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: The REIT has acquired an indirect interest in real property located in Canada through its investment in a unit trust that is a limited partner of a limited partnership that holds the real property in co-ownership with other parties. XXXXXXXXXX and the financial institutions providing mortgages on the real property require the REIT and other co-owners to guarantee jointly and severally, or solidarily, the indebtedness on the real property. Will the issuance of guarantees by the REIT on the mortgages held on the properties for the benefit of the REIT and the other co-owners be considered an undertaking other than investing funds in property such that the REIT would not qualify as a mutual fund trust under 132(6)(b)?
Position: No, a guarantee issued in the situation described in the ruling will not, in and by itself, disqualify the REIT as a mutual fund trust as defined in 132(6)(b).
Reasons: The REIT will receive no fee for the guarantee and the other co-owners will be jointly and severally, or solidarily, liable for the indebtedness on the property. In addition, each guarantor will enter into an indemnity agreement with each other guarantor in respect of the indebtedness. The Supreme Court of Canada has opined that an undertaking can be made of an array of activities. Even though there is no case law dealing with the requirement that the only undertaking be the investing of funds, the courts have considered in several cases dealing with other issues that a guarantee can be part and parcel of an investment provided that the level of integration between the guarantees and the investing activities is sufficiently high to make sure that the undertaking blends with the investing of funds because a guarantee is an undertaking by itself. It is reasonable to conclude in this case that the degree of integration between the investment of the funds and the guarantee is sufficiently high that the guarantee will not be considered to be a separate undertaking.
Re: Advance Income Tax Ruling
This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling in respect of the above-noted taxpayer. We also acknowledge your correspondence of XXXXXXXXXX.
To the best of your knowledge and that of your client, none of the issues involved in the ruling request is:
- in an earlier return of your client or a related person,
- being considered by a tax services office or taxation center in connection with a previously filed tax return of your client or a related person,
- under objection by your client or a related person,
- before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has not expired, or
- the subject of a ruling previously considered by the Directorate in respect of your client or a related person other than ruling 2003-005422 (referred to in this letter as "Previous Ruling").
You provided us with a copy of the following documents:
- XXXXXXXXXX; and
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.
All statutory references in this letter are references to the provisions of the Income Tax Act, R.S.C. 1985 (5th supp.) c. 1, as amended (the "Act"), and the following terms have the meanings specified:
"GPBeneficiary" means XXXXXXXXXX, a taxable Canadian corporation which is the sole beneficiary of Trust2 and is wholly owned by Trust1;
"GPTrustee" refers to XXXXXXXXXX, a taxable Canadian corporation which was incorporated on XXXXXXXXXX and is wholly owned by REIT;
"Indemnified Party" means each and every member of Y Group collectively or, each and every member of X Group collectively, as the case may be;
"Indemnifying Party" means each and every member of Y Group collectively or, each and every member of X Group collectively, as the case may be;
"Lender" means XXXXXXXXXX, a financial institution that is resident in Canada;
"LP Units" refers to limited partnership units issued by XXXXXXXXXX LP;
"XXXXXXXXXX LP" refers to XXXXXXXXXX;
"Newco" refers to XXXXXXXXXX, a taxable Canadian corporation which is a wholly owned subsidiary of XXXXXXXXXX LP, which was created to act as prête-nom for and on behalf of XXXXXXXXXX LP, holding title to XXXXXXXXXX LP's interest in NewProperty;
"Properties" refers to the portfolio of XXXXXXXXXX and projects as described in paragraph 5 below;
"NewProperty" refers to a XXXXXXXXXX in XXXXXXXXXX as described in paragraphs 9 to 12 below; and
"REIT" refers to XXXXXXXXXX, a unit trust as defined in subsection 108(2) and is further described in paragraph 1 below;
"Trust1" means XXXXXXXXXX, an unincorporated, limited purpose unit trust established under the laws of the Province of XXXXXXXXXX;
"Trust2" means the XXXXXXXXXX, an inter vivos trust created under the laws of the Province of XXXXXXXXXX to act as the general partner of the XXXXXXXXXX LP;
"X Corporation" means XXXXXXXXXX, a taxable Canadian corporation that is not related to any members of Y Group;
"X Group" means X Corporation, XXXXXXXXXX; and
"Y Group" means Trust1, XXXXXXXXXX , REIT, and Newco.
The relevant Taxation Services Office for the REIT is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX and its account number is XXXXXXXXXX.
Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:
1. As described in the Previous Ruling, the REIT is a mutual fund trust as defined in subsection 132(6) and was established on XXXXXXXXXX, by declaration of trust for the principal purpose of investing its funds in units and notes of the Trust1 and in shares of GPTrustee. As of XXXXXXXXXX, the units of REIT have been listed on the XXXXXXXXXX Stock Exchange.
2. Trust1 is an inter vivos trust resident in Canada that is not a mutual fund trust. Trust1 is a limited partner of XXXXXXXXXX LP. The trustees of Trust1 are not the same individuals as the trustees of REIT. The REIT owns all the units and Series 1 Trust Notes issued by Trust1. The trustees of the Trust1 are XXXXXXXXXX, all residents of XXXXXXXXXX
3. Trust2 is an inter vivos trust resident in Canada that is not a mutual fund trust. Trust2 is the general partner of XXXXXXXXXX LP. Pursuant to the limited partnership agreement governing the XXXXXXXXXX, Trust2 administers, manages, controls and operates the business of the XXXXXXXXXX for and on behalf of the limited partners of the XXXXXXXXXX LP. The sole trustee of Trust2 is GPTrustee and the sole beneficiary of Trust2 is GPBeneficiary.
4. The trustees of REIT will not form a majority of the directors of GPTrustee or GP Beneficiary. The board of directors of GPTrustee or GP Beneficiary will have the powers and authority to manage the business and affairs of GPTrustee or GP Beneficiary. The trustees of REIT, in their capacity as trustees of REIT, will not have or limit such powers and authority.
5. XXXXXXXXXX LP has beneficial ownership of all of the Properties and carries on the business of XXXXXXXXXX, and in connection with such business to own, operate and lease assets and property, to manage and make investments and to hold direct and indirect rights in companies or other entities involved in the same business. Legal title to most of the Properties is held by various Canadian resident corporations as bare trustee for XXXXXXXXXX LP. Most of the Properties are located in Canada and are subject to encumbrances owed to Canadian financial institutions, some of which are insured by XXXXXXXXXX. The XXXXXXXXXX LP has also acquired an interest in XXXXXXXXXX Canadian properties which are held by various partnerships in which the XXXXXXXXXX LP has a significant interest. The XXXXXXXXXX LP also owns all of the shares of a U.S. corporation which indirectly owns property located in the U.S.
6. Under the terms of the partnership agreement of XXXXXXXXXX LP, Trust2 is entitled, as general partner, to XXXXXXXXXX% of the distributions and allocations of the cash flow and income of the partnership, not to exceed $XXXXXXXXXX per annum. As the general partner of XXXXXXXXXX LP, Trust2 does not act as agent on behalf the REIT. XXXXXXXXXX LP has two classes of limited partnership interests, Class A LP Units and Class B LP Units. The Class A LP Units, which are all held by Trust1, are entitled to all distributions and allocations of the partnership cash flow and income that is not payable to the Class B LP Units or to Trust2 in its capacity as the general partner of XXXXXXXXXX LP. The Class B LP units are held by entities other than Trust1 and were acquired as partial consideration for some of the Properties acquired by XXXXXXXXXX LP. A Class B LP Unit is entitled to distributions and allocations of the limited partners' share of the partnership cash flow and income which is, where practicable, economically equivalent to the distributions and allocations made by the REIT in respect of a unit of the REIT. Based on the Class B LP Units currently issued, Trust1 is entitled to approximately XXXXXXXXXX % of the income that is not otherwise allocated to Trust2 as general partner. It is expected that additional Class B LP Units will be issued to third party vendors by XXXXXXXXXX LP in the future from time to time in consideration for the acquisition of other properties. It is also anticipated that the holders of the Class B LP Units of XXXXXXXXXX LP will exchange their Class B LP Units for units of REIT from time to time.
7. The REIT has an indirect economic interest in the Properties by virtue of its XXXXXXXXXX% ownership of the shares of GPTrustee (the sole trustee of Trust2 which is the general partner of XXXXXXXXXX LP), and its XXXXXXXXXX % interest in the units and notes of the Trust1 (a limited partner in XXXXXXXXXX LP and the sole owner of the shares of GPBeneficiary which, in turn, is the sole beneficiary of Trust2). The REIT will not be directly involved in the XXXXXXXXXX.
8. Subsequent to the receipt of the Previous Ruling, REIT guaranteed XXXXXXXXXX-insured mortgages on properties that are wholly-owned by XXXXXXXXXX LP. It has not received any fee for providing such guarantees nor is it in the business of providing guarantees. REIT has not previously given a guarantee in respect of a mortgage where the property securing the mortgage is co-owned by an entity that is wholly-owned directly or indirectly by REIT and any other person.
9. XXXXXXXXXX LP has acquired a XXXXXXXXXX% undivided interest in NewProperty, and the title to such interest is held by Newco. The beneficial ownership of NewProperty is shared by XXXXXXXXXX LP, X Corporation and a member of X Group. NewProperty is subject to an encumbrance owed to a Canadian financial institution and that encumbrance is currently insured by XXXXXXXXXX without the benefit of a guarantee from REIT.
10. XXXXXXXXXX LP proposes to develop NewProperty on behalf of XXXXXXXXXX LP and X Corporation. The financing for the development will be provided by Lender. The indebtedness will consist of four segments: a refinancing of the existing mortgage held by Lender, two segments will involve the advancement of funds to construct a XXXXXXXXXX and the final segment will involve a refinancing the construction part of the loan.
11. In order to obtain the financing described in paragraph 10 above, the Lender and XXXXXXXXXX require all the members of X Group and all the members of Y Group to guarantee solidarily the indebtedness to the Lender on NewProperty. As a result, all the members of X Group and all the members of Y Group, including REIT, will each provide a guarantee of the mortgage and other obligations of Newco with respect to NewProperty. REIT will not be receiving any fees for providing such guarantee.
12. Each of the guarantors described in paragraph 11 will enter into an indemnity agreement under which each member of X Group and Y Group, as the Indemnifying Party, will solidarily indemnify the each and every member of X Group or Y Group as the Indemnified Party, harmless from, and against, any claim incurred or borne by one or more of the members of the Indemnified Party as a result of the guarantee so provided. As a result, to the extent that REIT is required to make a payment on the guarantee in excess of its XXXXXXXXXX% indirect ownership of NewProperty, each of the members of the X Group will be solidarily liable to REIT to the extent of such excess under the terms of the indemnity agreement.
13. It is also expected that entities indirectly owned by REIT may acquire additional properties in the future that will be co-owned with one or more third parties. In such a case, it is expected that REIT, along with the other co-owners, both direct and indirect, may be required to provide a guarantee in order to obtain the requisite financing to develop the property.
Purpose of the Proposed Transactions
14. XXXXXXXXXX-insured mortgages typically bear a lower interest rate and qualify for a higher loan-to-value ratio as compared to non-insured mortgages. To facilitate the financing of NewProperty by the co-owners at favourable interest rates and terms, the Lender has applied for and received XXXXXXXXXX insurance in respect of the mortgages on NewProperty. As part of XXXXXXXXXX conditions of the insurance, XXXXXXXXXX requires, subject to the receipt of a favourable advance tax ruling, that REIT provide a guarantee under the terms and conditions as described in paragraphs 11 and 12 above.
Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and the purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our ruling is as follows:
A. The guarantee to be provided by the REIT under the terms and conditions as described in paragraphs 11 and 12 above, will not, in and by itself, disqualify the REIT from meeting the requirements of paragraph 132(6)(b).
The above rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that the guarantee to be provided by REIT as described in paragraphs 11 and 12, is entered into within six months of the date of this letter. This ruling is based on the law as it currently reads and does not take into account any proposed amendments to the Act.
Nothing in this advance income tax ruling should be construed as implying that the CRA has agreed to or reviewed:
a) whether Trust1, Trust2, GPBeneficiary or the XXXXXXXXXX LP operates as principal, as opposed to agent, on behalf of the REIT, with respect to their respective business activities,
b) whether the REIT qualifies as a mutual fund trust for purposes of the Act, or
c) any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above.
for Division Director
International & Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch
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