2000 Ruling 2000-0008413 - Mutual Fund Trust - Reclassification

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: (a) Whether a reclassification of units of a mutual fund trust from one class to another would be considered a disposition?

(b) Whether the potential reclassification of units of a mutual fund trust from one class to another would trigger 104(7.1) and thus deny the trust a deduction under 104(6)?

Position: (a) No. (b) No.

Reasons: Consistent with other rulings.

(a) The rights, privileges, restrictions and conditions of each class are substantially the same, and the aggregate value of a unitholder's units of the class that will be exchanged will be equal to the aggregate value of the units of the other class.

(b) The purpose in having the two classes is to enable a different allocation of class expenses so as to be able to more effectively market to different segments of the investor market.

XXXXXXXXXX
XXXXXXXXXX 		2000-000841
XXXXXXXXXX 

Attention: XXXXXXXXXX

XXXXXXXXXX, 2000

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
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 in respect of the income tax consequences arising out of the proposed transactions described below. We acknowledge your subsequent letters and submissions of XXXXXXXXXX and our related telephone conversations.

We understand that, to the best of your knowledge and that of the taxpayers, none of the issues described herein is:

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

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

(d) before the courts; or

(e) the subject of a ruling previously issued by the Directorate to the taxpayers or a related person with the exception of ruling 942125 as amended by supplemental ruling 943048.

DEFINITIONS

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"). The meaning of the following terms is described below:

TERM

"Class 1 Units" means XXXXXXXXXX.

"Class 2 Units" means XXXXXXXXXX.

"Class 3 Units" means XXXXXXXXXX.

"Class 4 Units" means XXXXXXXXXX.

"Class 4 Criteria" refers to the criteria which an investor must meet in order to acquire Class 4 Units, as more particularly described in paragraph 5.

"Class Expenses" and "Common Expenses" are as described in paragraph 6.

"Funds" means the Funds named in Group 1 Funds, Group 2 Funds and Group 3 Funds.

"Group 1 Funds" means: Account Number

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX ("Fund X") XXXXXXXXXX

Group 1 Funds have Class 1 Units issued and outstanding and have authorized Class 4 Units.

"Group 2 Funds" means: Account Number

XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX
XXXXXXXXXX

Group 2 Funds have Class 1 Units and Class 4 Units issued and outstanding.

The Class 4 Units were issued in XXXXXXXXXX.

"Group 2A Funds" means XXXXXXXXXX, which Funds are also included in Group 2 Funds.

"Group 3 Funds" means: Account Number.

XXXXXXXXXX
XXXXXXXXXX

Group 3 Funds have Class 1 Units issued and outstanding and have authorized Class 4 Units.

"Manageco" means XXXXXXXXXX and its business identification number is XXXXXXXXXX.

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

FACTS

1. Each of the Funds was established by declaration of trust or trust agreement (hereinafter a reference to a declaration of trust includes a trust agreement) under the laws of the Province of XXXXXXXXXX and is or is expected to be a mutual fund trust as defined in subsection 132(6) of the Act. The Funds reflect a variety of investment objectives.

2. Manageco is a taxable Canadian corporation within the meaning of the Act. Manageco is the trustee of the Funds. Pursuant to a management agreement with each Fund, Manageco acts as the manager for each of the Funds and provides investment management services and administrative services to each Fund for a fee. Manageco is the principal distributor of units of the Funds and under distribution agreements between Manageco and each Fund, Manageco is responsible for marketing and distributing units of the Funds.

3. Under its declaration of trust, each Fund is authorized to issue an unlimited number of units which may be issued in classes of unlimited number. Manageco, as the trustee of the Funds, is entitled to create, determine the attributes of and authorize for issue one or more new classes of units for each Fund. Pursuant to its declaration of trust as amended in XXXXXXXXXX, each of the Funds is authorized to issue Class 1 Units and Class 4 Units. Certain Funds are authorized to issue Class 2 Units although no Funds have offered or issued Class 2 Units. Certain Funds have issued Class 3 Units which were issued in connection with a reorganization of some of the Funds in XXXXXXXXXX. Class 3 Units are not offered for sale but may be issued on the automatic reinvestment of distributions on Class 3 Units.

4. The declaration of trust for each of the Funds provides that each unit of a Fund is fully paid and non-assessable when issued. In addition, each unit of a Fund ranks equally with the other units of the same class of the Fund in the payment of distributions (other than management fee distributions, described below in paragraph 8) and return of capital in the event of liquidation, dissolution or winding-up of the Fund. Each unitholder of a whole unit of a Fund is entitled to one vote at all meetings of the Fund, except meetings at which unitholders of another class of units are entitled to vote separately as a class.

5. Class 1 Units of the Funds are offered for sale by prospectus to Canadian residents and the primary type of investor in Class 1 Units is a retail investor. Class 4 Units of the Funds are offered for sale by prospectus or offering memorandum to eligible Canadian resident investors who satisfy certain criteria (the "Class 4 Criteria") related to the total net asset value of the units held by the investor or certain other matters which will be established from time to time by Manageco, as trustee. Class 1 Units and Class 4 Units of Group 1 Funds (except for Fund X) and Group 2 Funds are presently offered in a Simplified Prospectus dated XXXXXXXXXX, while Class 1 Units and Class 4 Units of Fund X are presently offered in a Simplified Prospectus dated XXXXXXXXXX, and Class 1 Units and Class 4 Units of Group 3 Funds are presently offered in a XXXXXXXXXX Simplified Prospectus dated XXXXXXXXXX, respectively. A copy of these prospectuses was provided by you.

6. An additional distinction between the Class 1 Units and the Class 4 Units of a Fund is the Fund expenses allocated to a particular class. Certain expenses of a Fund are attributable only to a particular class of units of the Fund and include expenses related to the sale of the units of the class, expenses which are allocated based upon the number of transactions or accounts in that particular class such as securityholder administration and regulatory fees and management fees in respect of the class (collectively, "Class Expenses"). Any other expenses incurred by a Fund that are not attributable to a particular class are borne proportionately by all unitholders of the Fund ("Common Expenses").

7. The management fee charged by Manageco pursuant to the management agreement between Manageco and each Fund is a specified annual percentage of the average daily net asset value of each class of units of each such Fund. The management fees payable by the Funds for Class 1 Units range from XXXXXXXXXX% to XXXXXXXXXX% annually and for Class 4 Units range from XXXXXXXXXX% to XXXXXXXXXX% annually. Generally, the Class 4 Units of a Fund will have higher management fees than those for the Class 1 Units of the same Fund. XXXXXXXXXX The management fee is computed daily and payable daily.

8. To encourage holdings of Fund units by groups, such as group registered retirement savings plans, defined contribution pension plans, groups of investors receiving services, including investment selection services from a third party provider, and by other large investors, Manageco occasionally negotiates a reduction of the effective management fee payable by such large investors. The goal of such reduced fee arrangements is to achieve fees that are competitive for large holdings. Such fee reductions are fully negotiable between Manageco and the particular investor or its dealer and are based, among other factors, on the size of the holdings of the investor or group. Manageco reduces the effective management fee payable by such investors in a Fund by reducing the management fee it charges to the particular Fund on the condition that the Fund makes a special distribution to the investor in an amount equal to the amount of the management fee reduction negotiated with the investor or its dealer. Such distributions are referred to as management fee distributions.

9. Pursuant to the declaration of trust for each Fund as amended in XXXXXXXXXX, Class 4 Units may be reclassified as Class 1 Units of the same Fund at the direction of or with the consent of Manageco. At the time of such reclassification, the aggregate net asset value of the Class 4 Units of the Fund and the aggregate net asset value of the Class 1 Units into which they are reclassified will be equal. Other than as described above, the rights, privileges, restrictions and conditions of the Class 4 Units are substantially the same as those of the Class 1 Units, and on any reclassification, a unitholder will not be entitled to proceeds of disposition and the reclassified units will not be redeemed or cancelled. Generally, this reclassification will occur if an investor no longer satisfies the Class 4 Criteria. However, this reclassification feature of the Class 4 Units will only become effective if Manageco, as trustee, passes a resolution authorizing that this reclassification feature is to become effective. Manageco, as trustee of the Funds, has only passed such a resolution for the Group 2 Funds (other than Group 2A Funds). To date, none of the Class 4 Unitholders of the Group 2 Funds have had their Class 4 Units reclassified as Class 1 Units.

10. Under its declaration of trust, each Fund is required to distribute at the end of a taxation year to its unitholders in each class of the Fund the amount, if any, by which its net income and realized capital gains (net of any realized capital losses of the Fund in such year or prior years) exceeds any non-capital loss of the Fund and certain adjustment amounts to be determined by Manageco, including in respect of taxable dividends received by the Fund from taxable Canadian corporations and capital gains realized by the Fund (in particular, the non-taxable portion of such gains and any capital gains refund to which the Fund may be entitled), each computed in accordance with the relevant provisions of the Act. Generally, the portion of the distribution to which a class of units of a Fund is entitled is determined by taking its proportionate share of the net income of the Fund less the expenses of the Fund that are Class Expenses (as described in paragraph 6 above) and any management fee distributions to unitholders of units of the class, in each case not previously charged during the year to a distribution to all holders of that class.

11. Units of each class of each Fund are issued or redeemed at their respective net asset values. The net asset value per unit of a class of a Fund is computed by dividing the total net asset value of the class (calculated in accordance with the declaration of trust of each Fund) by the total number of units of the class of the Fund outstanding at the time. The net asset value per unit of a class of a Fund

is usually determined on a daily basis. As described in each Fund's declaration of trust, the net asset value of each class of a Fund is the value of that class' proportionate share of the Fund's assets less the class' proportionate share of the Fund liabilities common to all classes of the Fund and less liabilities of the Fund specific to that class.

PROPOSED TRANSACTIONS

12. Except for those Group 2 Funds for which the reclassification feature described here has already been activated, Manageco, as trustee of the Funds, proposes to pass a resolution for each Fund to activate the reclassification feature of the Class 4 Units such that Class 4 Units may be reclassified as Class 1 Units of the same Fund as described in paragraph 9 above. Such resolution will be effective upon being passed.

13. In addition, Manageco proposes to amend the declaration of trust for each of the Funds to provide that Class 1 Units of a Fund may be reclassified as Class 4 Units of the same Fund at the direction of or with the consent of Manageco if the Class 4 Criteria are met. At the time of such reclassification, the aggregate net asset value of the Class 1 Units of the Fund to be reclassified and the aggregate net asset value of the Class 4 Units into which they are reclassified will be equal. Other than as described above, the rights, privileges, restrictions and conditions of the Class 1 Units are substantially the same as those of the Class 4 Units, and on any reclassification, a unitholder will not be entitled to proceeds of disposition and the reclassified units will not be redeemed or cancelled. Manageco, as trustee of the Funds, proposes to pass a resolution for each fund to activate the reclassification feature of the Class 1 Units of the Funds. Such resolution will be effective upon being passed.

PURPOSE OF THE PROPOSED TRANSACTIONS

14. The purpose of the proposed transactions is to permit Manageco to more effectively market the Funds to different segments of the investor market and to tailor the fees and expenses applicable to such segments.

RULINGS

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. A reclassification of Class 4 Units of a Group 1 Fund, a Group 2A Fund or a Group 3 Fund as Class 1 Units of the same Fund, which reclassification will be effected pursuant to the reclassification feature referred to in paragraph 12 above, will not, in and by itself, be considered to be a disposition of those Class 4 Units;

B. A reclassification of Class 1 Units of a Fund as Class 4 Units of the same Fund, which reclassification will be effected pursuant to the reclassification feature referred to in paragraph 13 above, will not, in and by itself, be considered to be a disposition of those Class 1 Units;

C. The implementation of the proposed transactions will not result in the application of subsection 104(7.1) of the Act so as to prevent the Funds from claiming a deduction under paragraph 104(6)(b) of the Act;

D. The amount of Fund income (including taxable capital gains) paid or payable to a unitholder in a taxation year will be included in the unitholder's income pursuant to paragraph 104(13)(a) of the Act; and

E. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences determined in the other rulings provided herein.

The above rulings are based on the Act in its present form and do not take into consideration any proposed amendments to the Act. The rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R3 dated December 30, 1996 and are binding on the Canada Customs and Revenue Agency provided that the proposed transactions are completed by XXXXXXXXXX.

COMMENTS

Since the reclassification feature has already been activated for the Group 2 Funds (except for Group 2A Funds), we are not able to provide an advance income tax ruling with respect to those funds. However, it is our view that unitholders of such a Group 2 Fund whose Class 4 Units are reclassified as Class 1 Units of the same Fund, as described in paragraph 9 above, would not be considered to have disposed of their units by virtue only of such reclassification.

Yours truly,

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