2001 Ruling 2000-0045333 - Reclassification of units of a MFT

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: The addition of a redesignation feature to the existing units of a group of mutual fund trusts and the creation of new mutual fund trusts with multiple Classes of Units for different investor segments. The purpose of the multiple class structure is to allow the mutual fund trust's fee structure to be tailored to accommodate investore of dealer sponsored fee-based programs.

Rulings requested are: 1) whether the proposed transactions result in a disposition of units; 2) will subsections 104(7.1) and 245(2) apply to the proposed transactions.

Position: 1) Unitholders are not considered to have disposed of their units because of the redesignation of the units from one class to another class. Also, the addition of a redesignation feature to the existing units will not result in a disposition of those units. 2) Subsections 104(7.1) and 245(2) will not apply to the proposed transactions.

Reasons: 1) Similar positions taken in 9820753, 9726113 and 9525413.

2) Similar positions taken in 9820753 and 9603753

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XXXXXXXXXX, 2001

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
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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 your correspondence of 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:

(a) contained in earlier returns of the taxpayers or a related person;

(b) being considered by a tax services office or a tax centre in connection with a tax return previously filed by 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.

In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:

"Eligible Fee Program" means an investment dealer or financial advisor sponsored fee-based program under which a unitholder pays periodic service fees to its investment dealer or financial advisor rather than a fee for each transaction;

"Existing Fund" means, XXXXXXXXXX;

"Existing Funds" means each Existing Fund collectively;

"Fund" means any one of the Existing Funds or Proposed Funds;

"Funds" means all of the Existing Funds and Proposed Funds;

"Manageco" means XXXXXXXXXX, the manager of the Funds and a taxable Canadian corporation within the meaning of the Act; its business identification number is XXXXXXXXXX and it files its tax return at the XXXXXXXXXX Tax Services Office;

"Proposed Fund" means, XXXXXXXXXX;

"Proposed Funds" means each Proposed Fund collectively;

"Series A Unit" means a Unit which is classified as being a Series A Unit of a Fund;

"Series A Units" means those Units which are classified as being Series A Units of the Funds;

"Series F Criteria" means the conditions established by Manageco from time to time which must be met by a Unitholder in order to hold a Series F Unit;

"Series F Unit" means a Unit which is classified as being a Series F Unit of a Fund;

"Series F Units" means those Units which are classified as being Series F Units of the Funds;

"Series Unit" means a Unit which is classified as being a unit of a particular series of a Fund;

"Series Units" means those Units which are classified as being units of a particular series of the Funds;

"Trust Agreement" means XXXXXXXXXX dated XXXXXXXXXX, and in respect of the Existing Funds, includes both the supplemental XXXXXXXXXX under which the Existing Funds were created and the draft amendments to those supplemental XXXXXXXXXX under which the Trustee is to be authorized to designate Units as F Series Units, and in respect of the Proposed Funds, includes the draft supplemental XXXXXXXXXX under which the Proposed Funds are to be created, the terms of which are substantially the same as the sample supplemental XXXXXXXXXX and amendments which were submitted for our review;

"Trustee" means XXXXXXXXXX, a taxable Canadian corporation within the meaning of the Act and a trust company licensed to carry on the business of providing trust services in Canada;

"Unit" means a unit of a Fund determined without reference to whether the unit has been classified as a particular series of Series Units; and

"Units" means units of a Fund determined without reference to whether the units have been classified as a particular series of Series Units.

The tax services office of the Funds is the XXXXXXXXXX Tax Services Office and the Funds file their returns at the XXXXXXXXXX Centre. XXXXXXXXXX

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

Facts

1. Manageco established the Existing Funds as inter vivos trusts XXXXXXXXXX. The Existing Funds have a variety of investment objectives and invest in securities that are qualified investments for a trust governed by a registered retirement savings plan, registered retirement income fund, deferred profit sharing plan or registered education savings plan. The Existing Funds are mutual fund trusts as defined in subsection 132(6).

2. Under the Trust Agreement, the Existing Funds are authorized to issue an unlimited number of Units of only one class. Such Units may be issued in more than one series. XXXXXXXXXX.

3. Units of an Existing Fund may be purchased in either Canadian or U.S. dollars. Units that are purchased in Canadian dollars are redeemed in Canadian dollars and units that are purchased in U.S. dollars are redeemed in U.S. dollars.

4. All the Units of the Existing Funds are currently classified as Series A Units. Series A Units are offered for sale by prospectus to Canadian residents. The primary type of investor in Series A Units is a retail investor.

5. The attributes of the Series A Units of each Existing Fund are as follows:

(a) each Series A Unit is non-voting (except in exceptional circumstances as described in the Trust Agreement);

(b) each Series A Unit represents an equal share of the capital of an Existing Fund;

(c) each Series A Unit of an Existing Fund ranks equally in the payment of distributions of net income and net realized capital gains and in the return of capital in the event of liquidation, dissolution or winding-up;

(d) the Existing Fund is required to distribute at least annually to its unitholders the amount, if any, by which its net income and net realized capital gains exceeds any non-capital losses of the Existing Fund; and

(e) Series A Units are issued or redeemable at their net asset value, the calculation of which is set out in the Trust Agreement. The net asset value of a Unit and a Series Unit is usually determined on each day that Manageco is open for business.

6. In addition, the Trust Agreement for each Existing Fund provides that Series A Units of the Existing Fund may be reclassified as Series Units of another series of the Existing Fund, if and when such other series is offered, provided that the unitholder satisfies the criteria to hold such other Series Units and requests such reclassification. The Trust Agreement for each Existing Fund specifies that any other series of Series Units, once offered, may be reclassified as Series A Units upon either a request for reclassification by a unitholder holding such other series of Series Units or at the direction of Manageco where the unitholder ceases to meet the criteria to hold such other Series Units. The aggregate net asset value of a unitholder's Series Units before and after such reclassification will be equal. XXXXXXXXXX.

7. Unitholders purchasing Series A Units of an Existing Fund are required to pay a XXXXXXXXXX sales charge to their investment dealers at the time of purchase of such Series Units. XXXXXXXXXX Manageco will pay investment dealers, at the end of each calendar quarter, a trailing commission XXXXXXXXXX.

8. Pursuant to a master management agreement, Manageco has the authority and responsibility to manage and direct the investment of the assets of each Existing Fund and the offering of units of each Existing Fund. The management fee charged by Manageco to an Existing Fund in respect of the Series A Units is XXXXXXXXXX% of the net asset value of the Series A Units determined on an annual basis but calculated daily plus an annual fee of XXXXXXXXXX%, payable quarterly based on the net asset value of the Series A Units sold by investment dealers or brokers and not redeemed before the end of each quarter.

(a) Proposed Transactions

9. Manageco, as trustee of the Existing Funds, proposes to amend the Trust Agreement for each Existing Fund to create a new series of Series Units, Series F Units. As a result of the creation of a second series of Series Units, the provision of the Trust Agreement which permits the allocation of expenses attributable only to a particular series of Series Units to that series of Series Units will become effective and thus, in addition to the attributes of the Existing Fund as described in paragraph 5, each series of Series Units will be entitled to that portion of any distribution of net income and net realized capital gains of the Existing Fund equal to its proportionate share of the adjusted net income of the Existing Fund less any expenses attributable only to that particular series of Series Units.

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10. Under the Series F Criteria to be established by Manageco for the Existing Funds, Series F Units will only be offered for sale by prospectus to Canadian residents who participate in an Eligible Fee Program. XXXXXXXXXX.

11. Unitholders purchasing Series F Units generally will make their purchase without paying any sales charges or distribution fees. The management fee to be charged by Manageco to each Existing Fund in respect of the Series F Units will be equal to XXXXXXXXXX% of the net asset value of the Series F Units of the particular Existing Fund. Manageco will not pay trailing commissions to investment dealers in connection with the Series F Units. Since Manageco will not pay trailing commissions to investment dealers on Series F Units, Manageco will have lower distribution costs for the Series F Units than for the Series A Units of an Existing Fund and therefore will be in a position to charge a lower management fee to an Existing Fund for the Series F Units.

12. Manageco will establish each of the Proposed Funds as an inter vivos trust pursuant to a Trust Agreement. XXXXXXXXXX. The Proposed Funds will have a variety of investment objectives and will invest in securities that will be qualified investments for a trust governed by a registered retirement savings plan, registered retirement income fund, deferred profit sharing plan or registered education savings plan. It is intended that each of the Proposed Funds will be a mutual fund trust as defined in subsection 132(6).

13. The Trust Agreement for each Proposed Fund will authorize each Proposed Fund to issue an unlimited number of Units of only one class. Initially, the Units will be classified into two series of Series Units, Series A Units and Series F Units, for each Proposed Fund. The Series A Units and the Series F Units will be offered for sale by separate prospectuses to Canadian residents. The primary type of investor in Series A Units will be retail investors. Investors in Series F Units will be investors who meet the Series F criteria by participating in Eligible Fee Programs.

14. The Series Units of the Proposed Funds will have the same terms and conditions as those described in paragraphs 3, 5, 6 and 9 for Series Units of the Existing Funds.

15. Unitholders purchasing Series A Units of a Proposed Fund will be required to pay the same type of fees as unitholders who purchase Series A Units of the Existing Funds, as described in paragraph 7. Manageco will pay investment dealers a trailing commission XXXXXXXXXX.

16. Pursuant to the master management agreement, Manageco will charge the same management fee for the Series Units of the Proposed Funds as it does for the Series Units of the Existing Funds, as described in paragraphs 8 and 11.

17. The Trust Agreement for each Fund will specify that, if a unitholder no longer meets the Series F Criteria, then at the option of Manageco, the Series F Units held by the unitholder in the Fund may be reclassified into Series A Units of such Fund or, at the direction of the unitholder, into such other Series Units of the Fund which the unitholder is eligible to hold and is being offered at that time. In addition, the Trust Agreement for each Fund will specify that a unitholder may request the reclassification of its Series F Units into Series A Units or into any other Series Units that may be offered from time to time provided that the unitholder is eligible to hold such other Series Units. At the time of such reclassifications, the aggregate net asset value of the Series F Units to be reclassified and the aggregate net asset value of the Series A Units (or such other Series Units) into which they will be reclassified will be equal. As a result of the reclassification, the number of Series Units held by the unitholder may be adjusted to ensure that the net asset value at the time of reclassification be equal.

18. Except for the allocation of expenses which apply only to a particular series of Series Units of a Fund, a Series Unit that is reclassified as either a Series A Unit or a Series F Unit will have substantially the same rights, privileges, restrictions and conditions as it did prior to the reclassification. In particular, if a Series Unit of a Fund was purchased in a particular currency (Canadian or U.S. dollars) and was subsequently reclassified into another Series Unit, the Series Unit so reclassified is redeemable only in the currency used to purchase the Series Unit originally acquired. The unitholder will not be entitled to any proceeds of disposition, and the Series Units will not be redeemed or cancelled as a result of any reclassification from Series F Units of a Fund into Series A Units of the same Fund or from Series A Units of a Fund into Series F Units of the same Fund.

(b) Purpose of the Proposed Transactions

19. 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 by offering separate series of units of each of the Funds.

(c)

(d) Rulings 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 rulings are as follows:

A. Unitholders whose Series A Units of a Fund are reclassified as Series F Units of the same Fund, as described in paragraphs 6, 17 and 18, will not be considered to have disposed of their units by virtue only of such reclassification.

B. Unitholders whose Series F Units of a Fund are reclassified as Series A Units of the same Fund, as described in paragraphs 6, 17 and 18, will not be considered to have disposed of their units by virtue only of such reclassification.

C. In computing its income for a taxation year, each Fund will be entitled to deduct under paragraph 104(6)(b), the amount of Fund income (including taxable capital gains) that was paid or payable by the Fund to the unitholders of Series A Units and Series F Units in such taxation year pursuant to the Trust Agreement governing each Fund, and the provisions of subsection 104(7.1) will not apply to the Funds by virtue only of the implementation of the proposed transactions.

D. The amount of income of a Fund (including taxable capital gains) that is paid or payable to a unitholder in a taxation year will be included in computing the income of the unitholder under paragraph 104(13)(a).

E. The provisions of subsection 245(2) will not apply by virtue only of the implementation of the proposed transactions.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4, Advance Income Tax Rulings, and are binding on the Canada Customs and Revenue Agency provided the proposed transactions are completed within 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 Canada Customs and Revenue Agency's views on whether the Funds qualify as mutual fund trusts for purposes of the Act.

Yours truly,

for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch

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