2002 Ruling 2001-0072103 - FOREIGN PROPERTY

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: Whether debt of a trust resident in Canada is "foreign property".

Position: No

Reasons:

Debt of trust resident in Canada does not fall into definition of "foreign property" in subsection 206(1) and moreover the assets of the trust were comprised of property other than "foreign property". The fact that the risk and return on the debt issued by the trust was similar to the risk and return on certain foreign property as a result of the trust's derivative transactions did not result in the application of GAAR.

XXXXXXXXXX 						2001-007210

XXXXXXXXXX, 2002

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("Canco") - (XXXXXXXXXX )

This is in reply to your correspondence of XXXXXXXXXX requesting an advance income tax ruling for the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations and your e-mail correspondence.

DEFINITIONS

The following definitions apply in respect of this ruling.

(a) "Act" means the Income Tax Act, R.S.C. 1985, c. 1 (5th Supp.), as amended and unless otherwise specified, references herein to sections, subsections, paragraphs, subparagraphs, and clauses are references to provisions of the Act.

(b) "foreign property" has the meaning assigned in subsection 206(1).

(c) "Canco" is XXXXXXXXXX.

(d) "Issuer Trustee" is XXXXXXXXXX.

(e) "Issuer Trust" is XXXXXXXXXX.

(f) "Indenture Trustee" is XXXXXXXXXX.

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

FACTS

1. XXXXXXXXXX.

2. Canco, Issuer Trustee and Indenture Trustee are Canadian corporations as defined in subsection 89(1).

3. The shares of the capital stock of Canco cannot reasonably be considered to derive their value, directly or indirectly, primarily from foreign property.

PROPOSED TRANSACTIONS

4. Pursuant to a declaration of trust (the "Declaration of Trust") to be executed by a trust company incorporated under the laws of Canada, as trustee (the "Issuer Trustee"), a trust (the "Issuer Trust") will be established for the exclusive benefit of the beneficiaries therein described (the "Issuer Beneficiaries"). The initial trust property will be non-income producing property of nominal value, which will be provided by the Issuer Trustee. The Declaration of Trust will, among other things,

(a) provide that the Issuer Beneficiaries will consist of any one or more of the charities registered under the Act, as the same may be amended, restated or re-enacted from time to time, other than any registered charity which is a trust, which are members or otherwise part of the XXXXXXXXXX or any successor to such organization from time to time designated in writing by the Issuer Trustee in consultation with the Administrative Agent (as defined in the Declaration of Trust) on an annual basis or upon the termination of the Trust, their respective successors and assigns or, should such charities cease to exist or decline to accept a payment, such other charity registered under the Act as the same may be amended, restated or re-enacted from to time to time, other than any registered charity which is a trust, as the Issuer Trustee in its sole discretion may designate in writing from to time to time to be the recipient of the trust property (as defined in the Declaration of Trust) pursuant to the Declaration of Trust,

(b) provide for general terms and conditions with respect to the Issuer Trustee's powers and duties, including the power to issue obligations,

(c) provide for the timing, amount and manner of distributions to the Issuer Beneficiaries, and

(d) provide for normal trustee protections and other miscellaneous matters.

The affairs of the Issuer Trust will be administered in Canada. The Issuer Trust will be resident in Canada.

5. Pursuant to a servicing agreement (the "Servicing Agreement") to be entered into by and between Canco and the Issuer Trustee, the Issuer Trustee will delegate the provision of certain specified non-fiduciary services to Canco, in return for the payment of appropriate fees by the Issuer Trustee to Canco. Canco will perform such services in part in Canada and in part outside Canada.

6. Pursuant to a master trust indenture (the "Master Trust Indenture") to be entered into by and between the Issuer Trustee, Indenture Trustee and Issuer Trustee in its capacity as note agent (the "Note Agent"), the Indenture Trustee will undertake to execute certain powers in connection with the issuance of obligations by the Issuer Trust. In particular, the Master Trust Indenture will, among other things, provide for:

(a) various specific modalities (e.g., modalities as to the aggregate amount of the obligations, the interest rate thereon and their term), which could be selected in respect of a particular series of obligations to be issued by the Issuer Trust, and

(b) general terms and conditions with respect to the Indenture Trustee's powers and duties, including powers and duties over any security to be held by the Indenture Trustee.

7. Pursuant to a supplemental indenture, which incorporates a supplemental program memorandum (the "Series 1 SPM"), to be entered into by and between the Issuer Trustee, the Indenture Trustee and the Note Agent, as a supplement to the Master Trust Indenture, the Issuer Trustee will designate the modalities of that particular series of obligations to be issued by the Issuer Trust (the "Series 1 Issuer Obligations") as follows:

? The Series 1 Issuer Obligations will be issued in denominations of $XXXXXXXXXX bearing interest at the rate of XXXXXXXXXX% per annum and maturing XXXXXXXXXX.

? The Series 1 Issuer Obligations issued will have an aggregate principal amount of no more than $XXXXXXXXXX. These Series 1 Issuer Obligations will be debt of the Issuer Trust. Pursuant to the terms and conditions of the Series 1 Issuer Obligations, the Issuer Trustee will, among other things, undertake:

? to make periodic payments (the "Series 1 Issuer Obligation Payments") to the Indenture Trustee on behalf of the Investors (described in paragraph 8 below) calculated as a function of XXXXXXXXXX% per annum applied to the aggregate face amount of the Series 1 Issuer Obligations (the "Principal Amount"), and

? to make a final payment to the Indenture Trustee on behalf of the Investors equal to the Principal Amount. In certain circumstances in which the Series 1 Issuer Obligations will be subject to early mandatory redemption (in whole or in part) prior to their stated maturity date ("Mandatory Early Redemption"), the recourse of the Investors will be limited to assets of the Issuer Trust having a value equal to the amount by which the Principal Amount (or the relevant portion thereof) exceeds the sum of (i) the Cash Settlement Amount (as defined in the Series 1 SPM and described below), if any, and (ii) the aggregate costs to the Issuer Trust related to the unwinding (in whole or in part) of the Periodic Swap and the Default Swap (as described in paragraphs 10 and 11 below) prior to the maturity date. XXXXXXXXXX. The "Cash Settlement Amount" is an amount payable by the Issuer Trust pursuant to the Default Swap upon the occurrence of one or more specified credit events with respect to any of XXXXXXXXXX (the "reference entities") or certain obligations of a reference entity XXXXXXXXXX.

8. Pursuant to a master programme memorandum and the Series 1 SPM (together, the "Offering Memorandum") prepared in accordance with applicable securities laws, the Issuer Trust will offer the Series 1 Issuer Obligations to a number of investors to which the Issuer Trust is not related (the "Investors"). XXXXXXXXXX

9. The Issuer Trustee will invest the net proceeds of the issuance of the Series 1 Issuer Obligations in securities and other assets which will not constitute foreign property (the "Series 1 Issuer Investments"). The Issuer Trust will hold such investments to maturity or may from time to time dispose of such investments and acquire other, similar investments (which will not constitute foreign property) in substitution therefor. Pursuant to the terms and conditions of the instruments documenting the Series 1 Issuer Obligations, the Issuer Trustee will pledge the Series 1 Issuer Investments and certain other property and/or rights it may hold from time to time (the "Collateral") to the Indenture Trustee on behalf of the Investors as collateral security for the performance of the Issuer Trustee's obligations under the Series 1 Issuer Obligations (the "Investor Pledge").

10. Pursuant to a master agreement prepared in the form of the International Swaps and Derivatives Association ("ISDA") Master Agreement (the "Master Agreement"), together with a schedule thereto (the "Schedule") and a related confirmation of terms and conditions (the "Confirmation") and the Series 1 SPM, the Issuer Trustee and Canco will enter into a swap arrangement (the "Periodic Swap") whereby:

the Issuer Trustee will undertake to make periodic payments to Canco (the "Periodic Issuer Swap Payments") calculated as the amounts, if any, by which:

? the amount, if any, determined for each period, as a function of the periodic return to the Issuer Trust in respect of the Series 1 Issuer Investments,

exceeds

? an amount, determined for each such period, as XXXXXXXXXX % per annum of the Principal Amount, and

Canco will undertake to make periodic payments to the Issuer Trustee (the "Periodic Canco Swap Payments") calculated as the amounts, if any, by which:

? an amount determined for each such period, as XXXXXXXXXX % per annum applied to the Principal Amount,

exceeds

? the amount, if any, determined for each such period, as a function of the periodic return to the Issuer Trust in respect of the Series 1 Issuer Investments. Provided that Mandatory Early Redemption in full has not occurred, the Issuer Trust will undertake to pay the liquidation proceeds of the Collateral to Canco and Canco will undertake to pay an amount equal to the Principal Amount to the Issuer Trust, in each case, on the maturity date of the Series 1 Issuer Obligations.

11. Pursuant to the Master Agreement, together with the Schedule and a related Confirmation, and the Series 1 SPM, the Issuer Trustee and Canco will enter into a second swap arrangement (the "Default Swap") whereby:

(a) the Issuer Trustee will undertake to make a payment to Canco equal to the Cash Settlement Amount, after a specified period, and

(b) Canco will undertake to make periodic payments to the Issuer Trustee in an amount equal to XXXXXXXXXX% per annum of the Principal Amount.

(c) Pursuant to the terms and conditions of the various instruments documenting the Periodic Swap and the Default Swap (collectively, the "Swaps"), the Issuer Trustee will pledge the Collateral to the Indenture Trustee on behalf of Canco as collateral security for the performance of the Issuer Trustee's obligations under the Swaps (the "Canco Pledge"). The Canco Pledge will rank ahead of the Investor Pledge.

If a Mandatory Early Redemption occurs (in whole or in part), the Swaps will terminate (in whole or in part) and a termination payment will be payable by either Canco or the Issuer Trust to the other pursuant to the Master Agreement.

12. It is expected that the Issuer Trust would have no net income from the issuance of the Series 1 Issuer Obligations and the entering into of the swaps described in paragraphs 10 and 11 above. However, there will be a payment of approximately $XXXXXXXXXX by Canco to the Issuer Trust in order to induce the Issuer Trust to enter into those swaps. Therefore, it is expected that there will be net income earned by the Issuer Trust which will be distributed to the beneficiaries.

PURPOSE OF PROPOSED TRANSACTIONS

13. The purpose of the proposed series of transactions is to permit Canco to offer Series 1 Issuer Obligations to Canadian pension plans and other clientele without such investments being included in the investors' portfolios as foreign property. Each of the Proposed Transactions has this purpose.

ADDITIONAL INFORMATION

14. To the best of our knowledge and that of the responsible officers of Canco, Issuer Trust, Issuer Trustee, and Indenture Trustee (together the "Parties Involved") none of the issues raised in this ruling request is

a) in an earlier return of any of the Parties Involved or a related person;

b) being considered by a tax services office or taxation centre in connection with a previously filed tax return of any of the Parties Involved or a related person;

c) under objection by any of the Parties Involved or a related person; or

d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired.

RULINGS GIVEN

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, we rule as follows:

A. The Series 1 Issuer Obligations, as described in paragraph 7 above, will not constitute foreign property.

B. Subsection 245(2) will not be applied to redetermine the tax consequences confirmed in ruling A above.

The above rulings, which are based on the Act in its present form and do not take into account any proposed amendments thereto, are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 dated January 29, 2001, and are binding on the Canada Customs and Revenue Agency provided the proposed transactions are completed by XXXXXXXXXX.

COMMENT

Nothing in this letter should be construed as confirmation that the CCRA has reviewed or made a determination that the Series 1 Issuer Obligations are debt rather than units in Issuer Trust.

Yours truly,

XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate