CRA rules on the use of s. 107.4 transfers of debt to a new fixed investment trust in order to increase cross-border leverage of a REIT U.S. sub
The units of a REIT were stapled to those of another mutual fund trust (Finance Trust), so that they traded on a stock exchange together. Finance Trust held interest-bearing notes of the indirect U.S. commercial real estate subsidiary of the REIT (U.S. Holdco). Finance Trust qualified as a fixed investment trust for Code purposes, so that its unitholders were treated as if they held such notes directly. This avoided the U.S. earnings stripping limitations on the level of permitted interest deductions by U.S. Holdco. However, subsequently to this structure being implemented, U.S. acquisitions by U.S. Holdco were funded with loans from REIT, which were subject to the earnings stripping rules.
In order that much of this additional debt could access the benefits of the stapled structure, Finance Trust made a s. 107.4 transfer of its notes of U.S. Holdco to the REIT and, following the replacement of those notes and some of the newer debt with amended notes, and the effective distribution to the unitholders of units of a new fixed investment trust with nominal assets (the F17 Trust), the amended notes were transferred by the REIT under s. 107.4 to the F17 Trust. Thus, there was a replacement stapled structure similar to what was there before, except that the new Finance Trust (F17 Trust) held more U.S. Holdco debt.
The only ruling requested and granted (other than on GAAR) was that the disposition of the Finance Trust loans to the REIT and of the amended loans to F17 Trust constituted “qualifying dispositions” under s. 107.4(1).
Neal Armstrong. Summary of 2017 Ruling 2017-0720591R3 under s. 107.4(1)(a).