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: This ruling request involves proposed transactions that will be undertaken by a group of mutual funds. Under the proposals, the trust agreements governing the Funds will be amended to introduce a new method of allocating capital gains that will provide unitholders with a more equitable allocation of capital gains. That is, capital gains will first be allocated to unitholders who redeemed units during the year and then allocated pro-rata among unitholders of record at the end of the year.
1) Will the proceeds of disposition of a redeemed unit equal the Series Unit Value at the time of redemption less the Capital Gains Distribution in respect of that unit?
2) Will subsection 104(7.1) apply to the proposed transactions?
3) Will subsection 245(2) apply to the proposed transactions?
Position: 1) Yes 2) No 3) No
REASONS: The position taken with respect to the allocation of capital gains to redeeming unitholders and for determining the proceeds of disposition on such redemptions is consistent with the position taken in previous rulings (Doc # 981758 and 2000-004136). Similarly, the position taken with respect to the application of subsection 104(7.1) is consistent with the position taken in these previous rulings. Also, since there are good business reasons for undertaking the proposed transactions, the proposals are not avoidance transactions and GAAR should not be applied.
Re: Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX, in which you requested an advance income tax ruling on behalf of the above-noted taxpayers and your subsequent correspondence of XXXXXXXXXX, in respect of the income tax consequences arising out of the proposed transactions described below.
We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:
(a) in an earlier return of the taxpayers or related persons;
(b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayers or related persons;
(c) under objection by the taxpayers or related persons;
(d) before the courts; or
(e) the subject of a ruling previously issued by this Directorate to the taxpayers or related persons.
In this letter, unless otherwise indicated, all statute references are to the Income Tax Act (Canada) (R.S.C. 1985, 5th Supplement, c.1, as amended) (the "Act"), and the following terms have the meanings specified:
"Common Expenses" means the costs and expenses and other similar amounts common to all Series of Units and not specifically referable to an individual Series of Units.
"Fund" means a fund listed in Appendix A.
"Funds" mean the funds listed in Appendix A.
"Manageco" means XXXXXXXXXX.
"Unitholder of record" means the holder of units as at the close of business on the second last business day of each year.
"Valuation Day" means each day, other than a Saturday or Sunday that the XXXXXXXXXX, is open for business.
"Valuation Time" means 4:00 PM XXXXXXXXXX time on each Valuation Day.
Manageco deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. The Funds file, or will file their returns with the XXXXXXXXXX Centre and deal, or will deal with the XXXXXXXXXX Tax Services Office.
Our understanding of the relevant facts, proposed transactions and purpose thereof is as follows:
1. Each Fund is a trust governed by the laws of the Province of XXXXXXXXXX. Manageco is the manager and trustee of each Fund. Accordingly, each Fund is resident in Canada for purposes of the Act.
2. Each Fund listed in Appendix A is currently, and will continue to be, a "mutual fund trust" within the meaning of subsection 132(6).
3. The Funds were formed principally for the purpose of providing individual or institutional investors with professional money management and portfolio diversification services on a cost-effective basis. The Funds earn income and realize capital gains and losses.
4. The trust agreement for each Fund (the "Agreement") authorizes a Fund to have either one or more than one Series of units issued and outstanding. A copy of the Agreement, that is representative of the trust agreement for each of the Funds was included with the ruling request.
5. The Agreement provides that "net income" of a Fund for any year is to be determined in accordance with the provisions of the Act regarding the calculation of income (other than paragraph 82(1)(b) and subsection 104(6) and excluding the Fund's capital gains and capital losses and the portion of those Fund expenses, as determined by the trustee, that are related to those capital gains) for the purposes of determining the "taxable income" under the Act. Also, "net realized capital gains" of a Fund is the amount, if any, by which the capital gains of the Fund in the year (less the portion of those Fund expenses related to the capital gains as determined by the trustee) exceeds the total of:
a) the Fund's capital losses for the year, and
b) to the extent not previously deducted in computing the Fund's net realized capital gains, such portion of the amount by which the Fund's capital losses exceeded the Fund's capital gains for all previous years in which capital losses exceeded capital gains as will permit the maximization of the Fund's capital gains refund for the year.
6. On the last business day in the year, a Fund makes payable to each unitholder of record, that unitholder's pro rata share of the amount by which the net income and net realized capital gains of each Fund for the year exceed:
a) such part of the net realized capital gains of the Fund for the year required to be retained by the Fund to maximize its capital gains refund for the year (within the meaning of the Act);
b) the amount in respect of any non-capital losses (as defined in the Act) for prior years which the Fund is permitted by the Act to deduct in computing its taxable income for such year;
c) any amount previously made payable or distributed on an interim basis during the year; and
d) any amount payable in the year as a management fee rebate.
7. Where units of a Fund are redeemed, the Fund pays to the unitholder, out of the assets of the Fund, an amount equal to the net asset value of such units (determined as of the applicable valuation day in respect of the redemption).
8. Unless a unitholder otherwise instructs the Fund, distributions of net income and net realized capital gains payable to a unitholder are reinvested in additional units having a value equal to the amount of the distribution. A unitholder may elect to receive cash instead of additional units.
9. The trustee prepares such information slips as are required under the Act and Income Tax Regulations to report the amount of income and taxable capital gains allocated to the unitholders of each Fund.
10. The Agreement governing each Fund will be amended, with effect from XXXXXXXXXX, where the Fund has elected to have a XXXXXXXXXX taxation year-end, and in any other case with effect from XXXXXXXXXX, to provide for the distribution to redeeming unitholders of their share of the Fund's net realized capital gains in the year up until the date of redemption. Net realized capital gains
of a Fund for a year that are not distributed on redemption will continue to be distributed on a pro rata basis to unitholders at the end of the year. A copy of the proposed amendments to the trust agreement (the "Amended Agreement") was included with the ruling request and is attached (see Appendix B).
11. XXXXXXXXXX of the Amended Agreement will provide that each unitholder will be entitled to redeem all or any part of the unitholder's units, at any time, at a redemption amount equal to XXXXXXXXXX less the amount of any distribution in the year to the redeeming unitholder as provided for in XXXXXXXXXX. On a redemption, the XXXXXXXXXX is the price at which units of a particular XXXXXXXXXX of a Fund may be redeemed determined as of the first Valuation Time following the receipt by the trustee of the redemption request and will be calculated by dividing the particular XXXXXXXXXX by the total number of units of that XXXXXXXXXX outstanding on the relevant Valuation Day.
12. XXXXXXXXXX of the Amended Agreement will provide the trustee with the authority to distribute capital gains of the Fund to a unitholder who has redeemed units during the year. The amount of the Fund's capital gains distributed to a redeeming unitholder (hereinafter referred to as a "Capital Gains Distribution") will be the unitholder's share, at the time of redemption, of the Fund's net realized capital gains for the year. XXXXXXXXXX the amount of such distribution cannot exceed the XXXXXXXXXX of the redeemed unit. For these purposes, the manager will calculate the net realized capital gains of the Fund for the year on a XXXXXXXXXX. The Capital Gains Distribution to a redeeming unitholder in respect of a redeemed unit will be the amount obtained when the XXXXXXXXXX:
13. In accordance with XXXXXXXXXX of the Amended Agreement, a Fund's net income and any of the Fund's net realized capital gains not distributed to unitholders who redeemed units during the year will be distributed pro rata to unitholders of record at the end of the year.
14. XXXXXXXXXX of the Amended Agreement provides that a unitholder will have the legal right to enforce payment of any amount which is due and payable to the unitholder pursuant to XXXXXXXXXX.
15. XXXXXXXXXX of the Amended Agreement provides that unless a unitholder elects to receive cash, distributions of net income and net realized capital gains of the Fund payable to a unitholder under XXXXXXXXXX will be reinvested in additional units having a value equal to the amount of the distribution. A Capital Gains Distribution, as described in 12 above, will be payable in cash in accordance with XXXXXXXXXX of the Amended Agreement.
16. Each Fund will make a designation under subsection 104(21) so that the taxable portion of any capital gain distributed to a unitholder (either at redemption or otherwise) is deemed to be a taxable capital gain of the unitholder.
PURPOSE OF PROPOSED TRANSACTIONS
17. The purpose of the proposed transactions is to allow for the allocation of capital gains amongst unitholders on a more equitable basis than currently provided under the Agreement.
Provided that the above statements are accurate and constitute complete disclosure of all the relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as described herein, our advance income tax rulings are as follows:
A. For the purposes of paragraph 104(6)(b), a Fund may deduct from its income for a taxation year the taxable portion of a Capital Gains Distribution that was payable in the year to a unitholder who redeemed units during that taxation year.
B. Pursuant to subsection 104(13), the taxable portion of a Capital Gains Distribution of a Fund that became payable in the taxation year to a unitholder who redeemed units during the year will be included in computing that unitholder's income for the year. To the extent that a Fund makes the proper designations in its return of income for the taxation year, the taxable portion of the Capital Gains Distribution will be deemed to be the redeeming unitholder's taxable capital gain in accordance with subsection 104(21).
C. In computing a unitholder's gain in respect of units of the Fund that were redeemed in the taxation year, the proceeds of disposition for those units will be the amount by which the XXXXXXXXXX at the time the units were redeemed exceeds the amount that was the unitholder's Capital Gains Distribution in respect of those units.
D. In computing the amount of a Fund's "capital gains refund" for the year under subsection 132(1) in respect of the capital gains of a Fund which are subject to tax in the Fund, amount A in the calculation of the "capital gains redemptions" of a Fund for a taxation year in subsection 132(4) will be equal to the aggregate of the proceeds of disposition (as described in Ruling C above) for all units redeemed in the year.
E. 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 Funds a deduction under paragraph 104(6)(b).
F. Subsection 245(2) will not be applied to redetermine the tax consequences of Rulings A to E above solely as a result of the implementation of the proposed transactions described herein.
The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R4, Advance Income Tax Rulings, and are binding on the Canada Customs and Revenue Agency (the CCRA) provided that the proposed transactions are completed within six months of the date of this letter. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act, which if enacted into law, could have an effect on the rulings provided herein.
The above rulings should not be construed as providing the CCRA's views on whether the Funds qualify as mutual fund trusts for purposes of the Act.
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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