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: Will the use of swaps so that Canadian bank deposits earn income based on the returns earned by a XXXXXXXXXX trust that invests in foreign property result in the application of GAAR?
Position: No.
Reasons: The use of derivatives in respect of the returns on the Canadian property does not result in the property being considered foreign property for purposes of the Act.
XXXXXXXXXX 2001-007914
XXXXXXXXXX, 2001
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Company") (XXXXXXXXXX)
This is in reply to your letters of XXXXXXXXXX, requesting an advance income tax ruling on behalf of the above-noted taxpayer. We also acknowledge the information provided during our various telephone conversations (XXXXXXXXXX).
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
Facts
1. The Company is a taxable Canadian corporation. The Company's business includes the management of mutual fund trusts. The expression "taxable Canadian corporation" has the meaning assigned by subsection 89(1) of the Income Tax Act (the "Act").
The Company's head office is located at XXXXXXXXXX. The Company files its tax returns with the XXXXXXXXXX Tax Centre and is located within the area served by the XXXXXXXXXX Tax Services Office.
Each of XXXXXXXXXX (each an "Underlying Fund", and collectively referred to as the "Underlying Funds") is a "mutual fund trust" within the meaning assigned by subsection 132(6) of the Act. The Company is the manager and trustee of each of the Underlying Funds. The Underlying Funds are not "registered investments" within the meaning assigned by subsection 204.4(1) of the Act and units of each of the Underlying Funds are "foreign property" within the meaning assigned by subsection 206(1) of the Act.
3. Each of XXXXXXXXXX (the "RSP Funds") is a mutual fund trust. The Company is the manager and trustee of each of the RSP Funds. The RSP Funds are registered investments under paragraph 204.4(2)(c) of the Act for registered retirement savings plans, registered retirement income funds and deferred profit sharing plans (collectively, "Registered Plans").
4. Each RSP Fund currently invests, at all relevant times, not less than XXXXXXXXXX% of its property in the Canadian money market, such as treasury bills of the Government of Canada, and in cash ("Money Market Securities"). Each RSP Fund currently invests up to XXXXXXXXXX% of its property in units of an Underlying Fund having similar investment objectives (the "Reference Fund"). Each RSP Fund achieves its primary investment objective by entering into one or more forward contracts (each, a "Forward Contract") with one or more arm's length financial institutions (each, a "Counterparty"). Each Forward Contract provides for a payment from time to time of an amount either by the RSP Fund to the Counterparty or vice versa which is linked to the investment returns generated by a notional investment in the Reference Fund. The arrangement was the subject of an advance income tax ruling (ruling #991458 dated XXXXXXXXXX, 1999).
Proposed Transactions
5. Each RSP Fund now proposes to achieve its primary investment objective by entering into the bank deposit arrangements described below in place of entering into one or more Forward Contracts. Each RSP Fund will continue to invest not less than XXXXXXXXXX% of its assets at any relevant time in a combination of Money Market Securities and deposits with a Canadian chartered bank (the "Bank") pursuant to the arrangements described below. The deposit made by an RSP Fund will be evidenced by a Deposit Confirmation executed between the Bank and the RSP Fund (the "Bank Deposit'). It is anticipated that approximately $XXXXXXXXXX will be invested with the Bank through the RSP Funds.
6. Each Bank Deposit will mature on the next business day after it is issued for an amount linked to the investment returns generated by a notional number of units in the Reference Fund having an initial value equal to the original deposit amount of that Bank Deposit. Generally, if the value of the notional units of the Reference Fund has increased, then the Bank Deposit will mature for an amount greater than the original deposit amount and, if the value of the notional units for the Reference Fund has decreased, then the Bank Deposit will mature for an amount less than the original deposit amount. The maturity amount will be reduced by a servicing fee paid to the Bank pursuant to the terms of the Bank Deposit.
7. A Bank Deposit will not provide the RSP Funds with any right to acquire or vote units of the Reference Fund or to have any ownership interest in the Reference Fund or in any of the securities held by the Reference Fund. Subject to 12 below, each RSP Fund is entitled only to a cash payment of the Bank Deposit maturity amount. The timing, amount and character of payments under a Bank Deposit will differ from the timing, amount and character of payments that would be made to an investor who made an equivalent investment in the Reference Fund.
8. On the same day that it issues the Bank Deposit, the Bank will advance the proceeds it receives from the issue of the Bank Deposit to a special purpose trust (the "Trust"), which will be evidenced by a note (the "Trust Note") issued to the Bank. The Trust will be established by a declaration of trust made by the trustee, XXXXXXXXXX (the "Trustee"), solely for the purposes of carrying out the transactions described herein. The Trustee is a taxable Canadian corporation with its principal office in XXXXXXXXXX. The beneficiaries of the Trust will be designated in writing by the Trustee on an annual basis and will be one or more charities registered under the Act. The Trust Note will mature on the next business day after it is issued for its principal amount plus interest at the rate equal to the 30 day Canadian Dollar Bankers Acceptance rate on the issue date.
9. Simultaneously with the issue of the Trust Note, the Bank and the Trust will enter into a total return swap agreement (the "Corresponding Swap") based on a notional principal amount equal to the original deposit amount of the Trust Note (the "Notional Principal Amount"). The Trust will agree to pay the Bank an amount linked to the positive investment returns generated by a notional number of units of the Reference Fund having an initial value equal to the Notional Principal Amount. The Bank will agree to pay the Trust an amount linked to the negative investment returns generated by a notional number of units of the Reference Funds having an initial value equal to the Notional Principal Amount plus an amount equal to the interest received in respect of the Trust Note. The Corresponding Swap will terminate on the next business day after it is entered into.
10. Both the Trust Note and the Corresponding Swap will be entered into contemporaneously with the Bank Deposit. In order to hedge its obligation under the Corresponding Swap, the Trust may, but is not required to, acquire units of the Reference Fund.
11. XXXXXXXXXX.
12. XXXXXXXXXX.
13. New funds (the "New RSP Funds") may be established to enter into the proposed transactions described in 5 to 12 above, in a manner similar to the RSP Funds. The New RSP Funds will be registered investments effective from the date they are created.
14. Unitholders of the RSP Funds and of a New RSP Fund will receive a lesser investment return than investors in the Reference Fund. The public documents relating to the RSP Funds state that if an investor is investing through a non-registered account or through a registered education savings plan, or if its foreign property holdings is less than the limit allowed under the Act, a direct investment should be made in the Underlying Fund. A direct investment in the Underlying Fund will provide a better return and generally, better tax treatment, because most of the distributions made by the RSP Fund will be considered income and taxed at higher rates than the capital gains distributions paid by the Underlying Funds.
15. At all relevant times, the cost amount of the Money Market Securities and the Bank Deposit or, if the put right is exercised, then the Trust Note and Corresponding Swap, held by an RSP Fund will exceed XXXXXXXXXX% of the cost amount of all the property of that RSP Fund.
Purpose of the Proposed Transactions
16. The purpose of the proposed transactions is to provide an alternative to the existing RSP Fund arrangements, under which Forward Contracts are used to provide investors in the RSP Funds with the economic equivalent in the Underlying Funds. XXXXXXXXXX.
17. To the best of your knowledge and the knowledge of the Company, none of the issues involved in this request for an advance income tax ruling is:
(a) in an earlier return of the Company or of a person related to the Company;
(b) being considered by a tax services office or tax centre in connection with a previously-filed return of the Company or of a person related to the Company;
(c) under objection by the Company or by a person related to the Company;
(d) before the courts; nor
(e) the subject of a ruling, other than the ruling referred to in 4 above, previously issued by the Income Tax Rulings Directorate to the Company.
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, and provided that the proposed transactions are as described above, we rule as follows:
A. The Bank Deposits acquired by the RSP Funds will not constitute foreign property for purposes of Part XI of the Act.
B. For the purposes of subsections 248(1) and 206(2) of the Act, the cost amount of a Bank Deposit to an RSP Fund or a New RSP Fund will be equal to its original deposit amount.
C. The servicing fee paid to the Bank by the RSP Funds, as described in 6 above, will be deductible in computing profits under subsection 9(1) of the Act.
D. Subsection 245(2) of the Act will not be applied to redetermine the tax consequences confirmed in the Rulings given.
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 in respect of the proposed transactions that are completed by XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
Financial Industries Division
Income Tax Rulings Directorate
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