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: 1. Whether "redeemable on demand" requirement in ss. 108(2) would be met.
Position: The conditions necessary for a trust to be considered a unit trust are met.
Reasons: Particular facts and circumstances would suggest conditions are met at a point in time.
XXXXXXXXXX 2000-004168
Attention: XXXXXXXXXX
XXXXXXXXXX, 2000
Dear Sirs:
Re: XXXXXXXXXX
Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling in respect of the income tax consequences arising from the proposed transactions described below. We also acknowledge the additional information received by our office dated XXXXXXXXXX. We understand that, to the best of your knowledge, and that of the taxpayers on whose behalf this ruling is requested, none of the issues contained in this advance income tax ruling are:
i) contained in earlier returns of the taxpayer or a related person;
ii) being considered by a tax service office and/or a tax centre in connection with a tax return previously filed by the taxpayer or a related person;
iii) under objection by the taxpayer or a related person;
iv) before the courts; or
v) the subject of a ruling previously issued by the Directorate to the taxpayer or a related person.
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) and the following terms have the meaning specified:
a) "ABC" means XXXXXXXXXX,
b) "Xco" means XXXXXXXXXX, and
c) "Zco" means XXXXXXXXXX.
Facts
1. The ABC is a tax-exempt entity.
2. The ABC sponsors two registered pension plans (the "Plans").
3. Both Plans are primarily contributory money purchase pension plans under which members have accounts that include contributions made by the member and the ABC and the investment return earned on such contributions.
4. The investments for each member's account are selected by the member from a number of options that are made available by the ABC pension boards (the "RPP Options"). There are currently XXXXXXXXXX RPP Options available to the members of the Plans. The RPP Options comply with the requirements of the Income Tax Act for registered pension plans.
5. As required by the Plans, the Income Tax Act, and the Pension Benefits Act (XXXXXXXXXX), members of the Plans cannot draw variable retirement income directly from the Plan. Rather, the locked-in pension funds and non locked-in pension funds must first be transferred to one of the following vehicles: an annuity purchased from a life insurance company; a locked-in retirement account (a registered retirement savings plan with locking-in provisions prescribed by the Pension Benefits Act (XXXXXXXXXX)); a registered retirement income fund ("RRIF"); a life income fund ("LIF") (a RRIF with locking-in provisions prescribed by the Pension Benefits Act); or a locked-in retirement income fund ("LRIF") (a RRIF with different locking-in provisions prescribed by the Pension Benefits Act) (collectively, the "Transfer Vehicles").
6. Members are permitted to leave their account balances in the Plans following termination of employment or retirement. Although Plan contributions do not continue, the account balances continue to attract investment earnings and former members (and their surviving and former spouses, in certain circumstances) continue to benefit from the considerably lower investment management fees available under the Plans than apply under commercially available mutual funds.
7. However, by the end of the year in which a former member turns age XXXXXXXXXX, he or she is required to transfer the account balance out of the Plans to a Transfer Vehicle under which the individual will commence receiving retirement income. The RPP Options are unique to the Plans and cannot currently be replicated under any of the commercially available Transfer Vehicles. Consequently, former Plan members are often faced with the task of selecting a completely new set of investment options at age XXXXXXXXXX.
8. To give former members (and their surviving and former spouses, in certain circumstances) greater flexibility, the ABC has reached an agreement with a trust company, Xco, to make available to former Plan members a "ABC Group RRIF". The investment options available under the RRIF (the "RRIF Options") will be the same as (or substantially similar to) the RPP Options. The ABC, through Xco, has had a specimen RRIF (and LIF supplement) approved by the Registered Plans Division of the Canada Customs and Revenue Agency ("CCRA"). An additional supplement for a specimen LRIF is currently being drafted and will be submitted to the CCRA for approval in due course.
9. The ABC has also obtained an exemption under subsection XXXXXXXXXX with respect to the trades in Trust units in the various RRIF Options to former members, and their surviving spouses and former spouses in certain circumstances. One of the conditions for the granting of the exemption order is that the RRIF Options must be substantially similar to the RPP Options.
Proposed Transactions
10. Separate quasi-mutual fund trusts (the "Trusts") will be established to hold the assets of each of the RPP Options. Each Trust will be an inter vivos trust and the interests of the beneficiaries will be described by reference to units of the trust. The ABC has appointed Zco as trustee of the Trusts and the ABC pension boards as manager of the Trusts. Each such Trust will be submitted for registration as a registered investment pursuant to subsection 204.4 (2)(d) of the Income Tax Act.
11. The net asset value of the units of the Trusts will be calculated on the last day of each month (the "Valuation Date"). The draft Trust agreements provide that a unitholder shall be entitled on prior written notice (the "Notice") to Zco, at any time to require Zco to redeem all or any number of the unitholder's units at the net asset value of the units of the Trust calculated as on the next following Valuation Date. The Notice shall specify the dollar value to be redeemed and shall be in the form prescribed by the manager from time to time. The number of units to be redeemed shall be computed as of the closing time (generally XXXXXXXXXX) on the Valuation Date next following the day upon which the Notice was actually received. Payments for units to be redeemed shall be made by Zco on the direction of the manager as soon as practicable and in any event within 30 days following the Valuation Date. These payments will not bear interest after the Valuation Date. Promptly after such payment the manager shall issue or cause to be issued a confirmation setting out the number of units redeemed.
Purpose of Proposed Transactions
12. Although the RPP Options and investments comply with the requirements of the Income Tax Act for registered pension plans, the RPP Options are not qualified investments for a RRIF in accordance with section 146.3 of the Income Tax Act. In order to become qualified investments, the RPP Options must be structured as an investment that is capable of registration under section 204.4 of the Income Tax Act. The ABC has decided to structure the RPP Options as quasi-mutual fund trusts under subsection 204.4(2)(d) of the Income Tax Act. Once registered, the RPP Options will be qualified investments for RRIF purposes and will thereafter become available to the ABC RRIF members as RRIF Options.
13. Unit values for the RPP Options available under the Plan are currently calculated effective as at the Valuation Date. Many of the RPP Options are made up of units of a number of other registered (or otherwise qualified) pooled investments. For example, the ABC Diversified Equity Fund (one of the RPP Options) is made up of investments managed byXXXXXXXXXX different investment managers. Due to the complexity of the RRIF Options and the need to gather valuation information from a number of investment managers in order to arrive at a unit value that can be used to redeem units, the payment of redemption proceeds cannot be made available until up to XXXXXXXXXX days after the Valuation Date. Specifically, the unit value for the Trusts can be reasonably determined approximately XXXXXXXXXX business days after the Valuation Date. Thereafter, the redemption proceeds for units of that fund are paid as promptly as possible, and, in any event, within a total of XXXXXXXXXX days following the Valuation Date.
Ruling Given
Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as herein described, our advance income tax ruling is as follows:
A. At the time immediately following the completion of the proposed transactions, the Trusts will be considered to be unit trusts within the meaning of that expression under paragraph 108(2)(a) of the Income Tax Act.
The above ruling is given subject to the general limitations and qualifications set out in Information Circular 70-6R3, Advance Income Tax Rulings, and is binding on the CCRA provided that the draft Trust agreements are signed and effective within six months of the date of this letter. This ruling is based on the law as it currently reads and does not take into account any proposed amendments to the Income Tax Act, which could, if enacted into law, have an effect on the ruling provided herein.
The above ruling should not be construed as providing our views on whether the Trusts will qualify as registered investments for purposes of the Income Tax Act. The determination of whether a trust qualifies as a unit trust at a particular time is a question of fact which can only be made following a review of the trust's activities at that time. Such a determination is a matter for which the local tax services office is responsible. However, it is our opinion that as long as the Trusts continue to meet the requirements contained in paragraph 108(2)(a) of the Income Tax Act, they will qualify as unit trusts.
Yours truly,
for Director
Resources, Partnerships and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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