21 November 2001 External T.I. 2001-0067455 - Multi-class Mutual Fund Trust - Disposition

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 CCRA.

Prenez note que ce document, bien qu'exact au moment émis, peut ne pas représenter la position actuelle de l'ADRC.

Principal Issues:

If units of a class of a multi-class mutual fund trust are changed (exchanged, converted, reclassified or redesignated) to another class or series of the same mutual fund trust, is there a disposition? The trust agreement establishing the particular mutual fund trust provides that each class of the trust will have different underlying assets and also provides for changes between classes.

Position TAKEN
Yes

Reasons FOR POSITION TAKEN
Whether or not there is a disposition of units when units of a class of a mutual trust are changed to another class of the same mutual fund trust is a question of fact.  Previously, we have indicated that where the trust agreement governing a particular mutual fund trust provides that more than one class of units may be issued by the trust and makes provision for changes between classes of units of that fund, a change of units generally will not result in a disposition.  For example, refer to documents: 2000-004156, 2000-004005, 2000-002298, 3-990500.)  However, in those instances, it was our understanding that the attributes of each class of units of the trust were substantially the same.  In this case, since each class of units has different investment objectives and derives its value from different property of the trust (i.e., the assets underlying each class of units are different), a change between classes will result in a disposition.
				2001-006745
XXXXXXXXXX 				G.W. Keable
(613) 957-2046
November 21, 2001

Dear XXXXXXXXXX:

Re: Changing Between Classes of a Mutual Fund Trust

This is in reply to your letter of January 26, 2001, concerning the above-noted subject and the subsequent telephone conversation of June 4, 2001 (XXXXXXXXXX/Keable) on this matter. We apologize for the delay in responding to your letter.

In your letter you describe the following hypothetical situation. A mutual fund trust agreement establishes a mutual fund trust that has four classes of units. Each class of units has different underlying assets: Class A only invests in U.S. equities, Class B only invests in bonds and other fixed income assets, Class C only invests in Canadian equities and Class D only invests in technology stocks. The trust agreement provides for exchanges between classes of units. Your letter also made reference to a technical interpretation dated December 7, 2000 (document number 2000-004005) issued by the Canada Customs and Revenue Agency wherein it was stated:

"Where the trust agreement governing a particular mutual fund trust provides that more than one class or series of units may be issued by the fund and makes provision for changes between classes or series of units of that fund, a change of units generally will not result in a disposition."

You have requested confirmation that there would not be a disposition when a unitholder changes one class of units of a mutual fund trust to another class of units of the same mutual fund trust when each class of the trust has different underlying assets.

Our Comments

As stated in technical interpretation 2000-004005, whether or not there is a disposition when units of one class of a mutual fund trust owned by a unitholder are changed to another class of the same mutual fund trust is a question of fact. In several advance income tax rulings, we have also indicated that a change from one class of units to another class of units of the same mutual fund trust will not result in a disposition where the trust agreement governing the particular mutual fund trust provides that more than one class of units may be issued and makes provision for changes between the classes. However, inherent in those rulings, it was our understanding that the attributes of each class of units of a particular mutual fund trust were substantially the same (even though each class may have different investment requirements - i.e., a minimum dollar investment, the assets underlying each class of units were the same), the unitholder would not be entitled to proceeds of disposition for the units, and the changed units would not be cancelled or redeemed. In the hypothetical situation described above, the attributes of each class of units do not appear to be substantially the same because of the fact that each class of units has different underlying assets and different investment objectives. Therefore, in this particular situation, it is our view that changes between classes of the same mutual fund trust would result in a disposition.

We trust these comments will be of assistance.

Yours truly,

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

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