2001 Ruling 2001-0081903

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.

XXXXXXXXXX 2001-008190

XXXXXXXXXX, 2001

Dear Sirs:

Re: XXXXXXXXXX (the "Company")
XXXXXXXXXX
XXXXXXXXXX
Advance Income Tax Ruling

This is in reply to your request of XXXXXXXXXX on behalf of the Company for an income tax ruling. We acknowledge your subsequent submission of XXXXXXXXXX and our related telephone conversations.

To the best of your knowledge and that of the Company, none of the issues involved in this ruling request is:

(i) in an earlier return of the Company or a related person,

(ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of the Company or a related person,

(iii) under objection by the Company or a related person,

(iv) before the courts and no judgment has been issued in respect thereof, or

(v) the subject of a ruling previously considered by the Directorate in respect of the Company or a related person.

Definitions

The following terms have the meanings specified:

"Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended;

"Cash Redemption Price" means the price which the MFT Unitholders are entitled to receive upon the redemption of their MFT Units. It is equal to the lesser of:

(i) XXXXXXXXXX% of the daily weighted average price at which the MFT Units have traded on the principal exchange on which MFT Units are listed (or, if the MFT Units are not listed on any exchange, on the principal market on which the MFT Units are quoted for trading) during the period of the last ten days of trading on such exchange or market immediately prior to the date on which the MFT Units were tendered for redemption; and

(ii) the closing price (or at the average of the highest and lowest prices if there is no closing price provided) of the Units on the principal exchange on which MFT Units are listed (or, if the MFT Units are not listed on any exchange, on the principal market on which the MFT Units are quoted for trading) if there was a trade on the date on which the Units were tendered for redemption, or at the average of the last bid and last ask prices if there was no trading on the date on which the Units were tendered for redemption;

"CDS" means Canadian Depository for Securities Limited;

"Cogeneration Assets" as defined in 3;

"cost amount" as defined in subsection 248(1) of the Act;

"CT" means XXXXXXXXXX, and is described in 14;

"CT Notes" means promissory notes issued by CT, and may be used to refer to Series 1 CT Notes, Series 2 CT Notes and Series 3 CT Notes;

"CT Trust Agreement" as defined in 14;

"CT Unitholder" as defined in 14;

"CT Units" as defined in 14;

"In Specie Redemption Price" as defined in 12;

"MFT" means XXXXXXXXXX, and is described in 4;

"MFT Trust Agreement" as defined in 4;

"MFT Unitholder" as defined in 4;

"MFT Units" as defined in 4;

"mutual fund trust" as defined in subsection 132(6) of the Act;

"personal trust" as defined in subsection 248(1) of the Act;

"Prospectus" as defined in 4;

"public corporation" as defined in subsection 89(1) of the Act;

"Regulations" means the Income Tax Regulations;

"relevant period for the particular month" as defined in subsection 5000(7) of the Regulations;

"Secured Note Indenture" as defined in 21;

"Series 1 CT Notes" as defined in 20;

"Series 2 CT Notes" as defined in 22;

"Series 3 CT Notes" as defined in 24;

"taxable Canadian corporation" as defined in subsection 89(1) of the Act; and

"unit trust" as defined in subsection 108(2) of the Act.

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

Facts

1. The Company's Business Number is XXXXXXXXXX and it files its income tax returns with the XXXXXXXXXX Tax Services Office.

2. The Company is a taxable Canadian corporation and a public corporation.

3. The Company owns cogeneration assets located in and around XXXXXXXXXX (the "Cogeneration Assets"). The Company has intensified its focus on its core business and as a result wishes to monetize its Cogeneration Assets by selling all of its interest using the transactions more completely described below and in a draft prospectus.

Proposed Transactions

4. MFT will be an open-ended inter vivos trust established by a trust agreement (the "MFT Trust Agreement") under the laws of the Province of XXXXXXXXXX for the purpose of owning all of the CT Units and the Series 1 CT Notes. The patrimony of MFT will be transferred in trust and will constitute a patrimony by appropriation, autonomous and distinct from that of settlors, the trustee or any beneficiary. The interest of each beneficiary (an "MFT Unitholder") will be described by reference to units of MFT ("MFT Units"). Pursuant to the MFT Trust Agreement, the MFT Units represent the undivided beneficial interest of the holders thereof in MFT. Each MFT Unit carries one vote at meetings of MFT Unitholders and an MFT Unitholder is entitled to participate equally in distributions by MFT and, in the event of any required distribution of all of the property of MFT, in the net assets of MFT after satisfaction of all liabilities of MFT. The MFT Trust Agreement will be executed prior to the filing of a prospectus (the "Prospectus") since the issuer, being MFT, must be constituted in order to file the Prospectus. A draft of the MFT Trust Agreement and the Prospectus was enclosed with your ruling request.

5. MFT will be a limited purpose trust and will be restricted to:

(i) issuing MFT Units for consideration in order to acquire securities issued by CT and securities or ownership interests in corporations, partnerships, trusts or other persons involved in the same or similar business as CT;

(ii) making investments in securities and borrowing funds for such purpose, and entering into the transactions contemplated by the Prospectus; and

(iii) temporarily holding cash and short-term investments.

6. It is intended that MFT will qualify as a unit trust and a mutual fund trust.

7. MFT will make an election under subsection 132(6.1) of the Act in order to be deemed to have been a mutual fund trust from the beginning of its first taxation year.

8. The trustee of MFT will be a trust company incorporated under the laws of Canada, resident in Canada and at arm's length with and unrelated to the Company and the trustees of CT.

9. Pursuant to the MFT Trust Agreement, the control and administration of the property of MFT and the right to conduct the affairs of MFT will be vested exclusively in the trustees of MFT. However, the trustees may not, without the

approval of the MFT Unitholders, vote the CT Units with respect to any matter which, under the CT Agreement, requires or permits the approval of the CT Unitholders by special resolution.

10. Pursuant to the MFT Trust Agreement, at no time may non-residents of Canada hold more than 49% of the MFT Units.

11. MFT Units will be represented in the form of a global unit certificate. The certificate will be transferred to the name of and deposited with CDS or its nominee as custodian. A purchaser of MFT Units will not be entitled to a certificate. Instead, beneficial interests will be represented only through the book-entry system.

12. The MFT Units will be redeemable at any time at the demand of MFT Unitholders for cash equal to the Cash Redemption Price at the time of exercise of the redemption up to a maximum of approximately $XXXXXXXXXX in the aggregate in any one calendar month, although the MFT trustee may waive this limitation in respect of any month. Such payment will be made five days after the end of the calendar month in which the MFT Units are tendered for redemption. Redemptions in excess of the $XXXXXXXXXX maximum will be in specie redemptions and at a price equal to the fair market value of the Units (the "In Specie Redemption Price"). MFT will satisfy the redemption by the distribution of that proportion of its property that the redeemed MFT Units are of the total MFT Units issued and outstanding, including the MFT Units to be redeemed: XXXXXXXXXX% of the In Specie Redemption Price will be satisfied by converting an appropriate number of Series 1 CT Notes into Series 3 CT Notes, and XXXXXXXXXX% of the In Specie Redemption Price will be satisfied by converting an appropriate number of CT Units into Series 2 CT Notes.

13. The CT Units and CT Notes will not be listed on any stock exchange and no market is expected to develop in such CT Units and CT Notes. It is anticipated that the in specie redemption right of the MFT Units as described in 12 above will not be the primary mechanism for an MFT Unitholder to dispose of MFT Units.

14. CT will be an open-ended inter vivos trust established by a trust agreement (the "CT Trust Agreement") under the laws of the Province of XXXXXXXXXX for the purpose of acquiring co-generation assets. The interest of each beneficiary of CT (a "CT Unitholder") will be described by reference to units of CT ("CT Units"). The patrimony of CT will be transferred in trust and will constitute a patrimony by appropriation, autonomous and distinct from that of settlors, the trustee or any beneficiary. Pursuant to the CT Trust Agreement, the CT Units represent the undivided beneficial interest of the holders thereof in CT. Each CT Unit carries one vote at meetings of CT Unitholders and a CT Unitholder is entitled to participate equally in distributions by CT and, in the event of any required distribution of all of the property of CT, in the net assets of CT after satisfaction of all liabilities of CT. A draft of the CT Trust Agreement was enclosed with your ruling request.

15. The trustees of CT will be individuals resident in Canada. At the annual meeting of the CT Unitholders, trustees will be elected from a list of candidates proposed by MFT.

16. Pursuant to the CT Trust Agreement, the control and administration of the property of CT and the right to conduct the affairs of CT will be vested exclusively in the trustees of CT.

17. It is intended that CT will be a unit trust but it will not be a mutual fund trust or a personal trust.

18. The CT Units will be redeemable at any time at the demand of CT Unitholders for cash or Series 2 CT Notes or a combination of cash and Series 2 CT Notes, as further described in 22 below.

19. MFT will issue MFT Units to the public in the amount of approximately $XXXXXXXXXX. After deducting the costs relating to the issue, MFT will be left with net proceeds of approximately $XXXXXXXXXX.

20. MFT's capital will be invested as to XXXXXXXXXX% thereof, approximately $XXXXXXXXXX, in (series 1) CT Notes (the "Series 1 CT Notes"), and as to XXXXXXXXXX% thereof, approximately $XXXXXXXXXX, in CT Units.

21. The Series 1 CT Notes will not be interest bearing. According to an indenture governing the issuance of the CT Notes (the "Secured Note Indenture"), the Series 1 CT Notes will be secured by way of a second-ranking hypothec on the immovable assets of CT and will be subordinated to the debt financing to be provided to CT by financial institutions. Any unpaid principal amount under the Series 1 CT Notes will be payable upon the XXXXXXXXXX anniversary date of their issue. The terms and conditions of the Series 1 CT Notes provide that the trustees of the CT, in all circumstances, may prepay the principal amount without penalty. A draft of the Secured Note Indenture was enclosed with your ruling request.

22. A second series of CT Notes (the "Series 2 CT Notes") will be issued in circumstances where a CT Unitholder has requested the redemption of his CT Units and CT chooses to effect an in specie redemption.

23. According to the Secured Note Indenture, the Series 2 CT Notes will be secured by way of a second-ranking hypothec on the immovable assets of CT and will be subordinated to the debt financing to be provided to CT by financial institutions. The Series 2 CT Notes will mature on a date which is no later than the XXXXXXXXXX anniversary of issuance thereof and bear interest at a market rate of interest to be determined at the time of issuance by the CT trustees, payable on the XXXXXXXXXX day of each calendar month that such Series 2 CT Notes are outstanding.

24. A third series of CT Notes (the "Series 3 CT Notes") will be issued in circumstances where an MFT Unitholder has requested that his MFT Units be redeemed and MFT effects an in specie redemption. In such circumstances, Series 1 CT Notes and CT Units of an aggregate value equal to the redemption price will be redeemed by CT and Series 3 CT Notes and Series 2 CT Notes, respectively, issued in consideration thereof immediately prior to the redemption of the MFT Units.

25. The Series 3 CT Notes will be identical to the Series 1 CT Notes except that they will bear interest payable on the XXXXXXXXXX day of each calendar month that such Series 3 CT Notes are outstanding. The interest rate payable on the Series 3 CT Notes for a given year will be the lesser of a market rate of interest determined at the time of issuance by the CT trustees and the yield earned on MFT Units during the previous year.

26. The CT Notes will not be convertible into or exchangeable for, or provide a holder thereof with, any right to acquire property that is foreign property.

27. CT will acquire all Cogeneration Assets directly from the Company for approximately $XXXXXXXXXX.

28. CT will conclude an agreement with the Company, under which the Company will operate and maintain the Cogeneration Assets.

29. At no time will the cost amount to MFT of the CT Units exceed XXXXXXXXXX% of the cost amount of all property held by MFT.

30. At the outset, MFT will be the only investor in CT Notes and CT Units. Additional CT Notes and CT Units can be issued to other investors in order to pay for future asset acquisitions but no such acquisition is planned at this stage.

31. MFT will conclude an administration agreement with the Company whereby the Company will manage the administrative affairs of MFT, with decision-making power remaining with the trustee.

32. CT will make regular distributions to CT Unitholders equal to substantially all of the net profit before taxes and capital cost allowance realized by it in carrying on exclusively its power production business.

33. MFT will make regular cash distributions to MFT Unitholders equal to substantially all the cash received by it on the CT Units and CT Notes owned by it.

Purpose of the Proposed Transactions

The central and basic purpose of the proposed transactions is to maximize the value of the Company's Cogeneration Assets. A unit trust whose units are publicly traded is a suitable acquisition vehicle to satisfy the above-mentioned commercial objectives.

In order to maximize the Company's proceeds of disposition, the Company wishes to ensure that the MFT Units will not constitute foreign property to tax exempt investors. Since a large proportion of publicly invested funds are controlled by tax exempt investors, it is important to ensure a positive reception by them. Tax exempt investors will be adverse to investing in a trust which is entirely tied to Canada but which constitutes foreign property to them. Units of a mutual fund trust are not foreign property to the extent that not more than 30% of the funds of the mutual fund trust are invested in foreign property. Therefore, the Company wishes to ensure that MFT qualifies as a mutual fund trust and respects the 30% limit. Also, while trusts governed by registered retirement savings plans, registered retirement income funds and deferred profit sharing plans may not necessarily constitute the bulk of the investors in MFT, it is desirable that the MFT Units be "qualified investments" in order to ensure their marketability to such investors.

Rulings

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are carried out as described above, our rulings are as follows:

A. At the time immediately following the completion of the proposed transactions, CT will qualify as a unit trust pursuant to subparagraph 108(2)(a)(i) of the Act;

B. At the time immediately following the completion of the proposed transactions, MFT will qualify as a unit trust pursuant to subparagraph 108(2)(a)(i) of the Act and as a mutual fund trust pursuant to subsection 132(6) of the Act provided that it complies with the conditions specified in paragraph 132(6)(c) of the Act;

C. The CT Notes will not be considered to be foreign property as defined in subsection 206(1) of the Act;

D. By virtue of the exception set out in paragraph 5000(1)(e) of the Regulations, the MFT Units will not be considered to be foreign property as defined in subsection 206(1) of the Act for any particular month provided that MFT is a mutual fund trust and MFT ensures that at no time during the relevant period for the particular month did the cost amount of all foreign property held by it exceed 30 per cent of the cost amount of all property held by it;

E. For any taxation year of CT throughout which MFT is a mutual fund trust and is the sole holder of CT Units, and in respect of which the trustees of CT certify as required by subsection 210.3(1), CT will not be liable for tax under Part XII.2 of the Act;

F. Pursuant to paragraph 210.1(b) of the Act, MFT will not be liable for tax under Part XII.2 of the Act in any year throughout which MFT is a mutual fund trust; and

G. Subsection 245(2) of the Act will not be applied as a result of the proposed transactions, in and by themselves, to redetermine the tax consequences confirmed in the other rulings provided herein.

These rulings are based on the Act as it currently reads and do not take into consideration any proposed amendments thereto. These rulings 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 that the proposed transactions are completed by XXXXXXXXXX.

Yours truly,

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