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 proposed transactions that will be undertaken by a group of mutual fund trusts. The proposals include amendments to a declaration of trust and the execution of an instrument pursuant to the declaration of trust which will permit the mutual fund trusts to rename their existing units; create two new classes of units; and add a redesignation feature to each class of units which, in certain circumstances, will allow these units to be redesignated as another class of units of the same fund. The purpose of the proposed transactions is to permit the manager of the funds to more effectively market the funds to different segments of the investor market and to tailor the fees and expenses applicable to such segments by offering a separate class of units of each such fund. In this ruling, the principal issues are:
1) Will the implementation of the proposed transactions result in a resettlement of the trust or a disposition of units?
2) Will subsection 104(7.1) and subsection 245(2) apply to the proposed transactions?
1) The amendments to the declaration of trust to permit the creation of additional classes of units are not significant enough to result in a resettlement of the trust. Unitholders are not considered to have disposed of their units because of the addition of a redesignation feature to the existing units or because of the redesignation of the units from one class to another class of units of the same fund.
2) Subsection 104(7.1) subsection 245(2) will not apply to the proposed transactions.
Reasons FOR POSITION TAKEN
1) Amendments to the trust agreement which will allow the trustee to create a new class of units and the creation of a new class of units with a redesignation feature will not result in the disposition of the existing units of a fund held by a unitholder as the rights of the unitholders have not been changed. Also, since a unitholder will not be entitled to proceeds of disposition on the redesignation of the units, the units will not be redeemed or cancelled upon the redesignation and the rights, privileges and conditions attached to the redesignated units will be substantially the same as the existing units, the redesignation of units will not result in a disposition. Given that there are no deferred sales charges on Class B or Class C Units, the fact that on a redesignation of Class A Units to Class B or Class C Units, a unitholder will be required to pay an amount equal to any deferred sales charges that would otherwise have been payable if there had been a redemption, merely recognizes that those Class A unitholders who purchased their units on a sales charge basis paid up-front fees, while those who purchased their units on a deferred sales charge basis paid no up-front fees. It thus equalizes the position of all Class B and Class C unitholders. Similar positions were taken in 2000-000551, 9905003, 9827053, and 9818043.
2) Similar positions were taken 2000-000551, 9930143, 9905003, 9818043 and 9827053.
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 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:
"TCo" means XXXXXXXXXX
"Exchange" means the XXXXXXXXXX
"Fund" means a fund listed in Schedule A.
"Funds" means, collectively, the funds listed in Schedule A.
"Fund A" means the XXXXXXXXXX
"Class A Units" means the XXXXXXXXXX
"Class B Units" means the XXXXXXXXXX
"Class C Units" means the XXXXXXXXXX
TCo deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. The Funds file their returns at the XXXXXXXXXX Tax Centre and deal with the XXXXXXXXXX Tax Services Office.
Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:
1. The Funds were formed under declarations of trust, as amended by supplemental declarations of trust, (the "Declarations of Trust") governed by the laws of the province of XXXXXXXX.
2. The Funds are open-end "mutual fund trusts", as defined in subsection 132(6), that offer a variety of investment objectives.
3. TCo is the manager and trustee of the Funds. TCo is a corporation that was incorporated under the laws of the province of XXXXXXXXXX.
4. Each of the Funds is divided into an unlimited number of identical units representing an equal undivided interest in the assets of the Fund (except with respect to "management fee distributions" as described in 12 below).
5. The net asset value of each Fund is the value of all of the assets of the Fund less its liabilities. The net asset value of each Fund is calculated on each day that the Exchange is open for trading (a "Business Day"). The net asset value per unit of each Fund is calculated by dividing the net asset value of the Fund at the close of business on a Business Day by the total number of units of the Fund outstanding at that time. The net asset value per unit is the basis for all purchases and redemptions of units of the Funds and the reinvestment of distributions from the Funds.
6. Under the Declarations of Trust of each of the Funds (other than Fund A) the trustee of a Fund, in its discretion, may authorize the division of the units of the Fund into two or more classes and determine variations between the different classes as to the allocation of expenses, fees, service charges, redesignation rights, rights to distributions, rights on redemption, rights on liquidation, and conditions under which the several classes shall have separate voting rights, provided that in all other respects all units of the Fund will be identical to each other. The establishment and designation of any class of units is effective upon the execution by the trustee of an instrument setting forth such establishment and designation and the relative rights and preferences of such class, or as otherwise provided by such instrument.
7. If the trustee of a Fund divides the units of the Fund into classes, the liabilities, expenses, costs, charges and reserves related to the distribution of units of a class and other identified expenses that should properly be allocated to the units of a class may be charged to and borne solely by such class and the bearing of expenses solely by a class of units may be appropriately reflected (in a manner determined by the trustee) and cause differences in distributions in respect of units of different classes and differences in the net asset value attributable to the units of different classes on acquisition, redemption or liquidation.
8. Where the units of the Funds are divided into classes, the net asset value per unit as of each Business Day, except for the last Business Day in each distribution period, will be determined for each class by dividing the net asset value of the class by the number of units of the class that are outstanding on that date.
Generally, the net asset value per unit of the class as of the last Business Day in each distribution period is determined by deducting the net capital gains and the net income of the class to be distributed for that period from the net asset value of the class on that date and dividing the result by the number of units of the class outstanding on that date.
9. Where the units of a Fund are divided into classes, the net income and net capital gains of the Fund will be recalculated by the trustee for each class as if each class was a Fund, provided that the net income of the Fund, before the deduction of expenses and distributions, and the net capital gains of the Fund, before the deduction of distributions, will be allocated by the trustee rateably among the classes from time to time based on the relative net asset value of the classes and provided that no class of the Fund may have net income or net capital gains which is less than zero for a taxation year of the Fund when another class of the Fund has net income or net capital gains that is greater than zero. Unitholders of a class will receive distributions of each unitholder's proportionate share of the net income of the class and the net capital gains of the class for the taxation year of the Fund.
10. Where classes have been created and the general nature of the business to be transacted at a unitholder meeting concerns an issue relevant to all unitholders of the Fund, units of all classes will be voted together and where an issue is relevant only to the unitholders of a particular class or classes, only unitholders of those classes to which such business is relevant will be entitled to vote and such units will be voted separately as a class.
11. Where classes have been created, any indemnification or reimbursement of the trustee of the Fund out of the property of the Fund from claims against the trustee in relation to the execution of the trustee's duties or the affairs of the Fund as required by the Declaration of Trust can only be made out of the share of Fund property of the one or more classes in respect of which the claim arose.
12. The manager has entered into management agreements with each Fund to provide all of the necessary management and administration services required to operate the business of each of the Funds, including services in connection with the distribution of units of the Funds. The remuneration of the manager is provided for in the management agreement. That remuneration is generally expressed as a management fee calculated as a percentage of the net asset value of each Fund and is paid by each Fund monthly. The percentage of the management fee differs depending on the investment objective of the Fund. At present, the management fee ranges from XXXXXXXXXX per annum. As there is currently only one class of units in each Fund, the same management fee is effectively charged with respect to each unit of a Fund, except in the case of management fee distributions.
To encourage large purchases in the Funds, the manager may reduce the management fee that it would be entitled to receive from a Fund with respect to an investment in the Fund, provided that the amount of the management fee reduction is distributed to the unitholder for whose benefit the fee was reduced. These are referred to as management fee distributions.
13. Other administrative and operating expenses paid by the Funds include commissions, brokerage fees, taxes, registrar and transfer agency fees, safe-keeping fees, unitholder servicing costs, costs of prospectuses and reports, interest and audit and legal fees.
14. The Declaration of Trust for Fund A will be amended to provide for the establishment of a multi-class structure by execution of an instrument by the trustee on the same terms as described in 6 to 11 above. These proposed amendments to the Declaration of Trust must be approved at a meeting of the unitholders of Fund A.
15. For each Fund the trustee will execute an instrument (a "XXXXXXXXXX") pursuant to the Fund's Declaration of Trust which will:
(a) allow each Fund to issue three classes of units, namely Class A Units, Class B Units and Class C Units with the attributes set out below;
(b) provide that in certain circumstances units of one class of a Fund may be redesignated as units of another class of that Fund (the "redesignation feature") as described in 23, 24 and 25 below; and
(c) designate the issued and outstanding units of each Fund on the effective date of the XXXXXXXXXX as Class A Units.
16. The XXXXXXXXXX will be entered into as soon as possible after the granting of the rulings requested herein and, in any event, within six months of the date such rulings are granted. A draft XXXXXXXXXX was enclosed with your ruling request.
Classes of units
17. Class A Units will be available to all investors under the initial sales charge method or the deferred sales charge method (i.e., an investor may pay a sales commission to their dealer at the time they purchase their units or the fund manager will pay a commission to the dealer in respect of the units purchased on a deferred sales charge basis and the investor may pay a deferred sales charge).
The manager will pay a trailer commission to the Class A unitholder's dealer or broker for continuing advice and service provided by the dealer or broker to the unitholder.
18. Class B Units will be offered primarily to investors who will hold their units in fee-based accounts with brokers and dealers who have entered into a Class B Dealer Agreement with the manager of the Fund. Fee-based accounts are those in which the dealer is generally compensated for services rendered in respect of the account through a periodic fee (such as weekly, monthly or quarterly) charged to the investor. Typically the fee is calculated as a percentage of the value of the assets in the investor's account or accounts. The investor is not required to pay sales or deferred sales charges in respect of Class B Units and the manager does not pay sales or trailer commissions to the investor's dealer or broker. Class B Units of each Fund will be offered pursuant to the terms of a simplified prospectus, a copy of which was enclosed with your ruling request.
19. Class C Units will be offered primarily to certain large institutional investors, the manager and entities related to the manager (such as other mutual funds) as determined from time-to-time and on a case-by-case basis by the manager. An investor is not required to pay sales or deferred sales charges in respect of Class C Units and no sales or trailer commissions will be paid by the manager to the dealer or broker of a unitholder of Class C Units. It is intended that Class C Units will be available for purchase by investors pursuant to certain private placement provisions under the applicable securities legislation within six months of the date the rulings requested herein are granted.
20. The attributes of each class of units of a Fund will be the same in all respects, except for differences such as management fees charged by the manager in respect of a class, whether management fees are charged to the Fund or directly to the investor, the availability of discretionary management fee distributions to unitholders, other administrative and operating expenses of a Fund allocated to a class, the fees, charges and commissions paid by the manager and the investor, investment minimums, separate class voting rights in certain limited circumstances and separate indemnification obligations. The management fees charged by the manager to a Fund with respect to the Class B Units will be less than on the Class A Units. No management fee will be charged by the manager to a Fund with respect to Class C Units; instead these fees will be charged by the manager directly to the Class C unitholder and negotiated on a case-by-case basis. Discretionary management fee distributions will be available only to holders of Class A Units and Class B Units. The other administrative and operating expenses of the Funds include commissions, brokerage fees, taxes, registrar and transfer agency fees, safe-keeping fees, unitholder servicing costs, costs of prospectuses and reports, interest and audit and legal fees. These expenses will be allocated by the trustee among the three classes of units as described in 22 below in a manner that reflects the actual administrative and operating costs of each class. Where the nature of the business to be transacted at a unitholder meeting concerns an issue that is relevant only to the unitholders of a particular class or classes, only unitholders of the class or classes to which such business is relevant will be entitled to vote, such units will be voted separately as a class, and each whole unit will entitle the unitholder to one vote. There may also be differences between the classes in the required minimum investment in units of the class.
21. The units of each class of a Fund will be redeemable at the option of the holder at the net asset value per unit calculated for the relevant class of units, less, in the case of Class A Units, any applicable deferred sales charges payable by an investor who has purchased the units on a deferred sales charge charge basis. All unitholders of a Fund will rank on a parity with each other with respect to property received on a termination or winding up of the Fund, based on the relative net asset value of each class of units.
22. Each class of units of each Fund will have a separate net asset value calculated for that class. The net asset value of each class of units of each Fund will be the value of all assets of the Fund multiplied by the percentage of the Fund's assets attributable to the Class less management fees and other administrative and operating expenses of the Fund which are specific to that particular class and less a portion of the administrative and operating expenses of the Fund which are not specific to a particular class determined at the sole discretion of the trustee based on: the relative net asset value of each class of units of the Fund; the relative number of unitholders in each class of units of the Fund; or the relative amount of sales or redemptions of units and account activity of each class of units of the Fund during any given period. Income taxes, refundable capital gains taxes and other taxes such as GST payable by each Fund are borne by one or more classes of that Fund as the trustee, in its sole discretion, determines. The net asset value per unit of each class of units of each Fund will be calculated as set out in 8 above.
Redesignation of units
23. Each class of units will have a redesignation feature which will, in certain circumstances, permit outstanding units of one class of a Fund to be redesignated as units of another class of the same Fund having a net asset value equal to the net asset value of the units being redesignated. That is, if a unitholder's Class A Units are held in a fee-based account, the unitholder may request that such units be redesignated as Class B Units. Similarly, if a unitholder holds Class A Units in a non-fee-based-account, the unitholder may transfer those units to a fee-based account and then request that such units be redesignated as Class B Units. However, if a Class B unitholder is no longer eligible to hold Class B Units (e.g., the Class B Units are transferred to a non-fee based account), the Class B Units may be redesignated as Class A Units provided the unitholder is given 30 days prior notice. The Class B Units may be redesignated as Class C Units if so agreed to by the unitholder and the manager, provided that the Class B unitholder meets the minimum investment requirement to hold Class C Units. Class A Units may also be redesignated as Class C Units if so agreed to by both the unitholder and the manager, provided that the Class A unitholder meets the minimum investment requirement to hold Class C Units. Class C Units may be redesignated as Class A Units at the option of the manager. This may occur, for example, where the Class C unitholder falls below the minimum investment requirement to hold Class C units. Class C Units may be redesignated as Class B Units if so agreed by both the unitholder and the manager, provided that the units are held in a fee-based account with a broker or dealer who has entered into a Class B Dealer Agreement with the manager of the Fund.
24. As Class A Units may be purchased on the deferred sales charge basis, prior to completing the redesignation of Class A Units into Class B Units or Class C Units, a unitholder must pay an amount equal to any deferred sales charges that would have been payable in respect of those Class A Units if there had been a redemption. Where a unitholder's Class B Units or Class C Units are redesignated into Class A Units, the unitholder may have to agree to pay an initial sales charge or a deferred sales charge in respect of the Class A Units.
25. On any redesignation of units, the unitholder will not be entitled to proceeds of disposition for the units and the redesignated units will not be cancelled or redeemed.
PURPOSE OF PROPOSED TRANSACTIONS
26. Currently, each Fund is effectively charged the same management fee with respect to all units (except with respect to management fee distributions which may be paid to a small number of unitholders). Currently, each Fund effectively divides other administrative and operating expenses equally among all units. The proposed transactions are designed to allow the manager the flexibility to charge differing management fees and to allocate other administrative and operating expenses depending on the nature of the investor. Having multiple classes of units will allow the administrative and operating expenses of the Funds to be allocated more equitably between different types of investors. The commission structure of the Class A Units, including up front commissions paid to dealers, financing costs and higher trailer fees, necessitates the charging of a higher management fee. The proposed transactions allow these costs to be allocated to the Class A Units only, so that they are not borne by the other classes of units. The costs of servicing the accounts of large institutional investors are also less, as a percentage of the total assets of the account, than other accounts because the fixed expenses of servicing accounts are spread over a significantly higher level of assets on a per account basis. The proposed transactions allow these costs to be allocated more equitably.
These changes are expected to attract new investors which will increase the Funds' asset bases which, in turn, should result in lower per unit costs and a lower management expense ratio for all of the classes of the Funds and may increase management fees paid to the manager. A larger total asset base will enable the manager to provide enhanced services to all Fund investors on a more cost-effective basis.
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. The execution by the trustee of each Fund of XXXXXXXXXX for each Fund pursuant to the Declaration of Trust of each Fund for the purposes described in 15 above will not, in and by itself, result in the resettlement of the Funds, a disposition of the property of the Funds or a disposition of the issued and outstanding units, or any part of the units, for the purposes of the Act.
B. A redesignation of
(I) Class A Units into Class B Units or Class C Units of the same Fund,
(II) Class B Units or Class C Units into Class A Units of the same Fund,
(III) Class B Units into Class C Units of the same Fund, or
(IV) Class C Units into Class B Units of the same Fund,
as described in 23, 24 and 25 above, will not result in a disposition of those units, or any part of those units, for the purposes of the Act.
C. The implementation of the proposed transactions described herein will not, in and by themselves, cause subsection 104(7.1) to apply so as to deny the Funds a deduction in computing their income under paragraph 104(6)(b).
D. Subsection 245(2) will not apply to redetermine the tax consequences of the above rulings as a result of the implementation of the proposed transactions described herein.
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 (CCRA) 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.
The above rulings should not be construed as providing the CCRA's views on whether the Funds qualify as mutual fund trusts for purposes of the Act.
Resources, Partnerships and
Income Tax Rulings Directorate
Policy and Legislation Branch
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