration of Trust. The Declaration of Trust will require that the trustee reinvest on the Unitholders' behalf any such amount payable to Unitholders in additional Units XXXXXXXXXX.

17.

XXXXXXXXXX

18. The Declaration of Trust will provide that Unitholders will have the legal right in any year to enforce payment in the manner provided for in the Declaration of Trust of amounts that are payable to them in the year as described in 16 and 17 above.

19.

XXXXXXXXXX

20.

XXXXXXXXXX

21.

XXXXXXXXXX

22.

XXXXXXXXXX

23. It is proposed that the Fund may lend shares held by it under "securities lending arrangements" as defined by subsection 260(1). Under the Declaration of Trust, these loans must be secured by collateral XXXXXXXXXX.

24. Amounts payable to Unitholders as described in 16 and 17 above will, to the extent required by subsection 104(13), be included in their incomes.

XXXXXXXXXX

PURPOSE OF PROPOSED TRANSACTIONS

25. XCo wishes to establish a XXXXXXXXXX investment instrument that will permit the holder thereof to achieve portfolio diversification and to earn a return based on the

XXXXXXXXXX

RULINGS GIVEN

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

A. Provided the conditions required under paragraph 132(6)(c) are satisfied, the Fund will be a mutual fund trust as defined in subsection 132(6).

B. Provided the issuance of additional Units in respect of amounts made payable to Unitholders XXXXXXXXXX, such amounts will be amounts payable to Unitholders for purposes of subsections 104(6), (13) and (24) and, accordingly, such amounts, to the extent they represent income of the Fund for purposes of the Act, will be deductible in computing the income for a taxation year of the Fund under subsection 104(6) and will be included in computing the income of a Unitholder under subsection 104(13).

C. As a result of the proposed transactions, in and by themselves, subsection 245(2) will not be applied to redetermine the tax consequences confirmed in the rulings given above.

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 the Declaration of Trust is entered into and the prospectus is filed with the applicable securities regulators within six months of the date of this letter.

Yours truly,

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

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