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: Will a non-resident investment fund not be considered to be carrying on business in Canada solely because of the provision of certain investment advisory and custodian services by residents of Canada?
Position: Ruling granted.
Reasons: Requirements of subsection 115.2(2) of the Income Tax Act have been met.
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Fund")
This is in reply to your letter of XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer with respect to certain investment advisory and custodial services to be provided by residents of Canada. To the best of your knowledge and that of the Fund, none of the issues involved in this ruling request:
i. is in an earlier return of the Fund or a related person;
ii. is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of the Fund or a related person;
iii. is under objection by the Fund or a related person;
iv. is before the Courts; or
v. is the subject of a ruling previously considered by the Income Tax Rulings Directorate.
In this letter, references to the "Act" mean the Income Tax Act, R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof. Unless otherwise stated, statutory references in this letter are to the Act. Our understanding of the facts, proposed transactions and the purpose of the proposed transactions is as follows:
1. The Fund is a corporation newly formed and organized under the laws of XXXXXXXXXX.
2. The Fund was incorporated as a company pursuant to the Companies Act, XXXXXXXXXX, and is not an "International Business Corporation" under XXXXXXXXXX corporate legislation.
3. The Fund is, and at all relevant times will be, a non-resident of Canada for the purposes of the Act.
4. The Fund is authorized to issue an unlimited number of common shares (the "Shares").
5. The Fund is a "mutual fund" within the meaning of, and is licensed and regulated by, the Mutual Funds Act (XXXXXXXXXX).
6. The Fund expects to raise funds from non-residents of Canada (primarily, but not exclusively European investors), to invest principally in Canadian, and to a lesser extent, U.S. securities. The Fund expects to initiate an initial private placement of its Shares in XXXXXXXXXX.
7. The objective of the Fund is to provide returns on capital through "long/short" hedge investing, superior securities selection, both long and short and hedging activities, and to minimize net market exposure. Greater detail regarding the Fund's investment program and the specific types of investments that are expected to form part of the investment program is set out below under the heading "Investment Program of the Fund".
8. The Fund has no presence or operations in Canada, but intends to obtain certain services from Canadian residents, more particularly described below under the heading "Proposed Transactions".
9. As of the date hereof, the Fund has not, directly or through any agent, filed any document with a public authority in Canada in accordance with the securities legislation of Canada or of any province in order to permit the distribution of Shares to persons resident in Canada.
10. As of the date hereof, the Fund has not, directly or through any agent, directed any promotion of investment in the Shares to residents of Canada, nor has the Fund sold any Shares to residents of Canada.
11. XXXXXXXXXX is a corporation organized under the laws of XXXXXXXXXX.
12. XXXXXXXXXX is, and at all relevant times will be, a non-resident of Canada for the purposes of the Act.
13. XXXXXXXXXX business will be to manage and administer the Fund and its assets.
14. XXXXXXXXXX is a privately held corporation incorporated under the laws of the Province of XXXXXXXXXX.
15. XXXXXXXXXX is and, at all relevant times, will be a resident of Canada for the purposes of the Act. At all relevant times, XXXXXXXXXX will carry on business in Canada for purposes of the Act.
16. XXXXXXXXXX is registered as an investment dealer under the Securities Act (XXXXXXXXXX).
17. XXXXXXXXXX provides, inter alia, investment advisory and securities brokerage services to the public and to various funds.
18. XXXXXXXXXX, a corporation formed under the laws of Canada, carrying on a financial services business.
19. XXXXXXXXXX is, and at all relevant times, will be a resident of Canada and carry on business in Canada for purposes of the Act.
20. XXXXXXXXXX offers, inter alia, custodial, administrative and clearing broker services to the public.
21. The following transactions and operating arrangements are proposed:
22. The Fund will appoint XXXXXXXXXX to act as the manager (the "Manager") of the Fund.
23. Under the terms of a management agreement with the Fund, the Manager will be responsible for the management of the Fund and the investment of the Fund's assets, subject to the policies and control of the Fund's board of directors. The Manager will be responsible for all aspects of the Fund's operations, and will perform these services itself or subcontract the performance of these services to other service providers.
24. To the extent the Manager subcontracts any responsibilities to other entities, it will manage, coordinate and oversee the service providers and the provision and performance of their services. It will have the authority to replace service providers at its discretion.
25. The Manager will appoint XXXXXXXXXX to act as the custodian (the "Custodian") to the Fund.
26. Pursuant to a custodial agreement among the Manager, the Custodian and the Fund, the Custodian will perform the following services for the benefit of the Fund:
a) receive and deliver securities purchased, sold, borrowed and loaned by the Fund;
b) make and receive payments therefor;
c) hold and administer custody of securities fully paid or not fully paid for, and maintain compliance with any related margin and maintenance requirements;
d) hold and administer custody of all cash, dividends and exchanges, distributions and rights accruing to the Fund's account, or deliver cash to the Fund's banks;
e) tender securities in connection with cash tender offers, exchange offers, mergers or other corporate reorganizations;
f) act as carrying broker, responsible for clearing and execution of all securities trade orders on behalf of the Fund, provide margin and lend securities to the Fund for investment purposes; and
g) perform services incidental or ancillary to the foregoing, including maintaining segregated accounts, managing services provided by other brokers and entering into and supervising sub-custodian and sub-broker arrangements.
27. The Custodian will have no decision-making discretion relating to the Fund's investments.
28. The Manager will appoint XXXXXXXXXX to act as investment advisor (the "Investment Advisor") to the Fund.
29. Under the terms of an investment advisory agreement (the "Investment Advisory Agreement") with the Manager, the Investment Advisor will be authorized to make, in its discretion and on an active basis, all day-to-day investment and trading decisions in respect of the investment of the Fund's assets, on behalf of the Manager and the Fund, subject to the oversight of the Manager and the policies and control of the board of directors of the Fund.
30. The Investment Advisor will perform the following investment services:
a) providing discretionary investment management and advice with respect to the investments of the Fund;
b) ordering and executing purchases and sales of investments on behalf of the Fund;
c) exercising certain rights incidental to the ownership of the investments of the Fund on behalf of the Fund such as voting, conversion and exchange;
d) entering into and executing agreements with respect to such purchasing and selling and the exercising of such rights;
e) arranging for the execution of trades in securities for the Fund as originating broker;
f) selecting and managing other brokers through whom trades may be executed; and
g) communicating with, directing and coordinating with the Custodian in respect of the Fund's transactions and assets.
31. The Custodian and the Investment Advisor will provide the services described above to the Fund until such time as they are replaced by the Manager.
Investment Program of the Fund
32. Under the terms of the Investment Advisory Agreement, the Investment Advisor will have the authority to invest the assets of the Fund in its discretion so as to meet the objectives of the Fund, subject to the defined restrictions and limitations set out below, in one or more of the following assets ("Permitted Assets"):
a) shares of the capital stock of a corporation that are listed on one or more of the stock exchanges set out in Schedule "A" attached hereto ("Permitted Exchanges");
b) partnership units that are listed on one or more Permitted Exchanges;
c) trust units that are listed on one or more Permitted Exchanges;
d) mutual fund units that are listed on one or more Permitted Exchanges;
e) any interest in a fund or other entity where such interest is listed on one or more Permitted Exchanges;
f) shares of the capital stock of a corporation, partnership units, trust units, mutual fund units or any interest in a fund or entity that are not listed on a Permitted Exchange provided that no more than 50% of the fair market value thereof is derived from one or more of:
i. real property situated in Canada;
ii. Canadian resource property; and
iii. timber resource property;
g) non-U.S. equity securities, which may be represented by American Depository Receipts, listed on a Permitted Exchange in the United States or, subject to item (f) above, traded in the over-the-counter market in the United States;
h) bonds or other indebtedness guaranteed by the government of Canada or a province thereof;
i) bonds or other indebtedness guaranteed by the government of the United States or an instrumentality thereof, or guaranteed by the government of a state thereof;
j) bonds, debentures, notes or similar obligations of a corporation whose shares are listed on one or more Permitted Exchanges;
k) other indebtedness;
l) money market instruments;
m) short-term Canadian or United States government debt instruments;
n) commodity futures bought or sold on a recognized commodity futures exchange; and
33. Under the terms of the Investment Advisory Agreement, the Investment Advisor will have the authority to enter into contracts in respect of derivatives and derivative instruments and to obligate the Fund under such contracts, as follows ("Permitted Derivatives"):
a) put or call options in respect of any Permitted Asset;
b) forward or futures contracts in respect of any Permitted Asset;
c) short sales of any Permitted Asset;
d) any rights or interests in any Permitted Asset;
e) interest rate puts, calls, shorts, swaps, caps, floors, collars, hedges, forwards or futures;
f) swaps, caps, floors, collars, hedges, and other forms of derivative contracts relating to the price, cash flows or returns of Permitted Assets;
g) puts, calls, forwards, futures, swaps, caps, floors, collars, hedges, short sales or options in respect of any composite index; and
h) composite indices derived from Permitted Assets and Permitted Derivatives.
34. Under the terms of the Investment Advisory Agreement, the Investment Advisor will, in the course of investing the assets of the Fund in its discretion, observe the restrictions and limitations set out below:
a) no investments will be made directly in physical commodities;
b) no investments will be made directly in real property;
c) not more than 5% of the net asset value of the Fund may be invested in unlisted equity or debt securities and not more than 20% of the net asset value of the Fund may be invested in the securities of companies not domiciled in Canada or the U.S.;
d) the Fund, together with all persons with whom the Fund does not deal at arm's length, will not acquire 25% or more of the issued shares of any class of the capital stock of a corporation or of the total value of interests in a partnership, entity, trust, fund or organization if more than 50% of the fair market value of such shares or interests (as the case may be) is derived from one or more of:
i. real property situated in Canada;
ii. Canadian resource property; and
iii. timber resource property.
35. If the Fund has acquired shares, interests or other investments that are Permitted Assets, Permitted Derivatives or comply with paragraph 34(d) above at the time of acquisition, and these shares, interests or other investments subsequently cease to be Permitted Assets, Permitted Derivatives or to comply with paragraph 34(d), the Fund shall dispose of at least as many shares, interests or other investments as would allow the Fund to revert to compliance with the list of Permitted Assets, Permitted Derivatives or paragraph 34(d), in an orderly fashion at the earliest opportune moment.
Marketing of the Fund and Restrictions on Ownership of Fund Interests
36. The Fund will offer Shares for sale outside Canada pursuant to a private placement the intended participants in which will be persons not resident in Canada ("Investors"). In connection therewith, the Fund will prepare and distribute an offering document to potential Investors. The offering document (and any amended or replacement offering documents) will be prepared largely in Canada by the Fund's Canadian legal advisor ("Legal Advisor"), but will be distributed to potential Investors outside Canada by a selling agent outside Canada. Promotion of the Fund will be principally directed at non-residents of Canada, although promotion of the Fund may incidentally come to the attention of Canadian residents.
37. The Legal Advisor is, and at all relevant times, will be a Canadian partnership for purposes of the Act.
38. The Fund will not sell its Shares to any Investor unless the Investor represents to the Fund that the Investor is not a resident of Canada for Canadian income tax purposes. The subscription agreement to be executed by each Investor in the Fund will include a representation to the effect that the Investor is not a resident of Canada for purposes of the Act, and will acquire and hold Shares as principal for the Investor's own account and not for the benefit of any other person.
39. The Fund will not, directly or through any agent, file any document with a public authority in Canada in accordance with the securities legislation of Canada or of any province in order to permit the distribution of Shares to persons resident in Canada.
40. Any persons or partnerships that are affiliated with the Custodian, the Investment Advisor or the Legal Advisor (collectively, the "Canadian Service Providers"), will be prohibited from acquiring, alone or together with all persons or partnerships affiliated to them, more than 25% of the fair market value of all investments in the Fund.
Purpose of the Proposed Transactions
41. The purpose of the proposed transactions is to enable the Fund to obtain the services offered by the Canadian Service Providers, who are residents of Canada.
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions, and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, and subject to the comments set out below, our ruling is as follows:
Pursuant to subsection 115.2 of the Act, the Fund will not be considered to be carrying on business in Canada for purposes of subsection 115(1) and Part XIV at any particular time solely because of the provision to it of the services described above by the Canadian Service Providers.
This ruling is governed by the general limitations and qualifications set out in Information Circular 70-6R5. It is binding on the Canada Customs and Revenue Agency (the "CCRA") as long as the proposed transactions are completed by XXXXXXXXXX. The ruling is based on the Act in its present form and does not take into account any proposed amendments to the Act, which, if enacted, could affect the ruling provided herein.
Nothing in this letter should be construed as implying that the CCRA has agreed to or ruled on:
a) Whether a representation from an Investor as set out in paragraph 38 of this ruling would constitute, in all instances, a "reasonable enquiry" by the Fund for purposes of subparagraph 115.2(2)(b)(i) of the Act. This is a question of fact that would depend on the specific circumstances; however, it is our view that a request for such a representation would normally qualify as a "reasonable enquiry".
b) Whether the Fund would be carrying on business in Canada for purposes of the Act during any period in which investments other than qualified investments (as defined in subsection 115.2(1)) are held. In the absence of any specific deeming provision (such as paragraph 253(b)), we would look to the particular facts and the traditional common law tests to determine whether business is being carrying on in Canada. Where such an investment is held for only a brief period in order to facilitate the investment's orderly disposition, our view is that, subject to paragraph 253(b), it is unlikely the Fund would be carrying on business in Canada.
Additionally, nothing in this ruling should be construed as implying that the CCRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions other than those specifically described herein.
We note that the Department of Finance has proposed to amend the Income Tax Regulations (the "Regulations") by adding Tier 1 and Tier 2 of the Canadian Venture Exchange (now known as the TSX Venture Exchange) to the list of prescribed stock exchanges in section 3200 of the Regulations. While we cannot provide a ruling in anticipation of proposed amendments to the Act or Regulations, it is our opinion that Tiers 1 and 2 of the Canadian Venture Exchange (now known as the TSX Venture Exchange) would be Permitted Exchanges from the effective date of such amendment. In accordance with paragraph 22 of Information Circular 70-6R5, this is an expression of opinion only, and as such is not binding on the CCRA.
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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