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.
This ruling request involves an open-end inter vivos trust which is designed to track the performance of shares included in an established stock index. The units of the trust will be issued pursuant to the terms of a prospectus and will be listed and posted for trading on a stock exchange in Canada. By acquiring units in the trust investors will be able, with a modest investment, to achieve portfolio diversification in shares that are included in the Index.
1) Will the securities lending arrangements to be undertaken by the trust prevent the trust from qualifying as a mutual fund trust?
2) Will the consolidation of units as described in the proposed transactions result in a disposition to the unitholders?
3) Will the fact that the trust agreement provides that a unitholders right to redeem units may be suspended in certain circumstances prevent the units from satisfying the redeemable on demand requirement in paragraph 108(2)(a)?
1) No 2) No 3) No
Reasons FOR POSITION TAKEN:
In general, the proposed transactions parallel those in several previous rulings (991731, 951026 and 3-2589). We have previously ruled (9805343) and opined (960628 & 913459) that securities lending arrangements constitute investing of funds in property. See 961004 & 991731 where similar rulings with respect to the consolidation of units were provided. With regard to the trust agreement providing for the possible suspension of a unitholder's right to redeem units in certain circumstances, see 913030 wherein we ruled that this would not by itself prevent the units from meeting the redeemable on demand requirement. It is noted that the trust agreement for every mutual fund will invariably provide for the possibility that the right to redeem may be suspended in certain circumstances. If a unitholder's right to redeem were in fact suspended, the circumstances surrounding that suspension would need to be reviewed to consider whether the conditions in paragraph 108(2)(a) continue to be satisfied.
Re: 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 taxpayer 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:
"Fund" means the XXXXXXXXXX.
"ACo" means the XXXXXXXXXX.
"FCo" means the XXXXXXXXXX.
"TCo" means the XXXXXXXXXX.
"XCo" means XXXXXXXXXX.
"Agreement" means the XXXXXXXXXX.
"Index" means XXXXXXXXXX.
"CDS" means XXXXXXXXXX.
"Exchange" means XXXXXXXXXX.
"Trading Day" means a day on which a session of the Exchange is held.
XCo deals with the XXXXXXXXXX and files its returns with the XXXXXXXXXX. The Fund 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 was incorporated under the laws of Canada on XXXXXXXXXX and is a "taxable Canadian corporation" within the meaning of subsection 89(1). It is an indirect wholly-owned subsidiary of FCo. XCo is an investment counsel and portfolio manager which provides investment management services primarily to institutional investors.
2. The Fund was established by the Agreement under the laws of the Province of XXXXXXXXXX and is expected to be an open-end "mutual fund trust" as defined in subsection 132(6). The manager of the Fund is XCo and TCo is the trustee of the Fund. TCo, XXXXXXXXXX, is a "taxable Canadian corporation" within the meaning of subsection 89(1).
3. The trustee holds the assets of the Fund in trust for the benefit of the unitholders. The legal ownership of the assets is vested exclusively in the trustee and the unitholders shall have no interest therein other than the beneficial interest in the Fund conferred by their holding of units of the Fund. The Fund will have only one class of units (the "Units") and each Unit will represent an equal beneficial interest in the assets of the Fund. No Unit will have any preference or priority over any other Unit 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.
4. The Fund will not be maintained primarily for the benefit of non-resident persons and the Agreement contains 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 purposes of the Act.
6. The Agreement provides that the Fund will be managed as XXXXXXXXXX in the manner as hereinafter described.
8. Units may be issued on an "Issue Day" meaning a Trading Day where Units are, or are allowed to be, issued and delivered through settlement in the CDS system by
11.The Fund will distribute to unitholders, at least, quarterly the net income of the Fund (other than taxable capital gains) which will consist primarily of dividends received by the Fund, interest income and security lending income less the expenses of the Fund. If, on the last business day of a fiscal period, the Fund has net realized capital gains, an amount equal to such net realized capital gains will be due and payable to unitholders. Such amount will be reinvested automatically by the trustee on the unitholder's behalf in additional Units. Immediately after the issue of Units on reinvestment, the number of outstanding Units will be consolidated so that the number of Units outstanding after the consolidation will equal the number of Units outstanding before the issue of Units on reinvestment.
12. The Units will be redeemable, at any time, at the option of the unitholder. A unitholder may redeem XXXXXXXXXX. Payment for redeemed units will be made within three Trading Days. Alternatively, a unitholder may also redeem any number of Units for cash at a redemption price per Unit equal to XXXXXXXXXX% of the closing price per Unit quoted by the Exchange on the Trading Day on which the redemption commitment became effective. Unitholders redeeming Units for cash will not be entitled to receive any XXXXXXXXXX. However, the Agreement provides that the unitholder's right to redeem Units for cash may be suspended by the manager if the Units are cease traded by order of a competent authority under applicable securities law, or if normal trading is suspended on the Exchange or if for any reason it is likely that there will be no closing bid price for the Units quoted by the Exchange for a Trading Day. The manager will end such a suspension as soon as practicable, or in the case of a suspension of redemption rights due to the lack of closing bid price for Units, as soon as it appears likely that there will be such a closing bid price on the relevant Trading Day.
Subject to the receipt of any required regulatory approvals and provided it is authorized thereto by a resolution of the unitholders duly adopted at a meeting called and held or signed in accordance with the terms of the Agreement, the manager may also suspend the unitholders right to redeem Units for a reasonable period in order to effect certain specified transactions in an orderly manner. These specified transactions are XXXXXXXXXX.
13. It is proposed that the Fund may lend XXXXXXXXXX held by it under "securities lending arrangements" as defined by subsection 260(1). Under such arrangements the manager of the Fund may lend XXXXXXXXXX to brokers, dealers or other financial institutions desiring to borrow securities. The income generated by the securities lending will be applied against the administrative costs and expenses of the Fund. The collateral to be acquired by the Fund in respect of securities lending may comprise cash and obligations of XXXXXXXXXX and will have an aggregate value of not less than XXXXXXXXXX% of the market value of the loaned securities. Such cash collateral may itself be invested in money-market and other short and medium term investments. By engaging in securities lending, the Fund will bear the risk of loss of any collateral it invests, as well as the risk of loss should a borrower default on its obligations to return the borrowed securities. The manager of the Fund, will enter into
14. Units of the Fund will be offered to the public by a prospectus (a copy of which was included with your submission) filed with the securities commission or similar regulatory authority
15. The fiscal year end of the Fund will be XXXXXXXXXX. Provided it becomes a mutual fund trust at any particular time before the 91st day after the end of its first taxation year, the Fund intends to elect, pursuant to subsection 132(6.1) of the Act, to be a mutual fund trust from the beginning of its first taxation year.
PURPOSE OF PROPOSED TRANSACTIONS
16. The purpose of the proposed transactions is to offer an XXXXXXXXXX investment product to investors that will compete with XXXXXXXXXX investment product currently available. To accomplish this the manager proposes to establish an XXXXXXXXXX investment instrument that will permit the holder thereof to achieve portfolio diversification and earn a return
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. Subject to the provisions of subsection 132(7), the Fund will be considered a "mutual fund trust" at a particular time within the meaning of that term under subsection 132(6) provided that at the particular time:
(a) the Fund is a "unit trust" within the meaning of that expression under subsection 108(2),
(b) the Fund is resident in Canada for purposes of the Act,
(c) the Fund's only undertaking is the investing of its funds in property as described in paragraph 132(6)(b), and
(d) the Fund complies with the prescribed conditions under section 4801 of the Income Tax Regulations.
B. For the purposes of determining whether the Fund constitutes a "unit trust" under paragraph 108(2)(a), the fact that the unitholder's right to redeem Units may be suspended as outlined in 12 above will not, in and by itself, prevent the Units qualifying under subparagraph 108(2)(a)(i).
C. The fact that the Fund may lend XXXXXXXXXX under securities lending arrangements as described in 13 above will not, in and by itself, mean that the only undertaking of the Fund is not the investing of its funds in property for the purposes of paragraph 132(6)(b)(i).
D. The fund will be regarded as a "mutual fund trust" within the meaning of subsection 132(6) from the commencement of its first taxation year provided that the Fund becomes a mutual fund trust on or before the day on which it is required to file its return of income for its first taxation year and the Fund so elects (see 15 above) in its return of income for its first taxation year.
E. The unitholders will not be considered to have disposed of their Units for the purposes of the Act by virtue only of the consolidation of Units as described in 11 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 the Canada Customs and Revenue Agency provided that the proposed transactions are completed within six months of the date of this letter. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act, which if enacted into law, could have an effect on the rulings provided herein.
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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