2005 Ruling 2004-0088711R3 - MFT investing its funds in property

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: Whether the acquisition of rights assigned or sold under a credit agreement meet the criteria of 132(6)((b)(i).

Position: Yes

Reasons: The MFT invests part of its funds in those rights.

XXXXXXXXXX 							2004-008871

XXXXXXXXXX, 2005

Dear Sirs:

Re: Advance Income Tax Ruling Request
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of XXXXXXXXXX. We also acknowledge our subsequent telephone conversations concerning your request.

This document is based solely on the facts and proposed transactions described below. The documentation submitted with your request does not form part of the facts and proposed transactions and any references thereto are provided solely for the convenience of the reader.

To the best of your knowledge, and that XXXXXXXXXX, none of the issues involved in this advance income tax ruling request:

(a) is considered in an earlier return of XXXXXXXXXX or a person related to XXXXXXXXXX;

(b) is being considered by a tax services office or a taxation centre in connection with a previously filed income tax return of XXXXXXXXXX or a person related to XXXXXXXXXX;

(c) is under objection by XXXXXXXXXX or a person related to XXXXXXXXXX;

(d) is or has been before the courts; or

(e) is the subject of a ruling previously considered by the Income Tax Rulings Directorate in respect of XXXXXXXXXX or a person related to XXXXXXXXXX.

The following definitions are applicable to this document:

"Act" means the Income Tax Act (Canada), R.S.C. 1985, c.1 (5th Supp.), as amended to the date of this document.

"Agent" means the XXXXXXXXXX (or any successor thereto) in its capacity as administrative agent designated under the Credit Agreement or any successor administrative agent appointed pursuant to Section XXXXXXXXXX of the Credit Agreement.

"Assigned Interest" means an interest of the Fund as an assignee of the rights and obligations of an Assigning Lender under all or a portion of an outstanding Facility pursuant to the terms of the Assignment Agreement.

"Assigning Lender" means a Lender who enters into an Assignment Agreement with the Fund.

"Assignment Agreement" means an agreement entered into by the Fund and an Assigning Lender. Schedule 1 of the Assignment Agreement specifies the Facility in respect of which an assignment is made, the principal amount of such Facility assigned and the effective date of the assignment.

"Borrowers" means the Canadian Borrower, XXXXXXXXXX.

"Canadian Borrower" means XXXXXXXXXX.

"Credit Agreement" means the agreement dated XXXXXXXXXX, entered into by the Borrowers, to have access to the Loans and other borrowed funds pursuant thereto for XXXXXXXXXX.

"Declaration of Trust" means the Master Declaration of Trust dated as of XXXXXXXXXX and most recently amended and restated as of XXXXXXXXXX. The preamble of the Master Declaration of Trust indicates that it is executed "XXXXXXXXXX".

"Facility" means a Loan under which the obligation to advance funds pursuant to the Credit Agreement has been fully satisfied. XXXXXXXXXX.

"Fund" means XXXXXXXXXX, an inter vivos trust governed by the laws of the province of XXXXXXXXXX under the Declaration of Trust.

"Lender" means a person listed in schedule 1.1 to the Credit Agreement who makes a Loan available to a Borrower and any person who becomes a Lender by way of assignment in accordance with the terms of the Credit Agreement.

"Loan" means a XXXXXXXXXX loan made under the Credit Agreement by a Lender to a Borrower. XXXXXXXXXX. A Loan is evidenced by a promissory note issued by a Borrower to the Lender(s).

"Participation Agreement" means an agreement entered into by the Fund and the Selling Lender.

"Participation Interest" means an undivided interest in the principal amount of a Facility identified in Schedule 1 to the Participation Agreement sold by a Selling Lender to the Fund under the terms of the Participation Agreement, entitling the Fund to receive, to the extent of its participating percentage in the Facility, amounts payable by the Borrower to the Selling Lender under the Facility (interest, fees and principal).

"Selling Lender" means a Lender who enters into a Participation Agreement with the Fund.

"Trustee" means XXXXXXXXXX, a corporation amalgamated under the laws of the province of XXXXXXXXXX and a taxable Canadian corporation within the meaning of the Act. Its address is XXXXXXXXXX and its business number is XXXXXXXXXX. The Trustee files its corporate income tax returns with the XXXXXXXXXX Tax Services Office. The Trustee is the manager of certain mutual fund corporations and is the manager and trustee of certain mutual fund trusts.

PROPOSED TRANSACTIONS

1. The Trustee will arrange for the settlement of the Fund and the issuance of trust units of the Fund to the public by way of a prospectus filed with applicable securities regulators in Canada. The Trustee will act as the trustee of the Fund and will also enter into a management agreement with the Fund to provide investment management and administration services to the Fund.

2. The Fund will be a mutual fund under securities law and will comply with the investment and other provisions of National Instrument 81-102. The Fund will also be a unit trust within the meaning of paragraph 108(2)(a) of the Act from the date of its establishment and a mutual fund trust within the meaning of subsection 132(6) of the Act before the 91st day after the end of its first taxation year. The Trustee will elect under subsection 132(6.1) of the Act in the income tax return of the Fund for its first taxation year to have the Fund qualify as a mutual fund trust from the beginning of its first taxation year.

3. The excess of income over the expenses of the Fund will be distributed to holders of its trust units in accordance with the terms of the Declaration of Trust.

4. Once the Fund has obtained sufficient net proceeds from the issuance of trust units, it will acquire investments, including cash or cash equivalents, Assigned Interests, and Participation Interests.

5. The Fund will acquire the assets described in point 4 to generate a high level of current income. The Fund may realize or change an investment in order to reach that investment objective and accordingly dispose of those assets from time to time.

6. The Fund will acquire Assigned Interests in connection with what is described in the Credit Agreement as a Canadian Term Facility and a US Term Facility. The Assigned Interest will become legally effective once the Fund and the Assigning Lender execute it, provide the required notice, obtain any necessary consent in accordance with the terms of the Credit Agreement and once the Fund pays the consideration and any required fees for the Assigned Interest.

7. The Assignment Agreement will incorporate the significant assignment provisions contained in the Credit Agreement, by providing that:

(a) The Assigning Lender represents that it is the legal and beneficial owner of the Assigned Interest and assumes no responsibility with respect to the financial condition of the Borrower or the performance of the Borrower (Section XXXXXXXXXX of the Assignment Agreement).

(b) The Fund has received a copy of the Credit Agreement, financial statements of the Borrower and such other information as it has deemed appropriate to make its own credit analysis and decision to enter into the Loan assignment (Section XXXXXXXXXX of the Assignment Agreement).

(c) The indemnities, representations and warranties of the Assigning Lender survive the execution and delivery of the Credit Agreement, the making of the Loans thereunder and the repayment of the Loans and other obligations thereunder (Sections XXXXXXXXXX of the Credit Agreement).

(d) The Assigning Lender's rights and obligations with respect to a Facility are irrevocably sold and assigned (Section XXXXXXXXXX of the Assignment Agreement).

(e) The Fund agrees to be bound by the provisions of the Credit Agreement and to perform all obligations required to be performed by it as a Lender thereunder (Section XXXXXXXXXX of the Assignment Agreement). The Fund becomes a party to the Credit Agreement and, to the extent provided in the Assignment Agreement, shall have the rights and obligations of the Assigning Lender thereunder (Section XXXXXXXXXX of the Assignment Agreement). Conversely, the Assigning Lender relinquishes its rights and is released from its obligations except as specified in the Credit Agreement. The essence of those rights and obligations is described in point 8. The Assigned Interest will not be an interest described in subsection 2.3(i) of National Instrument 81-102; i.e., it will not require the Fund to assume any responsibilities in administrating the Facility in relation to the Borrower.

(f) The Fund appoints and authorizes the Agent to take such action on its behalf and to exercise such powers and discretion under the Credit Agreement as are delegated to the Agent by the terms thereof, or are incidental thereto.

(g) Upon request by the Assigning Lender and the Fund, the Agent issues a new note payable to the Fund to the extent of the Assigned Interest, cancels the initial note issued to the Assigning Lender and issues a new note to the Assigning Lender to the extent of any interest in the Loan that was retained by the Assigning Lender (Section XXXXXXXXXX of the Assignment Agreement).

(h) After the effective date of the assignment, the Agent shall make all payments in respect of the Assigned Interest (principal, interest, fees and other amounts) to the Fund rather than to the Assigning Lender (Section XXXXXXXXXX of the Assignment Agreement).

8. The Fund will acquire the following rights and be subject to the following obligations as a result of acquiring the Assigned interest:

(a) The right to receive, and the obligation to share, payments from the Borrower on a pro rata basis where there are multiple Lenders (Sections XXXXXXXXXX of the Credit Agreement).

(b) The right to receive additional amounts if increased costs arise in specified circumstances such as a change in law or illegality (Sections XXXXXXXXXX of the Credit Agreement).

(c) The right to receive amounts payable by the Borrower free of withholding taxes (Section XXXXXXXXXX of the Credit Agreement).

(d) The right to set off any amounts held for, or owing by it to, the Borrower against amounts owing by the Borrower upon the occurrence of an event of default (Section XXXXXXXXXX of the Credit Agreement).

(e) The right to assign, or to sell a Participation Interest in, all or a portion of an Assigned Interest in specified circumstances (Section XXXXXXXXXX of the Credit Agreement).

(f) The right to receive the benefit of specified representations, warranties and covenants of the Borrower (Articles XXXXXXXXXX of the Credit Agreement).

(g) The right to accelerate the maturity date of the Loan in specified circumstances upon the occurrence of an event of default (Section XXXXXXXXXX of the Credit Agreement).

(h) The right to be indemnified for costs, expenses and losses arising in connection with a default under the Loan, the enforcement of security or the borrower's breach of a representation, warranty or covenant (Sections XXXXXXXXXX of the Credit Agreement).

(i) The obligation to appoint and authorize the Agent to act as its agent to take all such action on its behalf under the Credit Agreement and to exercise all such powers and duties as are expressly delegated by the terms of the Credit Agreement, including the application of all payments and other benefits arising thereunder (Section XXXXXXXXXX of the Credit Agreement).

(j) The obligation to indemnify the Agent for losses, costs and expenses other than those resulting from the Agent's gross negligence (Section XXXXXXXXXX of the Credit Agreement).

(k) The right to consent to or reject certain amendments to the Credit Agreement (Section XXXXXXXXXX of the Credit Agreement).

9. The Fund will also acquire a Participation Interest in connection with what is described in the Credit Agreement as a Canadian Term Facility and a US Term Facility. The Participation Agreement will become legally effective at the determined date or once the Fund and the Selling Lender execute the Participation Agreement, provide the required notice and obtain any necessary consent in accordance with the terms of the Participation Agreement and once the Fund pays the purchase price.

10. The Participation Interest described in point 9 will be acquired pursuant to the terms of the Participation Agreement, which will incorporate the significant participation provisions contained in the Credit Agreement, and provide that:

(a) The Selling Lender assumes no responsibility with respect to the financial condition of the Borrower or the performance of the Borrower of any provisions of the Credit Agreement (Paragraph XXXXXXXXXX of the Participation Agreement).

(b) The Fund represents that it has made its own credit analysis for the purpose of acquiring the Participation Interest and it has received the Credit Agreement and such additional documents and information as it has deemed necessary for such purpose (Paragraph XXXXXXXXXX of the Participation Agreement).

(c) The Fund's rights against the Selling Lender are those set forth in the Participation Agreement which provides that the Fund acquires the Participation Interest without recourse to the Selling Lender and for the Fund's own account and risk (Paragraph XXXXXXXXXX of the Credit Agreement and Section XXXXXXXXXX of the Participation Agreement).

(d) The Selling Lender sells, to the extent permitted to be transferred under applicable law, a Participation Interest in each Loan set forth in Schedule 1 to the Participation Agreement and to all related claims, suits, causes of action and any other right of the Selling Lender against the Borrower, including contract claims, tort claims, malpractice claims, statutory claims and all other claims related to the rights and obligations sold pursuant to the Participation Agreement (Section XXXXXXXXXX of the Participation Agreement).

(e) The Participation Agreement specifically indicates that the relationship between the Selling Lender and the Fund is that of seller and purchaser, that neither party is a trustee or agent for the other party and that the Participation Agreement shall not be construed to create a partnership or joint venture between the parties (Paragraph XXXXXXXXXX of the Participation Agreement).

(f) The Selling Lender's obligations under the related Credit Agreement will remain unchanged. The Selling Lender will remain responsible for the performance of its obligations under the Credit Agreement, and the other parties to the Credit Agreement will generally continue to deal directly with the Selling Lender in connection with its rights and obligations under the Credit Agreement, except to the extent specified in the Credit Agreement. The Participation Interest will not be an interest described in subsection 2.3(i) of National Instrument 81-102; i.e., it will not require the Fund to assume any responsibilities in administrating the Facility in relation to the Borrower.

(g) Subject to the rights described in Paragraph XXXXXXXXXX of the Credit Agreement, the Fund shall not have any rights or benefits under the Credit Agreement.

(h) The Fund is entitled to receive from the Borrower or the Selling Lender, as the case may be, a percentage of the amounts payable by the Borrower in respect of the Loan in which the Fund has acquired a Participation Interest corresponding to the Fund's Participation Interest (Paragraph XXXXXXXXXX of the Credit Agreement, Section XXXXXXXXXX of the Credit Agreement and Section XXXXXXXXXX of the Participation Agreement).

(i) The Fund is required to indemnify the Selling Lender for the Fund's share of any costs and expenses incurred by the Selling Lender in connection with any action taken to collect the principal of the Loan or the interest thereon or to preserve or enforce any rights conferred by the Credit Agreement (Section XXXXXXXXXX of the Participation Agreement).

(j) Each of the Selling Lender and the Fund has the right to receive interest on any overdue amounts (Paragraph XXXXXXXXXX of the Participation Agreement).
11. The Fund will become entitled to the following rights and benefits as a result of acquiring the Participation Interest (Paragraph XXXXXXXXXX of the Credit Agreement) and the Selling Lender will cease to be entitled to such rights and benefits in regard to such participation:

(a) Identical to the rights described in respect of Loan assignments in points 8(a) to (c).

(b) The right to be indemnified for losses and expenses arising in connection with a default under the Loan (Section XXXXXXXXXX of the Credit Agreement).

(c) The Selling Lender and the Fund may agree that the Selling Lender will not, without the consent of the Fund, agree to a modification or amendment extending the final maturity of any Loan or portion thereof, amending the date of any scheduled repayment, reducing the interest rate, extending the payment period or reducing or waiving the principal amount of any Loan (Paragraph XXXXXXXXXX and Paragraphs XXXXXXXXXX of the Credit Agreement).

PURPOSE OF THE PROPOSED TRANSACTIONS

12. The purpose of the proposed transactions is the establishment of the Fund as an investment trust vehicle that will permit holders of units of the Fund to earn a financial return XXXXXXXXXX.

RULING

13. Provided the statements of facts and proposed transactions set out above are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our ruling is as follows:

(a) The acquisition by the Fund of Assigned Interests and Participation Interests in the Credit Agreement will not in and by themselves result in the Fund failing to meet the mutual fund trust requirement in paragraph 132(6)(b) of the Act that the Fund's only undertaking be the investing of its funds in property (other than real property or an interest in real property).

This ruling is based on the Act in its present form and does not take into account the effects of any proposed amendments thereto. This ruling is provided subject to the general limitations and qualifications set out in Information Circular 70-6R5 issued by the Canada Revenue Agency (the "Agency") on May 17, 2002, and is binding provided that the proposed transactions are completed on or before XXXXXXXXXX.

The scope of this ruling is limited to the Assigned Interests and Participation Interests in the Credit Agreement described in the proposed transactions section and cannot be extended to other investments. If at any point in time, the Assigned Interests and Participation Interests are or become an interest described in subsection 2.3(i) of National Instrument 81-102, this ruling is void and shall be considered unissued. The above ruling should not be construed as providing the Agency's view on whether the Fund qualifies as a mutual fund trust for purposes of the Act and nothing in this ruling should be construed as confirmation, express or implied, that the Agency has agreed to any other tax consequences arising from the facts or proposed transactions described above other than those specifically confirmed in the rulings given.

Yours truly,

XXXXXXXXXX
Manager
Trusts Section
International and Trusts Division
Income Tax Rulings Directorate
Policy and Planning Branch