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: What is the characterization of an Irish Common Contractual Fund for purposes of the Income Tax Act (the "Act")?
Position: For purposes of the Act, the Fund itself is a non-entity and each investor in the Fund is a co-owner of the assets of the Fund.
Reasons: See statement of principal issues.
Re: Advance Income Tax Ruling
This is in reply to your letter dated XXXXXXXXXX, wherein you requested an advance income tax ruling on behalf of the above-referenced taxpayer with respect to the transactions described herein. To the best of your knowledge and that of Foreignco, none of the issues involved in this ruling request:
1. is in an earlier return of Foreignco or a related person;
2. is being considered by a Tax Services Office or Taxation Centre in connection with a previously filed tax return of Foreignco or a related person;
3. is under objection by Foreignco, or a related person;
4. is before the courts; or
5. 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 set out below.
1. In this letter, unless otherwise expressly stated:
a) "Authority" means the Irish Financial Services Regulatory Authority, fulfilling the duties of the Central Bank and Financial Services Authority of Ireland set out in the Regulations;
b) "Common Contractual Fund" means common contractual fund as defined in subsection 2(1) of the Regulations - in particular, a collective investment undertaking being an unincorporated body established by a management company under which the participants by contractual arrangement participate and share in the property of the collective investment undertaking as co-owners;
c) "CRA" means Canada Revenue Agency;
d) "Custodian" means XXXXXXXXXX acting as custodian with respect to the Fund;
e) "Custodian Agreement" means the agreement to be entered into between XXXXXXXXXX with respect to the appointment of and duties of XXXXXXXXXX as Custodian;
f) "Deed of Constitution" means the deed of constitution to be entered into between the Custodian and the Manager providing for the establishment of the Fund;
g) "Fund" means the Common Contractual Fund to be established by the Manager and the Custodian;
h) "Manager" means XXXXXXXXXX, acting as manager of the Fund as set out in the Deed of Constitution;
i) "Prospectus" means the prospectus to be issued in connection with investment in the Fund by prospective Unitholders;
j) "Regulations" means Irish Statutory Instrument No. 211 of 2003, European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2003 (dated May 29, 2003), as amended;
k) "Tax Treaty" means a "tax treaty" as defined in subsection 248(1);
l) "Unit" means a unit of account, representing one undivided share in the assets of a Common Contractual Fund, or one undivided share in the assets of a particular portfolio of a Common Contractual Fund; and
m) "Unitholder" means a legal or natural person who holds Units of a Common Contractual Fund.
2. Foreignco is acting on behalf of certain multinational pension funds in the proposed establishment of the Fund. Foreignco is a non-resident of Canada for purposes of the Act.
3. The Authority must authorize any Common Contractual Fund established in Ireland.
4. A Common Contractual Fund established in Ireland is governed by the Regulations and must also meet any additional requirements imposed by the Authority.
5. The Regulations authorize the establishment of Common Contractual Funds with multiple portfolios of assets.
6. The Authority may also revoke the authorization of a Common Contractual Fund in specified circumstances.
7. Subsection 23(3) of the Regulations provides that the liabilities of a Unitholder are limited to the amount contributed by that Unitholder for the subscription of Units. It also provides that the deed of constitution of a Common Contractual Fund is binding on the Unitholders and all persons claiming through the Unitholders as if the person had been party to the deed of constitution.
8. Subsection 739C(1A) of the Taxes Consolidation Act, 1997 (Ireland), as amended by the Finance Act 2003 (Ireland), governs the taxation of particular Common Contractual Funds. If an investment undertaking is established by other than trust law or statute law (i.e., it is a Common Contractual Fund) and each of the Units of it is beneficially owned by a pension fund, or is held by a custodian or trustee for the benefit of a pension fund, then special rules apply. In particular, income and gains in relation to the investment undertaking shall be treated as arising or accruing to each Unitholder in the investment undertaking in proportion to the value of the Units beneficially owned by the Unitholder, as if the income and gains arise or accrue to the Unitholders in the investment undertaking without passing through the hands of the investment undertaking.
9. The Custodian and the Manager will to enter into the Deed of Constitution to establish the Fund.
10. The Fund will be constituted as a Common Contractual Fund established pursuant to the Regulations and approved by the Authority.
11. The Fund will be marketed as an investment arrangement for pension funds.
12. All Unitholders of the Fund will be pension funds. Investing pension funds will be from any or all of the jurisdictions listed in Appendix A.
13. A prospective Unitholder of the Fund will invest pursuant to the Prospectus. Under the Prospectus, the Unitholder will agree to accept the terms of the Deed of Constitution.
14. The Fund will invest only in those investments permitted by the Regulations, the Prospectus, the Deed of Constitution, and any other regulatory requirements. The Fund will invest in any or all of the jurisdictions listed in Appendix B.
15. The Fund will be an open-ended umbrella fund, which means that there will be multiple portfolios of assets and each Unitholder in the Fund will only have an interest in the assets of the Fund relating to the particular portfolio invested in.
16. The Unitholders and the Fund will be subject to subsection 739C of the Taxes Consolidation Act, 1997 (Ireland), as amended by the Finance Act 2003 (Ireland).
17. The Custodian will be responsible for the safekeeping of the assets of the Fund and executing transactions at the direction of the Manager pursuant to the Custodian Agreement entered into between the Custodian and the Manager.
18. Pursuant to the Deed of Constitution, the Custodian will enquire into the conduct of the Manager semi-annually and report thereon to the Unitholders. In specified circumstances set out in the Deed of Constitution, the Custodian may, or may be required to, remove and replace the Manager.
19. The Custodian will have no other material duties in connection with the Fund.
20. The Manager will have overall responsibility for the management of the Fund's assets in accordance with the Prospectus, Deed of Constitution, the Regulations and any other regulatory requirements.
21. The Deed of Constitution will provide that:
Each Unit represents an undivided co-ownership interest of a Unitholder as tenant in common with the other Unitholders in the assets of a Portfolio. No Unit shall confer any interest or share in any particular part of the assets of a Portfolio.
22. The Deed of Constitution will provide that the Fund must distribute gross income less expenses to Unitholders at least annually pro rata to each Unitholder's investment in the relevant portfolio of the Fund.
23. Pursuant to the Deed of Constitution, Unitholders will not be able to transfer (by sale or otherwise) their Units of the Fund.
24. Unitholders will be able to redeem their Units of the Fund for an amount based on the net asset value of that portfolio of the Fund.
25. The Units do not have any voting rights (other than the right on written notice signed by Unitholders representing XXXXXXXXXX% of the Units in issue to require the Manager to retire), rights to call general meetings, rights to request distributions or dissolutions or any influence over the management of the Fund.
Purpose of the Proposed Transactions
26. Many multinational corporations currently operate pension funds in each country in which they are established. Such pension funds invest in assets located not only in their home countries, but also in other jurisdictions. The intention is that these local pension funds would invest into an arrangement that would pool these investment assets. The pooled assets would be collectively held and future investments would be made through the pooling arrangement.
27. The pooling of the pension fund assets would enable a number of cost savings to be achieved through economies of scale. These savings would include a reduction in management fees, administration costs, and custodian fees. Equally important, a pooled arrangement would allow smaller country funds to diversify their risk by using a larger number of investment managers than would be possible if they operated on a stand-alone basis.
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above and the Fund is established by XXXXXXXXXX, and subject to the comments set out below, our rulings are as follows:
A. Each Unitholder in the Fund will directly own a proportionate, indivisible interest in each asset of the relevant portfolio of the Fund for purposes of the Act.
B. For purposes of Part I of the Act, each Unitholder in the Fund will directly earn its proportionate share of income, losses, capital gains and capital losses, earned by the assets of the relevant portfolio of the Fund.
C. For purposes of Part I of the Act, the character, source and timing of income, losses, capital gains and capital losses earned by each Unitholder from the assets of the relevant portfolio of the Fund will be not be affected by the fact that the Fund has been used as the mechanism by which each Unitholder owns its proportionate share of those assets.
D. Provided that a Unitholder meets its filing requirements set out in the Act and the Income Tax Regulations with respect to its income, losses, capital gains and capital losses described in Rulings B and C, distributions from the Fund to that Unitholder, as described in paragraph 22, will not be taxable events for purposes of Part I of the Act.
E. For purposes of Part XIII of the Act, any amount paid or credited by a Canadian payer to the Custodian will be an amount paid or credited to each Unitholder in proportion to the Unitholder's ownership of the assets of the relevant portfolio of the Fund.
F. For purposes of applying Part XIII of the Act to each Unitholder, the character, source and timing of any amount paid or credited by a Canadian payer in respect of the assets of the relevant portfolio of the Fund will be not be affected by the fact that the Fund has been used as the mechanism by which each Unitholder owns its proportionate share of those assets.
G. If a Unitholder redeems Units of the Fund, the Unitholder will have disposed of a proportionate interest in the assets of the relevant portfolio of the Fund for purposes of calculating the capital gain or loss on such disposition for purposes of the Act.
H. The proportionate share of the assets of the relevant portfolio of the Fund held by each Unitholder will be subject to the foreign property rules in Part XI of the Act.
I. Units of the Fund will not be foreign property for purposes of Part XI of the Act.
J. Each Unitholder that is a resident, for purposes of the applicable Tax Treaty, of an investor jurisdiction listed in Appendix A of this letter shall be entitled to the benefits of that Tax Treaty in respect of its proportionate share of the assets of the relevant portfolio of the Fund.
Nothing in this letter should be construed as implying that the CRA has considered, examined, agreed to or ruled on whether any Unitholder is a resident of any country with which Canada has entered into a Tax Treaty or the manner in which any article of a Tax Treaty applies to any Unitholder. Additionally, nothing in this letter should be construed as implying that the CRA has agreed to or reviewed any tax consequences relating to the facts and proposed transactions other than those specifically set out in the Rulings Given.
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch
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