2005 Ruling 2004-0106731R3 - Irish Common Contractual Fund

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 an Irish Common Contractual Fund (CCF) is a non-entity for Canadian tax purposes where the Custodian, through a related company resident in Canada, is responsible to withhold and remit Part XIII tax on behalf of the investors of the CCF?

Position: Yes.

Reasons: In a previous ruling, we have ruled that a CCF is a non-entity and each investor in the CCF is a co-owner of the assets of the CCF. It is standard practice for a custodian of an investment undertaking to withhold and remit withholding taxes.

XXXXXXXXXX 2004-010673

XXXXXXXXXX , 2005

Dear XXXXXXXXXX:

Re: XXXXXXXXXX
Advance Income Tax Ruling

We are writing in reply to the letter of XXXXXXXXXX from XXXXXXXXXX requesting an advance income tax ruling on behalf of the above-referenced taxpayer. We also acknowledge the letter of XXXXXXXXXX and various e-mail transmissions from your firm. You also provided us a draft copy of each of the Deed of Constitution, the Custodianship Agreement, and the Prospectus (all of which are defined below) with respect to XXXXXXXXXX.

To the best of your knowledge and that of the taxpayer involved, none of the issues involved with this request:

(i) is involved in an earlier return of the taxpayer or a related person;

(ii) is being considered by a tax services office or a taxation centre in connection with a tax return already filed by the taxpayer or a related person;

(iii) is under objection; or

(iv) is before the courts or, if a judgement has been issued, the time limit for appeal has not expired.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described below. Facts and proposed transactions in the documents submitted with your request not described below do not form part of the facts and proposed transactions on which this ruling is based and any reference to these documents is provided solely for the convenience of the reader.

Definitions

In this letter the following terms have the meanings specified:

(a) "Act" means the Income Tax Act R.S.C. 1985 c.1 (5th Supp.), as amended to the date hereof, and unless otherwise stated, every reference herein to a Part, section, subsection, paragraph or subparagraph is a reference to the relevant provisions of the Act;

(b) "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;

(c) "Chargeable Events" means those events set out in Section 739B of the Taxes Consolidation Act, 1997 (Ireland), which include any payment of gross income to Unitholders or any encashment, redemption, cancellation or transfer of units;

(d) "Common Contractual Fund" means a common contractual fund authorized by the Authority under the Regulations and meeting the conditions set out in Section 739C(1A) of the Taxes Consolidation Act, 1997 (Ireland), as amended;

(e) "CRA" means the Canada Revenue Agency;

(f) "Custodian" means the Irish branch of XXXXXXXXXX, a company incorporated in XXXXXXXXXX acting as custodian with respect to the Fund's property;

(g) "Custodianship Agreement" means the agreement to be entered into between the Manager and the Custodian relating to the appointment and duties of the Custodian;

(h) "Deed of Constitution" means the deed of constitution to be entered into between the Manager and the Custodian providing for the constitution of the Fund;

(i) "Dutch Treaty" means the Canada-Netherlands Income Tax Convention;

(j) "Fund" means the XXXXXXXXXX, a Common Contractual Fund to be constituted by the Manager;

(k) "Gross Income Payments" means such payment or payments to Unitholders as may be determined by the Manager available out of net income and realized or unrealized net profit on the valuation of investments of the Sub-Fund;

(l) "Irish Treaty" means the Canada-Ireland Income Tax Convention;

(m) "Manager" means XXXXXXXXXX, a corporation incorporated and resident in XXXXXXXXXX. It has its registered office at XXXXXXXXXX, and it will act in its capacity as manager of the Fund;

(n) XXXXXXXXXX;

(o) "Prospectus" means the prospectus prepared in accordance with the Regulations and pursuant to which Unitholders acquire an investment in the Fund;

(p) "Regulations" means Statutory Instrument No. 211 of 2003, European Communities (Undertakings for Collective Investment in Transferable Securities) Regulations 2003, as amended;

(q) "Sub-custodian" means XXXXXXXXXX incorporated in Canada and related to the Custodian;

(r) "Sub-Fund" means a portfolio of assets within the Fund;

(s) "Tax Treaties" means the Irish Treaty, UK Treaty and Dutch Treaty, as defined herein;

(t) "UK Treaty" means the Canada-United Kingdom Income Tax Convention;

(u) "Unit" means a unit of account, representing a proportionate undivided co-ownership interest in the property of a Sub-Fund as tenants in common with the other Unitholders of the Sub-Fund; and

(v) "Unitholder" means a legal or natural person that is the beneficial owner of Units of a Sub-Fund.

Facts

Our understanding of the facts, proposed transactions and purpose of the proposed transactions is as follows:

1. A Common Contractual Fund ("CCF") is a type of collective investment undertaking that is an unincorporated body without legal personality under which Unitholders by contractual arrangement acquire, own and share in the property of the CCF as co-owners, being entitled to an undivided interest as tenants in common in the property comprising the CCF. Accordingly, Unitholders are owners of, and are entitled to all income and gains derived from, the property of the CCF as such income and gains arise.

2. 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 CCF is binding on the Unitholders and all persons claiming through the Unitholders as if any such person had been party to the deed of constitution.

3. Under Section 739C of the Taxes Consolidation Act 1997 (Ireland), as amended by the Finance Act 2003 (Ireland), which governs the taxation of CCFs, an investment undertaking is a CCF only if (i) it is an Undertaking for Collective Investment in Transferable Securities ("UCITS") authorized by the Regulations, (ii) it is constituted otherwise than under trust law or statute law, (iii) each of its units is beneficially owned by a pension fund or is held by a custodian or trustee for the benefit of a pension fund, and (iv) all the investors in the investment undertaking make a declaration on acquiring units in the undertaking. A CCF would not be chargeable to tax on its profits or in respect of Chargeable Events. In addition, income and gains in relation to the CCF shall be treated as arising or accruing to each Unitholder in the CCF in proportion to the value of the units beneficially owned by the Unitholder, as if the income and gains arise or accrue to the Unitholder in the CCF without passing through the hands of the CCF.

4. Section 739C of the Taxes Consolidation Act, 1997 (Ireland), as amended by the Finance Act 2003 (Ireland) will apply to the Fund. Consequently, the Fund will not be subject to Irish tax and Unitholders will be treated for Irish tax purposes as having earned the income and gains that arise or accrue in respect of the Fund.

5. The Irish tax authority has confirmed that the Fund will not be treated as a resident of Ireland for purposes of the Irish Treaty.

6. The United Kingdom (UK) tax authority has confirmed that a CCF, like the Fund, will be treated as a fiscally transparent entity for UK double tax treaty purposes; and a UK pension fund that invests in an overseas security through a CCF will be taxable in the UK on income arising from that security on an arising basis (as opposed to a remittance basis). Further, the character and source of the income in the hands of the pension fund will be determined as if such items were realized directly from the underlying investment.

7. The Dutch tax authority has taken a position regarding the tax treatment of a CCF that is consistent with the UK tax position described above.

8. XXXXXXXXXX.

9. The Manager and the Custodian deal with each other at arm's length and they are both non-residents of Canada for purposes of the Act.

Proposed Transactions

10. The Custodian and the Manager will enter into the Deed of Constitution under which the Manager will constitute the Fund as a CCF and the Custodian will confirm its obligations and power with respect to the Fund.

11. The Fund will be an "umbrella fund" within the meaning of the Regulations. Accordingly the Fund will consist of several Sub-Funds and Units shall be issued in respect of each Sub-Fund. Each Unit will represent a proportionate undivided co-ownership interest in the property of the Sub-Fund.

12. XXXXXXXXXX.

13. Units will be issued pursuant to the Prospectus. The Prospectus provides that all Unitholders are entitled to the benefit of, are bound by, and are deemed to have received notice of, the Deed of Constitution.

14. Each Unitholder will be a pension fund that will be a resident of either the United Kingdom or the Netherlands for the purposes of the UK Treaty or the Dutch Treaty and, from the perspective of the UK or the Dutch tax authority, the beneficial owner of any dividends and interest it earns from its investment in the Sub-Fund for purposes of the UK Treaty or the Dutch Treaty, as the case may be.

15. Pursuant to the Deed of Constitution and the Custodianship Agreement, the Custodian will be responsible for safekeeping the Fund's property, executing transactions relating to the safekeeping of the Fund's property, and complying with obligations imposed on the Custodian by the Regulations. The Custodian will engage the Sub-custodian to have custody of the Fund's Canadian securities and cash deposits. Also, the Custodian will enquire into the conduct of the Manager semi-annually and report thereon to the Unitholders. If the Manager has not complied with the terms set out in the Deed of Constitution and the Regulations, the Custodian must state the reasons for the non-compliance and outline the steps which the Custodian has taken to rectify the situation. The Custodian will have no material duties other than those referred to above.

16. The Custodian's safekeeping responsibilities includes the responsibility to ensure that the appropriate amount of withholding tax is deducted and remitted to the tax authorities. In this connection, the Sub-custodian will be engaged by the Custodian to withhold and remit amounts on behalf of the Unitholders in respect of their Part XIII tax liabilities. The Custodian and the Sub-custodian will determine the amount of Part XIII tax to withhold on amounts paid or credited on a particular day in the following manner. Based on the treaty residency of the Unitholders, the Custodian and the Sub-custodian will first determine, for each Sub-Fund, the percentage of its Unitholders that are resident in the UK and the Netherlands, respectively. The Custodian and the Sub-custodian will then apply those respective percentages to the aggregate amount of the Sub-Fund's Canadian source receipts that are taxable under Part XIII of the Act to determine the amount received by the UK resident Unitholders and the Dutch resident Unitholders, respectively. The Custodian and the Sub-custodian intend to then apply the relevant provisions of the UK Treaty or the Dutch Treaty, as the case may be, to determine the amount of tax to withhold in respect of the amounts received by the UK and Dutch Unitholders. At the end of each month the Sub-custodian will compute the total amount withheld on behalf of the Unitholders for that month as determined above and remit that amount to the CRA by the 15th day of the following month. Within two months after the end of each year, the Sub-custodian will provide the Unitholders' custodian with an NR4 Supplementary form reporting the total amount of Part XIII tax withheld and remitted to the CRA on behalf of the Unitholders and will forward to the CRA a copy of the NR4 Supplementary issued by the Fund to the Unitholders' custodian as well as an NR4 Summary for the year.

17. The Manager will be responsible for managing the Fund's property in accordance with the Prospectus, Deed of Constitution, Regulations and any other regulatory requirements.

18. 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 the Sub-Fund. No Unit shall confer any interest or share in any particular part of the assets of a Sub-Fund.

19. The Deed of Constitution will also provide that the Unitholders are legally entitled to participate and share in the property of the Fund, including without limitation, income arising thereon and profits derived therefrom as such income and profits arise as co-owners and accordingly, income and profits accrue to Unitholders as they arise. The Manager has the authority to distribute such income and profits to the Unitholders as Gross Income Payments. The Deed of Constitution requires that Gross Income Payments (if any) shall be made on a yearly basis pro rata based on each Unitholder's investments in the relevant Sub-Fund.

20. The transfer of Units in a Sub-Fund will not be permitted without the prior consent of 100% of the Unitholders and the Manager, and where the Manager is of the opinion that such a transfer will not have an adverse impact on the Sub-Fund or Fund.

21. Unitholders will be able to redeem their Units of a particular Sub-Fund for an amount based on the net asset value of that particular Sub-Fund. They will be able to switch from Units of a particular Sub-Fund to Units of another Sub-Fund based on the redemption price of that particular Sub-Fund had those Units been redeemed.

22. The Units will not have any voting rights (save the right, on written notice signed by Unitholders holding XXXXXXXXXX% of the Units, to require the Manager to resign). Neither the Unitholders, nor their successors, shall have rights with respect to the representation or management of the Fund or any Sub-Fund. The failure or insolvency of a Unitholder shall have no effect on the existence of the Fund or any Sub-Fund.

Purpose of the Proposed Transactions

The purposes of the proposed transactions are: (i) to pool existing portfolios of XXXXXXXXXX securities currently managed by the Manager for several pension funds in order to achieve economies of scale; (ii) to further enhance the economies of scale by issuing Units of the Fund to other U.K. and Dutch pension plans the proceeds from which will also be invested in XXXXXXXXXX securities; (iii) for the Manager to earn fees from managing the assets of the Fund; and (iv) for the Custodian to earn fees for acting as the Fund's custodian.

The Fund will only be viable as a pooling vehicle for pension funds' property if it does not materially increase the tax costs incurred by the pension funds. Accordingly, it is of critical importance that the chosen pooling vehicle, namely the Fund, be treated as fiscally transparent for tax purposes to allow the Unitholders to claim treaty benefits in respect of the income and gains they earn from their property based on an application of the treaty between the country of which the Unitholder is a resident and the source country from which the income and gains arise.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, proposed transactions and purpose of the proposed transactions, and provided that the proposed transactions are completed in the manner described above and subject to the comments set out below, our rulings are as follows:

A. Each Unitholder will be treated as the owner of an undivided interest in each property of the relevant Sub-Fund for the purposes of the Act, and such an interest, as a percentage of all the interests in the property of the relevant Sub-Fund will be determined at any point in time based on the percentage of all of the Units of the relevant Sub-Fund owned by the Unitholder at that time.

B. For the purposes of Part I of the Act, each Unitholder will directly earn its proportionate share of income, losses, capital gains and capital losses from the property of the relevant Sub-Fund of which it is a Unitholder.

C. For the 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 property of the relevant Sub-Fund will not be affected by the fact that the Fund has been constituted as the mechanism by which each Unitholder will own such property as co-owner with the other Unitholders of the relevant Sub-Fund.

D. Gross Income Payments paid to the Unitholders, as described in paragraph 19 above, will not be taxable events for the purposes of the Act.

E. For the purposes of Part XIII of the Act, any amount paid or credited by a Canadian payer to the Sub-custodian in respect of the property of a particular Sub-Fund will be an amount paid or credited to each Unitholder of the relevant Sub-Fund in proportion to the Unitholder's ownership of the property of the relevant Sub-Fund.

F. For the purposes of applying Part XIII of the Act to each Unitholder, the character, source and timing of any amount paid or credited by a payer resident in Canada in respect of the assets of the relevant Sub-Fund will not be affected by the fact that the Fund has been used as the mechanism by which each Unitholder will own 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 property of the relevant Sub-Fund for the purposes of calculating any capital gain or loss on such disposition for the purposes of the Act.

H. In respect of the withholding at source, the UK Treaty will apply to each Unitholder that is a resident of the United Kingdom for the purposes of the UK Treaty for purposes of determining the withholding rates in respect of the Canadian source income it earns from its share of the property of the relevant Sub-Fund.

I. In respect of the withholding at source, the Dutch Treaty will apply to each Unitholder that is a resident of the Netherlands for the purposes of the Dutch Treaty for the purposes of determining the withholding rates in respect of the Canadian source income it earns from its share of the property of the relevant Sub-Fund.

J. If the Sub-custodian calculates and remits Part XIII tax on behalf of a Unitholder in the manner set out in paragraph 16 above, the amounts paid by the Sub-custodian in respect of a Unitholder's Part XIII tax will be treated as being paid on behalf of the Unitholder in respect of its Part XIII tax liability and both the Unitholder and the Sub-custodian will be considered to have complied with Part XIII of the Act.

The above rulings are given subject to the general limitations and qualifications set out in Information Circular 70-6R5 dated May 17, 2002, and are binding on the CRA provided that the Fund is established by XXXXXXXXXX.

These rulings are based on the Act in the present form and do not take into account amendments to the Act which, if enacted into law, could have an effect on the rulings provided herein.

Comments

Nothing in this ruling 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 (as defined in subsection 248(1) of the Act), whether income referred to herein is taxable under Part I or Part XIII, 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 described herein other than those specifically set out in the rulings given above.

Yours truly,

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

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