2005 Ruling 2005-0128301R3 - Management Fee changes; new Classes of units MFT

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: 1. Does the creation of the new classes of units, having substantially the same rights result resettlement of the trust or in a disposition of units of the trust? The various classes only differ in respect of the amount of management fees and other costs payable by each class.

2. Will the Common Expenses incurred by the Manager in respect of the new classes of units be deductible by the Manager and not by the Fund?

Position: 1. No. 2.Yes.

Reasons: 1.The proposed amendments to the trust indenture will not result in a resettlement of the trust nor will the existing units be considered to have been disposed of.

2. The Funds are liable for and incur the Common Expenses incurred by the Manager in respect of the existing units. Under the structure for the New Units, the Funds will not be liable for the Common Expenses applicable to those New Units as the New Units will bear a higher management fee. The effect of the transactions is to convert the fixed costs of Common Expenses into a management fee computed as a percentage of net asset value. GST Rulings was consulted. As GST is applicable on both the Common expenses and the management fees and the Manger is dealing at arm's length with the Fund, there is no GST concern provided that GST is payable on the total Common Expenses and Management Fees payable to the Manager.

XXXXXXXXXX 									2005-012830

Attention: XXXXXXXXXX

XXXXXXXXXX, 2005

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX

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 and email 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.

You provided us with a copy of the XXXXXXXXXX draft amended and restated trust agreement for the XXXXXXXXXX. 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:

"Class XXXXXXXXXX Unit" means a unit of a Fund which has been designated as a Class XXXXXXXXXX Unit of the Fund;

"Class XXXXXXXXXX Unit" means a unit of a Fund which has been designated as a Class XXXXXXXXXX Unit of the Fund;

"Class XXXXXXXXXX Unit" means a unit of a Fund which has been designated as a Class XXXXXXXXXX Unit of the Fund;

"Class XXXXXXXXXX Unit" means a unit of a Fund which has been designated as a Class XXXXXXXXXX Unit of the Fund;

"Class XXXXXXXXXX Unit" means a unit of a Fund which has been designated as a Class XXXXXXXXXX Unit of the Fund;

"Class XXXXXXXXXX Unit" means a unit of a Fund which has been designated as a Class XXXXXXXXXX Unit of the Fund;

"Class XXXXXXXXXX Unitholder Management Fee Agreement" means an agreement entered into by the Manager and a Class XXXXXXXXXX Unitholder which sets out the Management Fees payable by the Class XXXXXXXXXX Unitholder directly to the Manager for portfolio management services;

"Class XXXXXXXXXX Unitholder Management Fee Agreement" means an agreement entered into by the Manager and a Class XXXXXXXXXX Unitholder which sets out the Management Fees payable by the Class XXXXXXXXXX Unitholder directly to the Manager for portfolio management services;

"Class XXXXXXXXXX Unitholder Management Fee Agreement" means an agreement entered into by the Manager and a Class XXXXXXXXXX Unitholder which sets out the Management Fees payable by the Class XXXXXXXXXX Unitholder directly to the Manager for portfolio management services;

"Class XXXXXXXXXX Unitholder Management Fee Agreement" means an agreement entered into by the Manager and a Class XXXXXXXXXX Unitholder which sets out the Management Fees payable by the Class XXXXXXXXXX Unitholder directly to the Manager for portfolio management services;

"Common Expenses" means, in respect of a Fund, all of the expenses incurred by the Manager on behalf of the Fund in the conduct of its business and for greater certainty, excluding Management Fees;

"Custodian" means XXXXXXXXXX, the custodian for each of the Funds under the Trust Agreement;

"Fund" means each unit trust listed in Appendix A, individually;

"Funds" means each unit trust listed in Appendix A collectively;

"Management Fees" means the fees charged by the Manager for portfolio management services;

"Management Fee Distribution" has the meaning set out in paragraph 8 below;

"Manager" means XXXXXXXXXX, a taxable Canadian corporation that carries on a business that includes management of the investments of the Funds;

"New Units" means all of the Class XXXXXXXXXX Units, Class XXXXXXXXXX Units or Class XXXXXXXXXX Unit of a Fund;

"Trust Agreement" means the trust agreements between Manager, the Trustee, and the Custodian, as amended, governing each Fund;

"Trustee" means the duly appointed trustee under each of the Trust Agreements;

"Unit" means a unit of a Fund representing a fractional undivided beneficial interest in the Fund;

"Unitholders" means at any particular time the registered holders of Units of the Funds;

"Unitholder Management Fee Agreement" means the Class XXXXXXXXXX Unitholder Management Fee Agreement, the Class XXXXXXXXXX Unitholder Management Fee Agreement, the Class XXXXXXXXXX Unitholder Management Fee Agreement or the Class XXXXXXXXXX Unitholder Management Fee Agreements; and

"Valuation Time" means XXXXXXXXXX Eastern Standard Time on each business day upon which the XXXXXXXXXX Stock Exchange is open for business or at any other time as the Trustee may in his or her discretion determine.

The relevant Taxation Services Office for XXXXXXXXXX is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX Tax Centre Taxation Centre. The relevant Taxation Services Office for the Funds is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX

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

Facts

1. Each Fund is a "unit trust" as defined in subsection 108(2) and each of the XXXXXXXXXX are mutual fund trusts as defined in subsection 132(6). Each of the Funds except the XXXXXXXXXX are "registered investments" as defined in paragraph 204.4(2)(d).

2. Pursuant to the Trust Agreements, the Units of the Funds are not transferable and cannot be issued to non-residents of Canada.

3. Each Fund is authorized to issue an unlimited number of Units and classes as determined at the discretion of the Manager on written notice to the Trustee. There are currently three authorized and issued classes of Units of each Fund, namely, Class XXXXXXXXXX Units, Class XXXXXXXXXX Units and Class XXXXXXXXXX Units.

4. Each Unit currently has the following attributes:

• each Unit is without nominal or par value and is issued as fully paid and non-assessable;
• each whole Unit entitles the holder thereof to vote at all meetings of Unitholders of the Fund;
• there are no pre-emptive rights attaching to the Units;
• each Unit of a Fund represents an undivided interest in the assets of that Fund but not of any other Fund;
• there are no transfer, cancellation, surrender or redemption provisions except as set out in the Trust Agreement or as otherwise provided by the relevant securities legislation;
• each Unit of each class entitles the holder thereof to participate equally with respect to all payments, other than Management Fee Distributions made to Unitholders of that class, whether by way of interest, dividends or capital in accordance with the provisions of the Trust Agreement;
• each Unit of each class of each Fund entitles the holder, on liquidation, to participate equally with respect to all payments, other than Management Fee Distributions made to Unitholders of that class of that Fund, whether by way of interest, dividends or capital;
• there is no liability for future calls or assessment with respect to the Units; and
• fractional Units may be issued and subject certain conditions, the Trustee may in its discretion subdivide the Units outstanding at any time so that the number of Units may be increased, or consolidate the Units at any time so that the number of Units may be decreased.

5. Each Fund is responsible for payment of all Common Expenses incurred by the Manager or by others on behalf of the Manager, which include, without limitation, the following expenses:

• expenses (including those associated with securities regulatory filings) relating to the offering of Units of such Fund;
• commissions and brokerage fees on the purchase and sale of portfolio securities and taxes of all kinds to which such Fund is or might be subject;
• all amounts in respect of charges made for bookkeeping, accounting, registry and transfer agency services;
• services required in connection with the provision of information to Unitholders or the holding of meetings of Unitholders;
• interest expense;
• fees charged by the Trustee, including expenses incurred by the Trustee in the administration of the Fund;
• custodial, audit and legal fees and expenses; and
• costs of submitting all financial reports to Unitholders and all amendments to or renewals of any disclosure document of such Fund.

6. As compensation for management services provided by the Manager in respect of the Class XXXXXXXXXX Units and the Class XXXXXXXXXX Units, the Fund pays the Manager annual management fees calculated on a daily basis as a specified percentage of the average net asset value of the Fund attributable on such day to the class of Units. The specified percentages range from XXXXXXXXXX% to XXXXXXXXXX% depending on the class and the Fund.

7. The Manager is not compensated by the Fund for management fees in respect of the Class XXXXXXXXXX Units. The Manager is paid directly for those services by the Class XXXXXXXXXX Unitholders pursuant to Class XXXXXXXXXX Unitholder Management Fee Agreements.

8. To encourage institutional and large investors, the Manager may negotiate a reduction in the management fee payable by the Fund in respect of a particular Unitholder. If such a reduction is negotiated, the Unitholder is entitled to receive a distribution of an amount equal to such reduction in the form of a Management Fee Distribution out of net income, net realized capital gains or, if necessary, capital of the Fund.

9. Under the Trust Agreement, each Fund is required to distribute in respect of each taxation year to the Unitholders of each class of the Fund:

• the amount of the Fund's net income and taxable capital gains sufficient to reduce the federal tax liability of the Fund to an amount equal to the federal tax refund entitlement of the Fund for the taxation year (or if there is no such entitlement to a refund to nil); and
• an amount of capital representing the non-taxable portion of capital gains, that is equal to the amount of taxable capital gains so distributed.

10. Management Fee Distributions made to particular Unitholders are distributed first out of the income and net realized capital gains of the Fund to the extent that the Fund earns such income and realized capital gains in the year in which the Management Fee Distributions are paid or payable, and otherwise out of the capital of the Fund. After deducting the Management Fee Distributions from the net income and net realized capital gains of the Fund, the balance of net income and net realized capital gains of the Fund for that taxation year are payable to all the Unitholders of the Fund (including the particular Unitholders entitled to such Management Fee Distributions) in accordance with the allocations and entitlements set out in paragraphs 11 and 12 below.

11. For purposes of determining the amount of net income to be distributed to Unitholders of a class of Units of the Fund, the amount of the management fee, if any, that is payable by the Fund in respect of that class of Units and the proportionate share of the Common Expenses of the Fund in respect of that class of Units are both deducted from the proportionate share of gross income of the Fund attributable to that class of Units. For this purpose, the Fund's gross income is determined without reference to any capital gains realized by the Fund. Thus the Unitholders of a class of Units of the Fund effectively bear the cost of the management fee payable by the Fund in respect of that class and the proportionate share of the Common Expenses of the Fund attributable to that Class.

12. For purposes of determining the amount of any capital gains to be distributed to the Unitholders of the Funds, the amount of net realized capital gains of each Fund is computed separately from the amount of net income or loss of the Fund. Unitholders of all classes of a Fund are entitled to receive such distributions on a proportionate basis.

13. The net asset value of a class of Units is calculated daily and is determined by subtracting the aggregate management fees payable by the Fund in respect of a particular class of Units from that class of Unit's proportionate share of the value of the Fund's assets net of the outstanding liabilities related to the Common Expenses at the Valuation Time. This calculation ensures that the net asset value per Unit of a class of Units of the Fund reflects the fact that the Unitholders of that class of Units bear the full cost of the management fees applicable to that class and a proportionate share of the Common Expenses of the Fund.

14. The net asset value per Unit of each class of Units of each Fund is also calculated daily as the quotient obtained by dividing the net asset value of the class of Units calculated as described above by the total number of Units of such class outstanding immediately preceding the determination of the net asset value of the class. The net asset value per Unit is the price at which a Unit may be redeemed by a Unitholder on that day.

Proposed Transactions

15. The Manager proposes, with the approval of the Trustee and subject to the receipt of a favourable income tax ruling, to authorize an amendment of the Trust Agreement to create three new classes of units of each of the Funds, being the New Units.

16. Provided that a favourable advance income tax ruling is received, the Class XXXXXXXXXX Units, Class XXXXXXXXXX Units and Class XXXXXXXXXX Units will be made available for issuance to new or existing investors. There will be no reclassification of issued and outstanding Class XXXXXXXXXX Units, Class XXXXXXXXXX Units or Class XXXXXXXXXX Units into Class XXXXXXXXXX Units, Class XXXXXXXXXX Units or Class XXXXXXXXXX Units. With the exception of the requirement to pay the Common Expenses of the Fund, the rights, privileges and conditions attached to Class XXXXXXXXXX Units, Class XXXXXXXXXX Units and Class XXXXXXXXXX Units will be substantially the same as the rights, privileges and conditions attached to Class XXXXXXXXXX Units, Class XXXXXXXXXX Units or Class XXXXXXXXXX Units.

17. It is expected that the New Units will have total management fees that are higher than the management fees borne by the Class XXXXXXXXXX Units, Class XXXXXXXXXX Units and Class XXXXXXXXXX Units. The Management fees payable in respect of the Class XXXXXXXXXX Units will be determined by a Class XXXXXXXXXX Unitholder Management Fee Agreement. The Management fees payable in respect of the Class XXXXXXXXXX Units and Class XXXXXXXXXX Units will be the amount set out in the terms of the Trust Agreement plus the amount determined by a Unitholder Management Fee Agreement.

18. The Manager will be liable for and will pay all the Common Expenses which would otherwise be payable by the Fund that are attributable to the Class XXXXXXXXXX Units, Class XXXXXXXXXX Units and Class XXXXXXXXXX Units. The Fund will continue to be solely responsible and liable for the payment of the Common Expenses that are attributable to the Class XXXXXXXXXX Units, Class XXXXXXXXXX Units and Class XXXXXXXXXX Units.

19. For the purpose of calculating the net asset value of a Class XXXXXXXXXX Unit, Class XXXXXXXXXX Unit or Class XXXXXXXXXX Unit, the net asset value, as described in paragraph 14 above, will not be reduced by any amount of the Common Expenses of the Fund.

20. For the purpose of calculating the income and net realized capital gains to be distributed to the Class XXXXXXXXXX Unitholders, Class XXXXXXXXXX Unitholders and Class XXXXXXXXXX Unitholders as described in paragraphs 11 and 12 above as well as the net asset value per Unit of the Class XXXXXXXXXX, Class XXXXXXXXXX and Class XXXXXXXXXX Units, the amount of the income and net realized capital gains will not be reduced by any amount of the Common Expenses of the Fund.

Purpose of the Proposed Transactions

28. The purpose of the proposed transactions related to the creation and issuance of the Class XXXXXXXXXX Units, Class XXXXXXXXXX Units and Class XXXXXXXXXX Units is to ensure the alternatives for investing in the Funds are competitive with those offered by competitors in the industry (including the insurance industry) to group RRSPs, to attract new investors and to provide maximum flexibility to investors for the payment of management fees.

Rulings Given

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 rulings are as follows:

A. The issuance of the New Units of each Fund and related amendments to the Trust Agreement will not result in a disposition by the current Unitholders of the Fund of their existing Units of the Fund for the purposes of the Act.

B. The proposed transactions described herein will not, in and by themselves, cause the provisions of subsection 104(7.1) of the Act to apply so as to deny a Fund a deduction in computing its income under paragraph 104(6)(b) of the Act.

C. Subject to sections 18 and 67 of the Act, the Common Expenses paid or payable by a Fund that are attributable to the Class XXXXXXXXXX Units, Class XXXXXXXXXX Units and Class XXXXXXXXXX Units will be deductible in computing the Fund's income (in accordance with section 9 and paragraph 18(1)(a) of the Act) in the year in which such Common Expenses are incurred.

D. Subject to sections 18 and 67, the Common Expenses paid or payable by the Manager in respect of the New Units will be deductible in computing the Manager's income in accordance with section 9 in the year in which such Common Expenses are incurred.

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 proposed transactions described in paragraph 15 above, are completed within 6 months of the date of this letter. These rulings are based on the law as it currently reads and do not take into account any proposed amendments to the Act.

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

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