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:
Can an income or royalty trust held in a registered plan become a non-qualified investment for a registered plan if 50+ percent of its units are held by non-residents?
Position: They may.
Reasons:
It depends on what kind of trust the fund is. If the fund is a mutual fund trust, quasi mutual fund trust or some other fund that subsection 132(7) applies to, it might cease to satisfy the requirements for mutual fund trusts. If the trust is a registered investment there may be a time delay on the investment going offside.
XXXXXXXXXX 2003-003097
W. C. Harding
November 28, 2003
Dear XXXXXXXXXX:
Re: Foreign Ownership of Income and Royalty Trust Units
This is in reply to your letter of June 24, 2003 in which you requested an explanation of the tax implications to a registered plan that holds units of an income or royalty trust, if the foreign ownership of the trust exceeds 49%. In this reply, the term "registered plans" includes registered retirement income funds ("RRIFs"), registered retirement savings plans ("RRSPs"), and registered educational savings plans ("RESPs").
Written confirmation of the tax implications inherent in particular transactions can be provided by this Directorate where the transactions are proposed and are the subject matter of an advance income tax ruling request submitted in the manner set out in Information Circular 70-6R5, Advanced Income Tax Rulings, dated May 17, 2002. Where the particular transactions are completed, any inquiries should be addressed to the relevant tax services office. However, we are prepared to provide the following comments that may be of assistance to you. Please note that these comments are general in nature and are not binding on the Canada Customs and Revenue Agency ("CCRA"). All publications referred to herein can be accessed on the CCRA website at the following address: http://www.ccra-adrc.gc.ca/tax/technical/incometax/menu-e.html.
Trusts that may be qualified investments
Income and royalty trusts are not specifically defined, or referred to, in the Income Tax Act (the "Act") or in the Income Tax Regulations (the "Regulations") as qualified investments for registered plans. Accordingly, these types of trusts must satisfy the conditions for one of the kinds of trusts that are described in the Act or its Regulations as qualified investments, before they can be held as a qualified investment of a registered plan.
CCRA's Interpretation Bulletin IT-320R3 Qualified Investments - Trusts Governed by Registered Retirement Savings Plans, Registered Education Savings Plans and Registered Retirement Income Funds, provides detailed information on a number of provisions by which various kinds of property may be held as qualified investments of registered plans. Paragraphs 17 and 24 of the bulletin deal specifically with interests in trusts.
Paragraph 17 of the bulletin provides that an interest in a trust is a qualified investment at a particular time if it is:
? a "registered investment" during the calendar year in which the particular time occurs, or in the immediately preceding year (Registered investments are described in greater detail paragraph 24 of the bulletin and are discussed further below); or,
if the interest is not a registered investment, it is an interest in:
? a mutual fund trust as defined in subsection 132 of the Act;
? a unit trust that meets the conditions set out in paragraph 4900(1)(d.2) of the Regulations such that, among other things, it is resident in Canada, it is widely held, and it makes a lawful distribution in a province to the public of its units without having been required to file a prospectus or other documentation under the laws of the province before doing so;
? a foreign stock exchange index trust that meets the requirements of paragraph 4900(1)(n.1) of the Regulations; or,
? a "small business investment trust" as defined in subsection 5103(1) of the Regulations unless it is excluded from being a qualified investment by virtue of subsection 4900(8) or (9) of the Regulations.
As explained in paragraph 24 of IT 320R3, certain kinds of trusts may apply for and may be accepted as "registered investments", as defined in subsection 204.4(1) of the Act, for various registered plans. In general terms, funds that are registered investments assume various obligations under the Act concerning the holding of qualified and foreign investments that would otherwise apply to the registered plans that hold the funds.
The types of funds that may be registered investments are mutual fund trusts, as described above, "quasi-mutual fund trusts", "pooled fund trusts" and "quasi-pooled fund trusts". The latter three trusts are defined in subsection 204.4(2) of the Act. In general terms, a pooled fund trust is similar to a mutual fund trust but does not qualify as one and has a number of restrictions on the investments it may hold. Quasi-mutual fund trusts and quasi-pooled fund trusts are also funds that are similar to mutual fund trusts but restrict their investments to those that are qualified investments for the registered plans for which they are registered.
It is our understanding that income and royalty trusts are generally marketed as mutual fund trusts that are not registered investments. However, in general, it appears that a unit of an income or royalty trust could also be a unit of a small business investment trust in some situations, or a registered investment that is a mutual fund trust or a quasi-mutual fund trust. Because income and royalty trusts invest in a limited number of investments, it is unlikely they could be pooled fund trusts since these funds must limit their holdings in any particular investments.
Foreign ownership of Trust Units
In basic terms, subsection 132(7) of the Act provides that if a trust is established, or, at any time thereafter, is maintained, primarily for the benefit of non-resident persons, it will be deemed to not be a mutual fund trust from that point in time, unless the provisions of paragraph 132(7)(a) or (b) of the Act are met. Furthermore, because funds described under paragraph 4900(1)(d.2) of the Regulations, and registered investments that are either mutual fund trusts or quasi-mutual fund trusts, are defined, in part, as being trusts that would be mutual fund trusts but for their failure to satisfy certain specific provisions that would otherwise apply if the trusts were mutual fund trusts, it is our opinion that these trusts will also fail to satisfy their respective definitions if they do not satisfy the requirements of subsection 132(7) of the Act.
In general terms, paragraphs 132(7)(a) or (b) of the Act provide that a mutual fund trust will continue to be a mutual fund trust if:
(a) all or substantially all of the property held by the trust, since the later of February 21, 1990 or the date of the trust's creation, was not "taxable Canadian property" as defined in subsection 248(1) of the Act (read without reference to paragraph (b) thereof); or
(b) the trust has not issued any units since February 21, 1990, to any person it had reason to believe was a non-resident, except in certain limited circumstances described within the provision.
Timing of disqualifications for mutual fund trusts and registered investments
In general, if a mutual fund trust, a trust described under paragraph 4900(1)(d.2) of the Regulations or a registered investment that is either a mutual fund trust or a quasi-mutual fund trust, fails to satisfy the provisions of section 132 of the Act, it will cease to be a qualified investment for a registered plan at that time. However, special rules are available for mutual fund trusts and registered investments that may apply to defer this disqualification.
Mutual fund trusts
A trust that becomes a mutual fund trust at any time in its first taxation year, or before the 91st day following that year, may elect to be a mutual fund trust from the first day of that first taxation year. Accordingly, a unit of a mutual fund trust would generally be a qualified investment of a registered plan if the unit is acquired within that period. In addition, a trust that ceases to be a mutual fund trust at any time in a calendar year for one of the reasons provided in subsection 132(6.2) of the Act, will generally continue to be a mutual fund trust (and a qualified investment for a registered plan) for the remainder of that year, if all of the conditions specified in that provision are satisfied. However, subsection 132(7) of the Act is not one of the reasons listed in subsection 132(6.2) of the Act. Hence, subsection 132(6.2) of the Act will not apply where the mutual fund trust is deemed not to be a mutual fund trust because of the application of subsection 132(7) of the Act.
Registered Investments
If a registered plan acquires an interest in a trust before the trust becomes a registered investment, the interest will be considered a qualified investment at the time of its acquisition if the trust becomes a registered investment for that type of registered plan before the end of the year in which the interest was acquired. Also, if a trust loses its status as a registered investment for an RRSP or a RRIF, any interest acquired by the particular type of plan before deregistration will continue to be a qualified investment until the end of the calendar year immediately following the year in which the deregistration occurred. Thereafter, the interest will not be a qualified investment at any particular time unless the interest can otherwise continue to be a qualified investment under one of the other provisions discussed above.
Consequences to a registered plan
If an RRSP acquires units of a trust that were not qualified investments for an RRSP at the time they were acquired, subsection 146(10) of the Act will apply and the fair market value of the units at the time of their acquisition must be included in the income of the RRSP annuitant for the year of acquisition. However, the annuitant may generally claim a deduction under subsection 146(6) of the Act when the RRSP disposes of the units with the deduction being the lesser of the amount included under subsection 146(10) of the Act and the proceeds of disposition. Subsections 146.3(7) and 146.3(8) of the Act apply similar provisions to RRIFs. On the other hand, an RESP will become revocable if it acquires a non-qualified investment.
If an RRSP or RRIF holds a property that is a non-qualified investment, the RRSP or RRIF trust will also be taxable on any income earned on the investment according to the rules set out in subsection 146(10.1) of the Act in respect of RRSPs or 146.3(9) of the Act in respect of RRIFs. It should be noted that RRSPs are taxable on this income where the unit was a non-qualified investment at the time it was acquired or if it becomes a non-qualified investment subsequent to its acquisition. However, the same rule will only apply to RRIFs after 2003 under proposed amendments to subsection 146.3(9) of the Act. Prior to 2004, the rule only applies to RRIFs where the investment was a non-qualified investment at the time it was acquired.
RRSPs, RRIFs and RESPs are also subject to a tax under Part XI.1 of the Act in respect of any non-qualified investment that was not subject to taxation by virtue of subsection 146(10) of the Act in respect to acquisitions by RRSPs or subsection 146.3(7) of the Act in respect to acquisitions by RRIFs. The tax is equal to 1% of the fair market value of the property at the time the property was acquired, and is payable by the trust governed by the registered plan in respect of each month in which the property is held at the end of the month.
We trust our comments will be of assistance to you.
Yours truly,
Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
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