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. Does 107(4.1) apply to the REIT given that to compensate unitholders that are not party to the unique voting feature in the declaration of trust that will extend to a certain group of unitholders, they will have enhanced income entitlements?
2. Does the operation of parking lots by the REIT meet 108(2)(b)?
3. Are the interests in the REIT described by reference to units given the unique voting feature?
Position:
1. No
2. Yes
3. Yes
Reasons:
1. Reasoning similar to published ATR-65;
2. Operation of the parking lots is part of the leasing and managing of the properties owned by the REIT.
3. The voting feature by itself does not detract from the fact that the interest in the REIT are described by reference to units.
XXXXXXXXXX 2001-007569
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you requested advance income tax rulings 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:
i) contained in earlier returns of the taxpayers 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 taxpayers or a related person;
iii) under objection by the taxpayers or a related person;
iv) before the courts; or
v) the subject of a ruling previously issued by the Directorate to the taxpayers or a related person.
Definitions
In this letter, unless otherwise indicated, all statute references are to the Canadian Income Tax Act and Regulations (R.S.C. 1985, 5th supplement, c.1 as amended) (the "Act"), and the following terms have the meaning specified:
(a) "ACo" means XXXXXXXXXX.
(b) "XCo" means XXXXXXXXXX, a subsidiary of ACo.
(c) "YCo" means XXXXXXXXXX, an indirect wholly-owned subsidiary of XCo.
(d) "REIT-1" means XXXXXXXXXX.
(e) XXXXXXXXXX.
(f) "New Project" means the XXXXXXXXXX.
(g) "Initial Office Properties" means XXXXXXXXXX.
(h) "Complex 1" means XXXXXXXXXX.
(i) "Mr.Z" means XXXXXXXXXX.
(j) "Z Family" means, collectively, (i) Mr.Z; (ii) any individual who is connected with Mr.Z by blood relationship, marriage or adoption for the purposes of the Act; (iii) all trusts of which Mr.Z is a trustee, established primarily for the benefit of the persons listed in (i) and (ii) above, members of the W Family, or any combination thereof; (iv) partnerships, corporations or other entities, the majority of the equity interest of which is held by any combination of the foregoing; and (v) the executors or administrators of the persons mentioned in (i) and (ii).
(k) "Mr.W" means XXXXXXXXXX.
(l) "W Family" means, collectively, (i) Mr.W; (ii) any individual who is connected with Mr.W by blood relationship, marriage or adoption for the purposes of the Act; (iii) all trusts of which Mr.W is a trustee, established primarily for the benefit of the persons listed in (i) and (ii) above, members of the Z Family, or any combination thereof; (iv) partnerships, corporations or other entities, the majority of the equity interest of which is held by a combination of the foregoing; and (v) the executors or administrators of the persons mentioned in (i) and (ii).
Facts
The relevant background facts can be summarized as follows:
1. ACo is a "public corporation" as defined in subsection 89(1). Its shares are listed on the "XXXXXXXXXX".
2. ACo, XCo and YCo are residents of Canada for the purposes of the Act and the trust referred to below will, at all times, be a resident of Canada.
3. XCo owns a number of office properties including the Initial Office Properties. XCo is also currently developing a new office building, the New Project.
4. YCo owns an interest in Complex 1. YCo has issued $XXXXXXXXXX of first mortgage bonds. Such first mortgage bonds are secured by a fixed and floating charge and security interest on all of the assets of YCo.
5. A trust (the "Trust") has been established pursuant to a declaration of trust (the "Declaration of Trust"). A person has contributed $XXXXXXXXXX to the Trust and has been issued one unit of the Trust in order to create the Trust. There is only one class of units.
Proposed Transactions
6. Prior to the completion of the offering referred to below, the Declaration of Trust will be amended and restated. References to the Declaration of Trust hereafter are to the Declaration of Trust as so amended and restated. The name of the Trust will be "REIT-1". At the closing of the offering referred to below, the number of trustees of the Trust is expected to be XXXXXXXXXX. Trustees not appointed by XCo as described in paragraph 18 below must be independent of ACo, XCo and YCo.
7. The Trust is authorized to issue an unlimited number of units ("Units") of one class, each of which represents a unitholder's ("Unitholder's ") proportionate undivided beneficial interest in the Trust.
8. Units will be offered to the public by the Trust pursuant to the terms of a prospectus (the "Prospectus") to be filed with the securities regulatory authority of each province and territory of Canada (the "Offering"). The price per Unit under the Offering is expected to be $XXXXXXXXXX (the "Offering Price"). The gross proceeds of the Offering are expected to be $XXXXXXXXXX. The Units of the Trust will be listed on the XXXXXXXXXX at closing of the Offering.
9. Immediately after the closing of the Offering, the Trust will issue, convertible debentures of the Trust to XCo as partial consideration for the Initial Office Properties that it will purchase from XCo as described in paragraph 10 below. The convertible debentures will bear interest at a specified rate, payable quarterly, and are expected to mature in XXXXXXXXXX. Each debenture will be convertible into Units at a conversion rate to be established.
10. The Trust will use the proceeds of the Offering to pay issue expenses and to fund a portion of the cash consideration payable as part of the following transactions that will be completed immediately following the closing of the Offering:
(a) The Trust will purchase the Initial Office Properties from XCo for their fair market value. The consideration payable will consist of cash, the issuance of convertible debentures described in paragraph 9 above, the assumption of certain existing mortgages secured against the Initial Office Properties, the assumption of certain other liabilities and the issuance of Units.
(b) The Trust will make a "mezzanine" interest-bearing loan to XCo to fund a portion of the costs incurred by XCo to develop the New Project. The Trust will have an option to acquire the New Project at completion. The loan will be secured by a second mortgage on the New Project. ACo will guarantee this loan.
(c) The Trust will make a participating loan to YCo. The terms of this loan have yet to be finalized but the participation feature will relate to Complex 1. The loan will be evidenced by a loan agreement and a promissory note but will not be secured by a mortgage. This loan will be guaranteed by the shareholders of YCo and all of the shares of YCo will be pledged to the Trust as security for the guarantee.
The properties referred to above are all located in Canada.
11. Certain of the Initial Office Properties have underground and/or surface parking lots beneath or adjacent to the properties, the main purpose of which is to serve the tenants of the office building, including their clients or customers. Any additional properties that the Trust may acquire in the future may also have underground and/or surface parking lots beneath or adjacent to them. A fee will be charged by the Trust for the use of the parking spaces either on a monthly and/or daily basis. Many of the parking lots will initially be managed by a division of XCo, in its capacity as property manager of the buildings owned by the Trust. Any parking lot operations undertaken by the Trust will be a part of the leasing and managing of the Initial Office Properties or any additional properties the Trust may acquire.
12. XCo will provide the services of certain of its employees to the Trust who will act as the Trust's management. XCo will also provide certain administrative support services to the Trust. XCo will act as property manager and leasing manager for the Trust and will receive fees from the Trust.
13. It is intended that the Trust will satisfy the conditions in paragraph 108(2)(b) such that it qualifies as a "unit trust" at all times. The Initial Office Properties (including the parking lots referred to in paragraph 11 above) will be capital property of the Trust. It is also intended that the Trust continuously qualify as a "mutual fund trust" under subsection 132(6) and that the Trust will make the election contemplated by subsection 132(6.1) that it be deemed to be a mutual fund trust from the time it was established. The Declaration of Trust will contain restrictions on the ability of non-residents to own Units of the Trust such that non-residents may not be the beneficial owners of more than XXXXXXXXXX% of the Units.
14. The Trust will make monthly cash distributions to Unitholders. It is expected that distributions will consist partly of income (computed in accordance with the provisions of the Act other than subsection 104(6)) and that the balance will be capital. The Declaration of Trust will provide that, if necessary, on XXXXXXXXXX of each year, the Trust will distribute an additional amount to Unitholders such that the Trust will not be liable for tax under Part I of the Act for such year. The Trust intends to adopt a distribution reinvestment plan.
15. Under the Declaration of Trust, Units will be identical in all respects. On termination of the Trust, holders of Units will share equally in any remaining property of the Trust.
16. The Declaration of Trust will define the "XCo Group" to mean (i) XCo and its affiliates, (ii) so long as he is actively involved in the management of ACo, XCo or the Trust as a senior officer, Mr.Z and each other member of the Z Family (iii) so long as he is actively involved in the management of ACo, XCo or the Trust as a senior officer, Mr.W and each member of the W Family and (iv) certain lenders that have been granted a security interest in Units held by the foregoing persons.
17. The Declaration of Trust will provide that XCo and its affiliates will be entitled to enhanced voting rights (" the Voting Right"), provided that XCo and its affiliates directly or indirectly beneficially own or control at least XXXXXXXXXX Units subject to the Voting Right and the XCo Group directly or indirectly beneficially owns or controls at least 10% of all outstanding Units (the "Minimum Ownership Threshold"). If XCo and its affiliates directly or indirectly beneficially own or control less than a majority of the outstanding Units but at least XXXXXXXXXX Units, the Voting Right will entitle XCo to exercise XXXXXXXXXX% of the votes attached to all Units at any meeting of Unitholders. If XCo and its affiliates directly or indirectly beneficially own or control less than XXXXXXXXXX Units, the percentage of votes which XCo and its affiliates will be entitled to cast at any meeting of Unitholders pursuant to the Voting Right will be irrevocably reduced thereafter and will be equal to the percentage determined by multiplying XXXXXXXXXX% by a fraction, the numerator of which is the number of such Units so owned or controlled and the denominator of which is XXXXXXXXXX Units. For example, if XCo and its affiliates were to own less than XXXXXXXXXX% of the outstanding Units but own at least XXXXXXXXXX Units and the Minimum Ownership Threshold continues to be met, XCo and its affiliates would have the right to cast XXXXXXXXXX% of the votes attaching to all Units at any meeting of Unitholders. If XCo and its affiliates were to own only XXXXXXXXXX Units, XCo would have the right to cast only XXXXXXXXXX% of the votes attached to all Units at any meeting of Unitholders provided that the Minimum Ownership Threshold continues to be met. The Voting Right terminates and forever ceases to be applicable if at any time the Minimum Ownership Threshold ceases to be met. The Declaration of Trust will provide that the distributions referred to in paragraph 14 above on Units that are not subject to the Voting Right, whether or not owned by XCo and its affiliates, will be, on a per Unit basis, XXXXXXXXXX% of the distributions payable on Units beneficially owned directly or indirectly by XCo and its affiliates that are subject to the Voting Right. For clarity, the Prospectus will describe that the distributions paid to XCo and its affiliates on up to XXXXXXXXXX Units that are subject to the Voting Right, will be XXXXXXXXXX % less than distributions paid on each other Unit. Upon a transfer of Units subject to the Voting Right (other than a transfer to an affiliate of XCo), such Units will cease to be subject to the Voting Right. XCo and its affiliates have agreed that they will not dispose of any Units subject to the Voting Right (except for transfers among themselves) for a period of XXXXXXXXXX following the closing of the Offering except for transfers of such Units as security for loans to XCo and other obligations of XCo to the Trust. The Voting Right will also terminate in the event of certain acquisitions of control of ACo or XCo.
18. The Declaration of Trust will provide that XCo will have the right to appoint (i) XXXXXXXXXX trustees if XCo (and its affiliates) directly or indirectly beneficially own or control at least XXXXXXXXXX Units which entitle it to the Voting Right or the XCo Group directly or indirectly beneficially owns or controls at least XXXXXXXXXX% of the outstanding Units (ii) XXXXXXXXXX trustees if XCo (and its affiliates) directly or indirectly beneficially owns or controls at least XXXXXXXXXX Units which entitle it to the Voting Right or the XCo Group directly or indirectly beneficially owns or controls at least XXXXXXXXXX% of the outstanding Units, or (iii) one trustee if XCo (and its affiliates) directly or indirectly beneficially owns or controls at least XXXXXXXXXX Units which entitle it to the Voting Right or the XCo Group directly or indirectly beneficially owns or controls at least XXXXXXXXXX% of the outstanding Units.
19. The Declaration of Trust will provide that, on a resolution to approve the termination of the Trust or the sale of all or substantially all of the property of the Trust (which could include the Initial Office Properties and any substituted property) (a "Sale Resolution"), XCo may not cast more than XXXXXXXXXX% of the votes attached to all outstanding Units against such resolution or cast more than XXXXXXXXXX% of the votes attached to all outstanding Units in favour of such transaction. Such a resolution will require approval of XXXXXXXXXX% of the votes cast at the meeting of Unitholders at which the resolution is considered. In short, XCo will not, by itself have votes sufficient to veto a resolution to sell all or substantially all of the property of the Trust or to terminate the Trust and will not, by itself, have votes sufficient to approve the sale of all or substantially all of the property of the Trust or the termination of the Trust.
20. Immediately following the completion of the proposed transactions, XCo is expected to own approximately XXXXXXXXXX% of the outstanding Units depending on the size of the Offering.
Purpose of the Proposed Transactions
The purpose of the proposed transactions is to enhance value for ACo's shareholders through the creation of the Trust and completion of the Offering. The purpose of enabling XCo (and its affiliates) to exercise additional voting rights is to ensure that XCo has effective control over the selection of the trustees of the Trust as well as other fundamental changes relating to the Trust. As long as XCo continues to hold at least XXXXXXXXXX Units, it will have the ability to appoint a number of trustees and sufficient votes to be able to select the remaining trustees, although such remaining trustees must be independent of the ACo, XCo, and YCo. In addition, by virtue of such additional voting rights, XCo can effectively block any fundamental change proposed to be made to the Trust except a Sale Resolution. ACo has been advised by the lead underwriter for the Offering that the Offering cannot be marketed effectively if public holders of Units are not entitled to a greater share of distributions on a per Unit basis than XCo (and its affiliates) in light of XCo's additional voting rights. From a commercial perspective, it is similar to the case where a corporation has two classes of shares and holders of the class of shares with subordinate voting rights are entitled to a preferential dividend to compensate for the limited nature of their voting rights.
Rulings Given
Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof, the proposed transactions are carried out as herein described, our advance income tax rulings are as follows:
A. The provisions of the Declaration of Trust described in paragraphs 17, 18, and 19 above will not, in and of themselves, result in the interest of each beneficiary under the Trust not being described by reference to Units for the purposes of subsection 108(2).
B. The operation of underground and/or surface parking lots, as described in paragraph 11 above, will constitute an undertaking of managing real property or an interest in real property for the purposes of paragraph 108(2)(b).
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 Trust a deduction under subsection 104(6)(b).
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4 issued by the Canada Customs and Revenue Agency (CCRA) on January 29, 2001, and are binding on the CCRA provided that the proposed transactions are completed on or before the date that is six months from the date of this letter. These rulings are based on the Act in its present form and do not take into account the effects of any proposed amendments thereto.
Yours truly,
XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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