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.
Principal Issues: 1. Whether the proposed transactions to effectively replace a taxable Canadian corporation (TCC) owned by a mutual fund trust (MFT) with a trust would constitute a misuse of section 132.2 or an abuse of the provisions of the Act read as a whole. A new mutual fund corporation (MFC) will be created, owned wholly by the MFT. The new corporation will acquire all of the shares of TCC on a rollover basis, and then do a short-form amalgamation resulting in Amalco MFC. Amalco MFC will windup and do a "qualifying exchange" pursuant to section 132.2 with the MFT.
2. Whether the refinancing of a newly created trust is offensive of the "qualifying disposition" rules of section 107.4. The new trust, owned by the MFT, will obtain a daylight loan from a third party, then distribute the funds received on the loan to the MFT as a return of capital. The MFT will loan the funds back to the new trust, and new trust will repay its loan to the third party.
3. Does 107.4(3)(m) increase the ACB of the Fund's capital interest in the Trust?
Position: 1. No. 2. No. 3. Yes.
Reasons: 1. The proposed transactions do not involve the type of conversion of a taxable Canadian corporation to a mutual fund corporation that has historically caused us concern. The current corporation is presently within the mutual fund family and thus the conversion/restructuring is within that family. The desired structure could have been used when the MFT was created in XXXXXXXXXX (i.e., the MFT could have utilized a trust rather than the TCC to acquire the limited partnership units), XXXXXXXXXX .
2. The refinancing merely enables the MFT to hold at least 70% of its investment in the new trust in the form of debt rather than equity, thereby not being offside of the foreign property rules of Regulation 4800. The new trust will be resident in Canada and the property in which it will invest will be used in Canada, and thus the financing arrangement will be consistent with other rulings we have made.
3. The Fund will acquire one or more units of the Trust in exchange for the limited partnership units and 107.4(3)(m) will deem the cost of the additional units to be the Fund's tax cost of the limited partnership units so transferred. If the Fund had not acquired any additional units XXXXXXXXXX , the contribution to the Trust would not increase the Fund's ACB of its capital interest in the Trust, notwithstanding that it would increase the FMV of its capital interest in the Trust
XXXXXXXXXX 2003-005398
XXXXXXXXXX, 2004
Dear XXXXXXXXXX:
Re: Advance Income Tax Ruling
XXXXXXXXXX (the "Fund")
This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the Fund. We also acknowledge your correspondence of XXXXXXXXXX.
You confirmed that, to the best of your knowledge and that of the Fund, none of the issues involved in this ruling request:
? is in an earlier return of the taxpayer or a related person;
? is being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayer or a related person;
? is under objection or appeal by the taxpayer or a related person;
? is before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired; or
? is the subject of a ruling previously considered by the Income Tax Rulings Directorate.
Definitions
In this letter, the following terms have the meanings specified:
"Act" means the Income Tax Act, R.S.C. 1985, c.1 (5th Supp.), as amended, and all references to a statute are to the Act, unless otherwise indicated;
"agreed amount" in respect of an asset means the amount that the transferor and the transferee of the asset agree upon in their election under subsection 85(1) in respect of that asset;
"BCA" means the Business Corporations Act (XXXXXXXXXX);
"Business" means the cheque supply programs business, and related services, for Canadian financial institutions;
"capital property" has the meaning assigned by section 54 and subsection 248(1);
"Fund Unit" means a trust unit of the Fund;
"Fund Indenture" means the declaration of trust of the Fund dated XXXXXXXXXX;
"Partnership Unit" means the interest of a limited partner in the Partnership's capital;
"Regulations" means the Income Tax Regulations (Canada);
"stated capital" means stated capital as that expression is used in the BCA; and
"Trust Unit" means a trust unit of the Trust.
In addition, certain persons will be referred to as follows:
"Amalco MFC" means the corporation to be formed on the amalgamation of MFC and Holdco, as described in paragraph 22 below;
"Fund" means XXXXXXXXXX;
"General Partner" means XXXXXXXXXX;
"Holdco" means XXXXXXXXXX;
"MFC" means the corporation to be incorporated, as described in paragraph 15 below;
"Partnership" means XXXXXXXXXX;
"Pubco" means XXXXXXXXXX; and
"Trust" means the trust to be settled as described in paragraph 29 below.
Facts
1. The Fund is a limited purpose trust formed under the laws of XXXXXXXXXX pursuant to the Fund Indenture. The Fund is a mutual fund trust as defined in subsection 132(6) which was established to, among other things, invest in securities, including shares and debt of Holdco and General Partner. The Fund is not a registered investment as defined in section 204.4. The Fund Units are traded on the XXXXXXXXXX Stock Exchange and the Fund has a XXXXXXXXXX year-end for purposes of the Act.
2. The head office of the Fund is located at XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX. The Fund's account number is XXXXXXXXXX.
3. Under the Fund Indenture, the Fund may issue an unlimited number of Fund Units. Each Fund Unit represents an equal and undivided beneficial interest in the distributions made by the Fund, as well as the net assets of the Fund in the event of termination or winding-up of the Fund. Each Fund Unit is transferable, entitles the holder to one vote and is redeemable at the demand of the holder at a redemption price determined by formula. The Fund Indenture precludes non-residents of Canada from collectively owning the majority of the Fund Units.
4. There were XXXXXXXXXX Fund Units issued and outstanding as of XXXXXXXXXX. As of XXXXXXXXXX, Fund Units representing less than XXXXXXXXXX% of the outstanding Fund Units were owned by the Fund Trustees and directors and officers of General Partner and Holdco. Less than XXXXXXXXXX% of the Fund Units are owned by non-residents of Canada.
5. General Partner was incorporated under the BCA on XXXXXXXXXX. General Partner is a taxable Canadian corporation. The head office of General Partner is located at XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. General Partner's business number is XXXXXXXXXX. General Partner has a XXXXXXXXXX year-end for purposes of the Act. The authorized capital of General Partner consists of an unlimited number of common shares and XXXXXXXXXX% of the issued and outstanding common shares of General Partner are owned by the Fund.
6. Holdco was incorporated under the BCA on XXXXXXXXXX. Holdco is a taxable Canadian corporation. The head office of Holdco is located at XXXXXXXXXX, and it deals with the XXXXXXXXXX Tax Services Office and files its returns with the XXXXXXXXXX Tax Centre. Holdco's business number is XXXXXXXXXX. Holdco has a XXXXXXXXXX year-end for purposes of the Act. The authorized capital of Holdco consists of an unlimited number of common shares and an unlimited number of preferred shares. The Fund owns 100% of the issued and outstanding common shares of Holdco, as follows:
Shareholder Number ACB Paid-Up Capital Fair Market Value
The Fund XXXXXXX $XXXXXXXX $XXXXXXX Greater than the
adjusted cost base
The common shares of Holdco are capital property to the Fund for purposes of the Act. There are no issued and outstanding preferred shares in the capital of Holdco.
7. In addition to the Fund's investment in common shares of Holdco, the Fund also holds $XXXXXXXXXX principal amount of notes issued by Holdco in connection with the transactions described in paragraphs 12 and 13 below. The notes bear interest at a rate of XXXXXXXXXX% per annum, with interest payable monthly. The notes mature in XXXXXXXXXX. The notes of Holdco are capital property to the Fund for purposes of the Act.
8. The three trustees of the Fund are individuals resident in Canada. Under the Fund Indenture, holders of the Fund Units are entitled to vote with respect to the election or removal of the trustees of the Fund, as well as the election or removal of the nominees of the Fund to serve as directors of Holdco and of General Partner.
9. The Partnership is a limited partnership formed under the laws of XXXXXXXXXX and is governed by a limited partnership agreement dated XXXXXXXXXX. General Partner is the general partner of the Partnership and has exclusive authority to manage the business and affairs of the Partnership. The Partnership carries on the Business in Canada and the assets used in the Business are not foreign property within the meaning of subsection 206(1). The head office of the Partnership is located at XXXXXXXXXX and the registered office of the Partnership is located at XXXXXXXXXX.
10. Under the partnership agreement, the Partnership may issue an unlimited number of Partnership Units. Each Partnership Unit is transferable and entitles the holder to one vote. General Partner is entitled to one vote in its capacity as general partner of the Partnership. The income and loss of the Partnership for each fiscal year is allocated to General Partner and the limited partners as to XXXXXXXXXX% and XXXXXXXXXX%, respectively. Holdco is a limited partner of the Partnership and owns XXXXXXXXXX% of the issued and outstanding Partnership Units. As of XXXXXXXXXX, the adjusted cost base of the Partnership Units owned by Holdco was $XXXXXXXXXX. The Partnership Units are capital property to Holdco for purposes of the Act.
11. As at XXXXXXXXXX, the Partnership had $XXXXXXXXXX in available term credit facilities, which are due XXXXXXXXXX. As at XXXXXXXXXX, the Partnership had outstanding a total of $XXXXXXXXXX drawn under these term facilities.
12. XXXXXXXXXX. As part of this reorganization, the Fund was established and it completed an initial public offering of its Fund Units to the public for cash. The Fund then used these proceeds to subscribe for XXXXXXXXXX% of the common shares of General Partner and common shares and notes of Holdco. Holdco, in turn, used the funds to subscribe for Partnership Units. Immediately after these transactions, including the exercise of an over-allotment option by the Fund, Pubco owned a majority of both the shares of General Partner and the Partnership Units.
13. On XXXXXXXXXX, the Fund offered additional Fund Units to the public and used the proceeds to purchase the shares of General Partner owned by Pubco and subscribe for additional common shares and notes of Holdco. Holdco, in turn, used the funds to acquire the Partnership Units owned by Pubco. Immediately after these transactions, Pubco no longer owned any shares of General Partner or Partnership Units.
14. XXXXXXXXXX.
Proposed Transactions
15. The Fund will incorporate MFC under the provisions of the BCA. The only undertaking of MFC will be the investing of its funds in property, other than real property, including the common shares of Holdco and Partnership Units.
16. The authorized capital of MFC will consist of an unlimited number of common shares, "Class A" shares and "Class B" shares. Each common share will entitle the holder to one vote, dividends, as and when declared by the board of directors, be redeemable at the demand of the holder for a redemption price of $XXXXXXXXXX, and, on the dissolution of MFC, will entitle the holder to share ratably in any remaining assets of MFC. The terms of the "Class A" shares will be as follows:
? non-voting;
? entitle the holder to dividends, as and when declared by the board of directors;
? redeemable and retractable;
? entitle the holder to receive the redemption price upon receipt of a Class A share by MFC;
? have a redemption price equal to the fair market value of any consideration paid to acquire such share on issuance;
? the redemption price will payable in cash, or satisfied by the transfer of Fund Units;
? under no circumstances may MFC suspend their redemption; and
? on the dissolution of MFC, entitle the holder to the redemption price in preference to any participation on the common shares.
The terms of the "Class B" shares will be as follows:
? non-voting;
? entitle the holder to dividends, as and when declared by the board of directors;
? redeemable and retractable;
? entitle the holder to receive the redemption price upon receipt of a Class B share by MFC;
? have a redemption price equal to the fair market value of any consideration paid to acquire such share on issuance;
? the redemption price will payable in cash, or satisfied by the transfer of Fund Units;
? under no circumstances may MFC suspend their redemption; and
? on the dissolution of MFC, entitle the holder to the redemption price in preference to any participation on the common shares.
17. The Fund will acquire one common share of MFC on incorporation for $XXXXXXXXXX. MFC will file a prospectus, registration statement or similar document with the securities regulators in each of the provinces of Canada. In accordance with this prospectus, registration statement or similar document, the Fund will subscribe for a number of Class A shares of MFC equal to the number of Fund Units then outstanding for cash.
18. The Fund will distribute, as a return of capital, each Class A share acquired as described in paragraph 17 above, to the holders of Fund Units. Each holder will receive a number of Class A shares equal to the number of Fund Units owned by such holder immediately before this distribution. The number of Fund Units owned by each holder will not be reduced as a result of this distribution. Immediately after the distribution, MFC will satisfy the conditions in paragraphs 4800(1)(b) and (c) of the Regulations.
19. Following the distribution of the Class A shares of MFC described in paragraph 18 above, and prior to the amalgamation described in paragraph 22 below, MFC will elect to be a public corporation pursuant to paragraph (b) of the definition of "public corporation" in subsection 89(1). The Class A shares will be the class of shares designated under paragraph 4800(1)(a) of the Regulations in such election.
20. The Fund and MFC will enter into an agreement of purchase and sale under which the Fund will transfer the common shares and notes of Holdco then outstanding to MFC for an aggregate purchase price equal to the respective fair market value of each property so transferred. MFC will satisfy the purchase price by issuing to the Fund Class B shares with an aggregate fair market value equal to the fair market value of the common shares and notes of Holdco.
21. The Fund will jointly elect with MFC, in prescribed form and within the time referred to in subsection 85(6), to have the provisions of subsection 85(1) apply to the transfer of the common shares and notes of Holdco as described in paragraph 20 above. The agreed amount in respect of the common shares and notes of Holdco will be an amount not less than the lesser of the amounts described in subparagraphs 85(1)(c.1)(i) and (ii). In each case, the agreed amount will not exceed the fair market value of the respective property, nor will it be less than the amount permitted under paragraph 85(1)(b).
22. XXXXXXXXXX following the day on which the election described in paragraph 19 above is made, MFC and Holdco (hereinafter referred to as "predecessor corporations") will undertake a vertical short-form amalgamation under the provisions of the BCA to form Amalco MFC in such a manner that:
? all of the property (except any amounts receivable from any predecessor corporation or shares of the capital stock of any predecessor corporation) of the predecessor corporations held immediately before the amalgamation will become property of Amalco MFC by virtue of the amalgamation;
? all of the liabilities (except any amounts payable to any predecessor corporation) of the predecessor corporations immediately before the amalgamation will become liabilities of Amalco MFC by virtue of the amalgamation; and
? all of the notes and common shares of Holdco held by MFC immediately prior to the amalgamation will be cancelled by virtue of the amalgamation.
In accordance with the provisions of the BCA, the articles of amalgamation of Amalco MFC will be the same as the articles of MFC, and Amalco MFC will not issue any securities in connection with the amalgamation.
23. Amalco MFC will subscribe for a number of Fund Units at their fair market value, using the cash subscription proceeds received as described in paragraph 17 above.
24. Amalco MFC and the Fund will enter into an agreement of purchase and sale under which the Amalco MFC will transfer all of the Partnership Units to the Fund for a purchase price equal to their fair market value. The Fund will satisfy the purchase price by issuing to Amalco MFC a number of Fund Units with an aggregate fair market value equal to the fair market value of the Partnership Units so acquired.
25. Within XXXXXXXXXX of the transfer described in paragraph 24 above, Amalco MFC will redeem all of the issued and outstanding Class A shares other than the Class A shares owned by the Fund, as well as all of the Class B shares owned by the Fund. As consideration for such redemptions, Amalco MFC will distribute on a pro-rata basis the Fund Units that it acquires from the Fund as described in paragraphs 23 and 24 above, to the Class A shareholders and the Fund, respectively. The Fund Units received by the Fund will be cancelled upon receipt. XXXXXXXXXX.
26. Following the transactions described in paragraphs 24 and 25 above, but prior to the dissolution of Amalco MFC described in paragraph 28 below, Amalco MFC will jointly elect with the Fund, in prescribed form and within the time referred to in paragraph (c) of the definition of qualifying exchange in subsection 132.2(2), to have the provisions of section 132.2 apply to the transfer of the Partnership Units, as described in paragraph 24 above.
27. XXXXXXXXXX.
28. Following the exchange described in paragraph 24 above, the Fund will, by special resolution, resolve to liquidate and dissolve Amalco MFC under the applicable provisions of the BCA. The one common share of Amalco MFC owned by the Fund will be cancelled and any remaining properties of Amalco MFC will be distributed to the Fund on the wind-up. In due course, Amalco MFC will file a tax return for its final taxation year and articles of dissolution will be filed and Amalco MFC will be dissolved.
29. A Canadian resident third party settlor will settle the Trust under the laws of XXXXXXXXXX with a nominal cash contribution, and the third party will receive one Trust Unit. Under the declaration of trust establishing the Trust, the Trust may issue an unlimited number of Trust Units. Each Trust Unit will represent an equal and undivided beneficial interest in the distributions made by the Trust, as well as the net assets of the Trust in the event of termination or winding-up of the Trust. Each Fund Unit will be transferable and will entitle the holder to one vote.
30. The Fund will subscribe for one Trust Unit for nominal consideration. The initial Trust Unit issued to the third party settlor on the settlement of the Trust, as described in paragraph 29 above, will be repurchased by the Trust for an amount equal to the cash received from the third party.
31. Following the settlement of the Trust and the transactions described in paragraphs 24 and 30 above, the Fund will transfer all of the Partnership Units that it owns to the Trust for one or more Trust Units. This transfer will occur in one day. The Fund will not make the election in subparagraph 107.4(3)(a)(i) and the Trust will not make the election in clause 107.4(3)(c)(ii)(B). Following this transfer, the Fund will continue to directly own 100% of the Trust Units and will indirectly own 100% of the Partnership Units. The Partnership Units acquired by the Trust will not be used to fund a distribution by the Trust.
32. The Trust will obtain a daylight loan. Following the transfer described in paragraph 31 above, the Trust will distribute the cash proceeds of the loan to the Fund as a return of capital. The return of capital is contemplated to be an amount equal to XXXXXXXXXX% to XXXXXXXXXX% of the adjusted cost base of the Partnership Units transferred by the Fund to the Trust. This distribution of capital by the Trust will be funded by the daylight loan.
33. The Fund will loan the cash received from the Trust, as described in paragraph 32 above, to the Trust and the Trust will issue notes as evidence of this indebtedness. The loan from the Fund to the Trust will be payable on demand and non-interest bearing. The subscription and loan will occur on the same day as the transfer described in paragraph 31 above. The Trust will use the cash received to repay the daylight loan.
34. Following the transactions described in paragraphs 30 to 33 above, the Trust may subdivide the one Trust Unit into a number of Trust Units.
35. The value of the beneficial ownership of each holder of a Fund Unit under the Fund in the Partnership Units at the commencement of the transfer described in paragraph 31 above will be the same as the value of such holder's beneficial ownership under the Fund and the Trust in the Partnership Units at the completion of the transfer.
36. The approval of the holders of the Fund Units, by way of special resolution, will be sought prior to the implementation of the proposed transactions.
Purpose of Proposed Transactions
37. The Business carried on by the Partnership is profitable and accordingly, the Fund expects to have excess funds available to invest in additional investments within several years. In order to maximize cash distributions to holders of Fund Units, the Fund anticipates making such additional investments through a newly settled trust. Maintaining both Holdco and a new trust would, however, result in significant administrative cost and effort. Consequently, the objective of the proposed transactions is to reorganize the current organizational structure of the Fund and its subsidiaries into a trust-on-trust structure in anticipation of future expansion.
38. The purpose of the transactions described in paragraphs 32 and 33 above is to ensure that the Fund's investment in Trust does not cause the Fund to hold more than XXXXXXXXXX% of its property as foreign property.
Rulings
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, the proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:
A. Provided that at the time Amalco MFC transfers its assets to the Fund, Amalco MFC is a mutual fund corporation and the Fund is a mutual fund trust, and provided that the joint elections are filed in prescribed form and within the time set out in to in paragraph (c) of the definition of qualifying exchange in subsection 132.2(2), the transactions described in paragraphs 24 to 26 above will constitute a qualifying exchange such that provisions of subsection 132.2(1) will apply to:
(a) the transfer of the Partnership Units from Amalco MFC to the Fund described in paragraph 24 above;
(b) the purchase for cancellation by Amalco MFC of the Class A shares and Class B shares described in paragraph 25 above; and
(c) the transfer of the Fund Units from Amalco MFC to holders of the Class A shares and the Class B shares described in paragraph 25 above.
B. The transfer of the Partnership Units from the Fund to the Trust will be a "qualifying disposition" pursuant to subsection 107.4(1).
C. The debt owing by the Trust to the Fund will not be considered foreign property for purposes of Part XI provided that the Trust remains resident in Canada.
D. Subsection 245(2) will not apply to redetermine the tax consequences described above, solely as a result of the proposed transactions described herein.
The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act. Nothing in this ruling should be construed as implying that the Canada Revenue Agency has agreed to or reviewed any tax consequences relating to the facts and proposed transactions described herein other than those described in the rulings given.
Provided that the draft legislation, as contained in subsection 72(1) of the Legislative Proposals released by the Department of Finance on February 27, 2004, is enacted substantially as proposed, it is our opinion that the tax consequences confirmed in Ruling A will not be affected by the proposed changes to section 132.2.
These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that the proposed transactions described in 15 to 34 above are completed before XXXXXXXXXX.
Yours truly,
XXXXXXXXXX
for Director
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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