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: Would a trust still meet the conditions of 132(6) and qualify as a MFT after having guaranteed a debt of a corporation held indirectly by a partnership (70% interest in the partnership)? The following facts were considered to be important in making that determination: (i) the only reason why the guarantee was provided was to enable the corporation to file a short form prospectus by being guaranteed by a public entity; (ii) the partnership commited to compensate the trust should it be requiered to honour the guarantee; (iii) the minority interests in the partnership can be converted in trust units issued by the MFT or be sold to the MFT.
Position: The trust will still meet the conditions of 132(6) after having provided the guarantee.
Reasons: In light of the facts described above, the guarantee ought to be viewed as incidental to, or part of, the Fund's investment.
XXXXXXXXXX 2004-006822
April 6, 2004
Dear XXXXXXXXXX:
Re: Debt guaranteed by a mutual fund trust
This is in reply to your request dated March 24, 2004, wherein you ask whether the provision of a guarantee by a trust affects its mutual fund trust status. 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". You enquire whether that condition is met by a trust that guarantees the loan of an indirect subsidiary that is not wholly-owned.
Your letter states the following facts:
1. A trust qualifies as a mutual fund trust pursuant to subsection 132(6) of the Act (the "Fund").
2. The Fund owns all the issued and outstanding units of a second trust (the "Trust").
3. The Trust owns 70% of the limited partner interest in a limited partnership. A corporation is the general partner of the partnership.
4. The other limited interests in the partnership are owned by third parties. The third parties can either sell those limited interests to the Fund or convert them into Fund units.
5. The limited partnership owns all the issued and outstanding shares of a holding company ("Holdco").
6. Holdco holds all the issued and outstanding shares of an operating company ("Opco").
7. Holdco and Opco both reside in Canada.
8. Holdco issues notes and debentures to the public and that debt is guaranteed by Opco, the partnership and the Fund.
9. The partnership provides a guarantee in favour of the Fund in respect of Holdco's debts described in point 8.
10. No guarantee fee will be paid to the Fund nor to the other guarantors described in point 8.
The guarantee described in point 8 above is provided by the Fund solely to enable Holdco to access the financial markets by issuing a short form prospectus in order to benefit from the expediency and other advantages stemming from that procedure. In light of all the facts described above, the guarantee should be viewed as incidental to, or part of, the Fund's investment.
In light of the above mentioned facts, provided that all the conditions of section 253.1 of the Act are met and that the Fund is not engaged in the business of lending money or guaranteeing loans, we are willing to consider that the requirements of subsection 132(6) of the Act are not violated by the mere fact that the Fund provides the guarantee referred to in point 8.
We are not in a position to, and express no view with respect to, the application of section 253.1 of the Act, nor with respect to whether the Fund is engaged in the business of lending money or guaranteeing loans.
This opinion is provided in accordance with the comments in paragraph 22 of Information Circular 70-6R5. As stated therein, this opinion is not an advance income tax ruling and is not binding on the Canada Revenue Agency.
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 Planning Branch
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