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:
1. By changing investment strategies so that >10% of cost amount may be invested in the shares of any one corporation, will the status of a Fund under 4801(a) change?
2. Will the status of the fund as a quasi mutual fund trust change as a result of the change in investment strategy?
Position:
1. No.
2. No.
Reasons:
1. Funds qualified before proposed transactions & proposed transactions will not disqualify. The different types of pooled, unit, mutual fund, quasi mutual fund -trusts really only specify different income/asset holding requirements; some can actually fit into more than one category as some rules are less restrictive than others (i.e., a mutual fund trust also will fit into the definition of a quasi mutual fund trust).
2. Same reasons as above.
XXXXXXXXXX 2001-010149
Attention: XXXXXXXXXX
XXXXXXXXXX, 2002
Dear Sirs:
Re: Advance Income Tax Ruling
XXXXXXXXXX
This is in reply to your letter of XXXXXXXXXX, in which you requested an 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 (R.S.C. 1985, 5th supplement, c.1, as amended) (the "Act"), and the following terms have the meaning specified:
a) "A Fund" means XXXXXXXXXX.
b) "B Fund" means XXXXXXXXXX.
c) "C Fund" means XXXXXXXXXX.
d) "D Fund" means XXXXXXXXXX.
e) "E Fund" means XXXXXXXXXX.
f) "F Fund" means XXXXXXXXXX.
g) "G Fund" means XXXXXXXXXX.
h) "H Fund" means XXXXXXXXXX.
i) "The Funds" means collectively Fund A through H listed above and are part of a group of funds known as the XXXXXXXXXX.
j) "Trustee of the Funds" means the XXXXXXXXXX, "a taxable Canadian corporation" within the meaning of subsection 89(1) of the Act, incorporated under the laws of Canada and licensed to carry on in Canada the business of offering to the public its services as a trustee.
k) "Xco" means XXXXXXXXXX a "taxable Canadian corporation" and a "public corporation" within the meaning of subsection 89(1) of the Act, the common shares of which trade on the XXXXXXXXXX.
The XXXXXXXXXX Tax Services Office serves each of the Funds and their returns are filed with the XXXXXXXXXX Centre.
Facts
1. Each of the Funds was established by declaration of trust, dated XXXXXXXXXX, or amendment thereto, under the laws of the Province of XXXXXXXXXX.
2. The Funds have at all times since their inception invested (and will continue to invest) at least 80% of the cost amount of their property in investments described in subparagraph (a)(i) of the definition of "pooled fund trust" in subsection 5000(7) of the Income Tax Regulations (the "Regulations"). Also, at least 95% of the income of the Funds in any given year has been (and will continue to be) derived from, or from the dispositions of, investments described in the definition of "pooled fund trust" in subsection 5000(7) of the Regulations.
3. At no time prior to the proposed transactions has or will more than 10% of the cost amount of property to the Funds consist of shares, bonds, mortgages or other securities of any one corporation or debtor, other than Her Majesty in Right of Canada or a province or a Canadian municipality.
4. Each of the Funds is a "unit trust" as described in subparagraph 108(2)(a)(i) of the Act and is resident in Canada. None of the Funds has been established or is maintained primarily for the benefit of non-resident persons as described in subsection 132(7) of the Act.
5. The only undertaking of each of the Funds is the investing of its funds in property (other than real property or an interest in real property that is capital property of the trust). Specifically, the investment objectives of each of the Funds require the Funds to track the performance of various indices pursuant to the Offering Memorandum (an "OM") of each Fund.
6. Each of the Funds is divided into identical units of participation. An unlimited number of units may be issued. The units may be purchased or redeemed at their net asset value per unit. The net asset value per unit of each Fund is the total value of the net assets of the Fund divided by the number of units of the Fund outstanding at that time. The total value of the net assets of each Fund is equal to the value of all of the assets held by the Fund less any liabilities of the Fund, due or accrued.
7. In respect of each Fund, an OM has been filed with the Director of the Securities Commission in Ontario and in each of the provinces and territories in Canada. The units of the Funds have been issued to the public pursuant to, and in accordance with, the terms, conditions and requirements described in each OM.
The units of the Funds are not listed on a prescribed stock exchange. Other than on a redemption of units of the Funds, there is no available market through which unitholders wishing to realize on their investment can dispose of units of the Funds.
8. Prior to implementing the proposed transactions, described below, each of the Funds has qualified as a "pooled fund trust" as defined in subsection 5000(7) of the Regulations and for purposes of paragraph 5000(1)(b) of the Regulations.
9. Xco is a constituent company in the XXXXXXXXXX On a market value basis, the common shares of Xco accounted for XXXXXXXXXX% of the XXXXXXXXXX on XXXXXXXXXX, and on XXXXXXXXXX, accounted for a high of XXXXXXXXXX% of the XXXXXXXXXX. Xco is a constituent company of other XXXXXXXXXX.
10. As noted above, none of the Funds has at any time held shares of one issuer which accounted for more than 10% of the cost amount of a particular Fund's property. As the Funds have limited their investment in the shares of any one issuer to 10% by cost amount while pursuing an investment objective of tracking indices which may weight individual stocks above 10% (e.g. Xco's weighting in the XXXXXXXXXX prior to its recent decline in price) or may determine weighting based upon trading price rather than by cost amount, a weighting of 10% by cost amount may be less than the weighting of those shares within the index the Funds are attempting to track. For example, prior to Xco's recent decline in price, by restricting the weighting of Xco below its weighting in the XXXXXXXXXX it has been difficult for the D Fund and the F Fund to realize their investment objectives of tracking the performance of the XXXXXXXXXX. Further, depending on the volatility of the shares within an index the Funds are attempting to track the market weighting of those shares may be more or less than the weighting by cost amount to a Fund. Thus, Funds which acquired Xco shares at higher prices and limited weighting of Xco to 10% by cost amount, have been under weighted in Xco in comparison to the XXXXXXXXXX. Even though recent price declines have reduced the market weighting of Xco below 10%, if these Funds were to purchase Xco shares to match the XXXXXXXXXX market weighting, the cost amount of Xco shares would exceed 10% of the aggregate cost amount of the Fund's assets.
11. The Funds are permitted to hold weightings in excess of 10% in single stocks under applicable securities laws. Index funds which are subject to the concentration limits of National Instrument 81-102, are generally permitted or granted the necessary relief to hold weightings over 10% in a constituent corporation within the index the fund is attempting to track. As the Funds are quasi mutual funds, they are not subject to the application of National Instrument 81-102.
Proposed Transaction
12. Each of the Funds will acquire on the XXXXXXXXXX, common shares of constituent companies within the relevant index which together with existing holdings will allow the Funds to more efficiently track performance of the relevant index without limiting the Funds' holding in any one stock to 10% by cost. For example, A Fund, C Fund, D Fund, B Fund, F Fund and the H Fund will acquire common shares of Xco on the XXXXXXXXXX (the "Shares") such that after the acquisition, the cost amount of Xco Shares to each such Funds will exceed 10% of the Fund's assets by cost amount (although the market weighting of such Xco common shares would be below 10% at current prices). While the G Fund and the E Fund will not acquire shares of Xco, these Funds will otherwise track the performance indices and will not restrict their investments in common shares of one issuer to 10% (based on cost) such that at times the Fund's cost amount of shares of single issuers may exceed 10% of the Fund's assets by cost amount.
Purpose of the Proposed Transaction
13. The purpose of the proposed transactions is to allow each Fund to more closely and more efficiently fulfill its investment objectives through acquiring shares which more closely match the weighting of stocks on the relevant index without limiting holdings in a particular stock to 10% by cost amount.
Rulings Given
Provided that the preceding statements are accurate and constitute complete disclosure of all relevant facts, proposed transactions and purpose thereof and the proposed transactions are carried out as herein described, our advance income tax ruling is as follows:
A. Provided that, immediately before the proposed transactions, the Funds were trusts described in subparagraph 5000(1)(b) of the Regulations, upon the acquisition of common shares as described in paragraph 12 above, the units of each of the Funds will be considered to be qualified for distribution to the public and each of the Funds will be trusts described in paragraph 5000(1)(c) of the Regulations. As such, the units of the Funds will not be considered as foreign property for the purpose of computing the tax payable under Part XI of the Act in respect of any particular month provided that at no time during the relevant period for the particular month did the cost amount to the Fund of all of the foreign property held by it exceed 30 per cent of the cost amount to it of all property held by it.
The above ruling is 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 provided the proposed transactions are completed within six months of the date of this letter. This ruling is based on the Act in its present form and does not take into account the effects of any proposed amendments thereto.
Yours truly,
XXXXXXXXXX
Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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