CRA rules that a sideways transfer of property between two MFTs with identical unitholders came within s. 107.4(1)

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 and had identical ownership by the same unitholders. 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, so as to avoid the U.S. earnings stripping limitations on the level of permitted interest deductions by U.S. Holdco. However, U.S. tax reform eliminated this issue, and the decision was taken to unwind this structure.

Finance Trust will transfer all it notes to the REIT for no consideration, the REIT will purchase all the Finance Trust units for what now is their nominal value and Finance Trust will be terminated through its redemption of its units.

CRA ruled that the disposition of the notes to the REIT will constitute a “qualifying disposition” within the meaning of s. 107.4(1), such that the rules in s. 107.4(3) will apply to the REIT, Finance Trust and their respective unitholders. No reference was made to the safe harbour rule in s. 107.4(2)(a) (whose application was ambiguous), and this ruling letter might be authority for the proposition that (as required by s. 107.4(1)(a)) there was no change in the beneficial ownership of the property (the transferred notes) on general principles notwithstanding that they were held by the unitholders through a sister rather than subsidiary trust.

The same REIT and Finance Trust were issued a s. 107.4(1) ruling in 2017-0720591R3.

Neal Armstrong. Summary of 2018 Ruling 2018-0752811R3 under s. 107.4(1)(a).