23 November 2004 External T.I. 2004-0056271E5 - income trusts as qualified investments

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: Three follow-up questions were asked based on our file E2003-0030975.

1. Are income trusts qualified investments for an RRSP because they are mutual funds?

2. Are oil and gas income trusts always mutual fund trusts because they derive their value from Canadian resource property?

3. Can it be assumed that a fund is a mutual fund if either:

i. the prospectus includes a clause providing that the sale of the trusts to non-residents is not intended; or
ii. the units are only available on a Canadian prescribed stock exchange?

Position:

1. If an income trust is a mutual fund, it will be a qualified investment under Regulation 4900(1)(d) or (d.1). It is a question of fact whether any particular income trust is a mutual fund trust.

2. No.

3. No.

Reasons:

1. Application of Regulations.

2. This is a question of fact.

3. This is a question of fact..

XXXXXXXXXX 2004-005627
W. C. Harding
November 23, 2004

Dear XXXXXXXXXX:

Re: Income and Royalty Trust Units

This is in reply to your electronic correspondence of January 14, 2004 in which you requested clarification of the comments in our letter 2003-0030975, dated November 28, 2003 (the "Letter"), concerning the tax implications to a registered plan that holds units of an income or royalty trust.

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 Revenue Agency ("CRA"). All publications referred to herein can be accessed on the CRA website at the following address: http://www.cra-arc.gc.ca/formspubs/menu-e.html.

In your first question, you ask us to confirm that while income and royalty trusts are not specifically defined in the Income Tax Act (the "Act") they are considered qualified investments for registered plans (including registered retirement income funds, registered retirement savings plans, and registered educational savings plans), because they are structured as mutual fund trusts.

We cannot confirm this position. As stated in our Letter, income and royalty trusts are not specifically defined, or referred to, in 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 (as set out in our Letter), before they can be held as qualified investments of a registered plan. While it is our understanding that income and royalty trusts are generally marketed as mutual fund trusts, it is a question of fact whether any particular income or royalty trust is a mutual fund trust or any other type of qualified investment.

With respect to your second question on foreign ownership of units of a mutual fund, we noted in our Letter that, subsection 132(7) of the Act basically 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 not be treated as a mutual fund trust from that point in time, unless the provisions of paragraph 132(7)(a) or (b) of the Act are met. We then noted that, in general terms, the exceptions to the general rule provided under these paragraphs provide that a mutual fund trust will continue to be treated as such 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.

Given this explanation, you have asked if it can be assumed that oil and gas income trusts would be mutual fund trusts because the assets held by such trusts derive their value from "Canadian resource property" as defined in subsection 66(15) of the Act. In other words, can it be assumed that the test in paragraph (a) has been met where substantially all of the mutual fund's property derives its value from Canadian resource properties?

We cannot confirm this position. The term "Canadian resource property" as set out in subsection 66(15) of the Act is defined to include various interests in oil, gas and mineral resources located in Canada, as well as any right to, or interest in, such properties. Accordingly, it is possible, for example, for a corporation, a trust or a partnership to own a Canadian resource property and derive all or a portion of its own value from that holding. In addition, the term "taxable Canadian property" is defined in subsection 248(1) of the Act to include, among others, shares of corporations, units of trusts and interests in partnerships that satisfy one of the conditions set out in the definition.

Without specifically referring to those conditions, it is possible to conclude that a share of a corporation, a unit of a trust, or an interest in a partnership or some other entity, could be a "taxable Canadian property" even though it derives its value from a "Canadian resource property". It follows that a mutual fund trust could fail to satisfy the exception described in paragraph (a) above because all or substantially all of the property of the mutual fund trust is made up of such taxable Canadian properties, even though the mutual fund trust derives substantially all of its value through (indirect) investments in the Canadian resource property held by these entities. Again, the determination of this would be a question of fact.

We would also note that an oil and gas income trust would have to qualify as a mutual fund trust in accordance with all relevant provisions of section 132 of the Act and, as noted above, this would be a question of fact.

In your last question you asked if, in respect of the application of paragraph 132(7)(b) of the Act, it may be assumed that a fund is a mutual fund if either:

i. the prospectus includes a clause providing that the sale of the trust's units to non-residents is not intended; or

ii. the units of the trust are only available on a Canadian prescribed stock exchange.

The terms of a prospectus may need to be considered in determining whether the provisions of subsection 132(7) of the Act should be applied in a particular situation. However, subsection 132(7) indicates that all circumstances must be considered when applying the provision. Accordingly, the terms of a prospectus could not be relied upon by itself.

Paragraph 132(7)(b) of the Act basically provides that, except as otherwise provided, if a mutual fund trust issues a unit to a non-resident, the mutual fund trust must establish that reasonable inquiries were made and that it had reason to believe the person to whom the unit was issued was not a non-resident at the time the unit was issued. Where a unit of a mutual fund trust is traded on an exchange, we would presume that the mutual fund trust would establish appropriate procedures for the application of these tests. In any event, any determination that these conditions were satisfied would have to be considered on a case-by-case basis.

We trust our comments will be of assistance to you.

Yours truly,

Roberta Albert, CA
for Director
Financial Industries Division
Income Tax Rulings Directorate
Policy and Planning Branch

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