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 : Is a mutual fund trust tainted where it guarantees a loan to a wholly owned subsidiary?
Position: Generally, no.
Reasons: Object and spirit of the Act and previous rulings.
XXXXXXXXXX 2002-016767
Yves Moreno
April 15, 2003
Dear XXXXXXXXXX:
Re: Debt guaranteed by a mutual fund trust
This is in reply to your letter dated October 9, 2002, wherein you ask whether a trust is a mutual fund trust. Subsection 132(6) of the Income Tax Act (the "Act") provides that to be a mutual fund trust for the purposes of section 132 of the Act, the only undertaking of the trust must be the "investing of its funds in property". The same test might apply to determine whether a trust is a unit trust where paragraph 108(2)(b) of the Act applies. You enquire whether that condition is met by a trust that guarantees the loan of a wholly owned subsidiary.
Your letter states the following hypothetical facts:
1. A trust qualifies as a mutual fund trust pursuant to paragraph 108(2)(b) and subsection 132(6) of the Act (the "Trust").
2. The Trust owns all the issued and outstanding shares of a corporation ("Subco").
3. Subco owns oil and gas working interests and royalties (the "Oil and Gas Interests").
4. Subco finances the acquisition of the Oil and Gas Interests (a) by selling royalty units to the Trust and (b) by borrowing money from a syndicate of Banks (the "Banks" and the "Subco Debts").
5. All the royalty units are owned by the Trust.
6. The money borrowed from the Banks is also used for working capital purposes.
7. The Trust is required to guarantee the Subco debts.
We assume that the adjusted cost base of the Subco shares acquired by the Trust represents 10% or less of the aggregate cost amount of all properties owned by the Trust (subparagraph 108(2)(b)(v)). Provided the Trust is not carrying on a business in respect of the Subco shares and is not engaged in the business of lending money or guaranteeing loans, we are willing to consider that the requirements of paragraph 108(2)(b) and subsection 132(6) of the Act are not violated by the mere fact that the Trust guarantees a loan that is contracted by Subco. However, the payment of a fee by Subco with respect to that guarantee might taint the Trust.
This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5.
We trust our comments will be of assistance.
Theresa Murphy
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Legislation Branch
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