2006 Ruling 2005-0135761R3 - Class of German Arrangement & Treaty Benefits

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) Whether the German arrangement in issue can be classified as a trust for the purposes of the Income Tax Act. 2) Whether the arrangement is entitled to the benefits of the Canada-Federal Republic of Germany Tax Agreement

Position: 1) yes 2) yes

Reasons: 1) The arrangement meets the essential elements of a trust. 2) The arrangement falls within the ambit of Article 4.

XXXXXXXXXX 								2005-013576

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: XXXXXXXXXX - Advance Income Tax Ruling

This is in reply to your letter of XXXXXXXXXX which you have amended by correspondence dated XXXXXXXXXX, wherein you requested an advance income tax ruling in respect of XXXXXXXXXX (collectively, "Funds" and, individually, "Fund") regarding the Canadian federal income tax treatment of the Funds and their investors under the Income Tax Act (Canada), including the application of the Canada-Germany Tax Agreement (the "German Treaty"), in connection with a proposed investment by the Funds in Canadian real estate.

You have confirmed that, to the best of your knowledge and to the knowledge of XXXXXXXXXX ("GERMANCO"), the capital investment company that manages the Funds, none of the issues involved in this ruling request are (i) in an earlier return of a Fund or a related person to the Fund, (ii) being considered by a tax services office or taxation centre in connection with a previously filed tax return of a Fund or a related person to the Fund, (iii) under objection by a Fund or a related person to the Fund, (iv) before the courts, or the subject of a ruling previously issued by the Directorate to a Fund or a person related to the Fund.

In this letter, unless otherwise noted all statutory references are to the Income Tax Act (Canada), R.S.C. 1985, 5th Supplement, c. 1, as amended (the "Act") and each "technical" tax term used in this request has the same meaning as it has for purposes of the Act.

Facts

Relevant Parties

1. GERMANCO was established in XXXXXXXXXX and is a capital investment company that manages investment funds established under the Investment Act (Germany). GERMANCO is authorized by the German Federal Agency for Financial Services Supervision (the "Federal Agency") to operate as a capital investment company in relation to the establishment and operation of public funds like each Fund in accordance with the provisions of the Investment Companies Act, and as of October 1, 2005 of the Investment Act (Germany). By its articles of incorporation, except for activities required in connection with its own assets (i.e., those assets that are not part of the Funds or another fund managed by GERMANCO, which are thus not held by GERMANCO exclusively for the account of the Funds and for the benefit of the unitholders), the activities of GERMANCO are restricted to establishing and managing public funds in accordance with the Investment Companies Act (Germany) (Gesetz uber Kapitalanlagegesellschaften) (the "KAGG"). On January 1, 2004, the German Act for the Modernisation of the Investment Sector and for the Taxation of Investment Funds (Investment Modernisation Act) came into force. It replaced the KAGG and the Foreign Investment Act (Auslandinvestment-Gesetz - AuslInvestmG) by the Investment Act (Investmentgesetz) and the Investment Tax Act (Investmentsteuergesetz - InvStG)¹ . Whereas the previous acts contained both regulatory provisions and tax provisions, the new acts follow a different approach. The Investment Act (Germany) contains only regulatory provisions, for both domestic and foreign funds, whereas the Investment Tax Act (Germany) contains the taxation rules for domestic and foreign funds.

2. By its articles of incorporation, except for activities required in connection with its own assets described above, the activities of GERMANCO are restricted to establishing and managing public funds in accordance with the Investment Act (Germany) and the KAGG (with respect to funds that are still subject to the KAGG under the transitional rules enacted at the time of the coming into force of the Investment Act (Germany) (the "Transitional Rules")).

3. At present, GERMANCO manages XXXXXXXXXX open-ended real estate funds, XXXXXXXXXX.

4. GERMANCO established FUND XXXXXXXXXX as an open-end real estate fund under the provisions of the KAGG in XXXXXXXXXX and, pursuant to a prospectus, GERMANCO sold the units in FUND XXXXXXXXXX to thousands of XXXXXXXXXX investors. At present, at least XXXXXXXXXX% of the investors in FUND XXXXXXXXXX are residents of Germany for the purpose of the German Treaty. Further, at least XXXXXXXXXX% of the unit holders and at least XXXXXXXXXX% of the approximately XXXXXXXXXX investors in FUND XXXXXXXXXX will continue to be residents of Germany for the purposes of the German Treaty. As of XXXXXXXXXX , FUND XXXXXXXXXX became subject to the provisions of the Investment Act (Germany). There are no real commercial or tax incentives under the applicable tax law of Germany for persons who are not residents of Germany to invest in FUND XXXXXXXXXX.

5. GERMANCO established FUND XXXXXXXXXX as an open-end real estate fund under the provisions of the KAGG in XXXXXXXXXX and, pursuant to a prospectus, GERMANCO sold the units in FUND XXXXXXXXXX to institutional investors. At least XXXXXXXXXX% of the units are held and will continue to be held by residents of Germany for the purposes of the German Treaty and at least XXXXXXXXXX% of the unit holders are and will continue to be residents of Germany. FUND XXXXXXXXXX currently has a total of approximately XXXXXXXXXX institutional investors with an average investment of € XXXXXXXXXX. As of XXXXXXXXXX, FUND XXXXXXXXXX became subject to the provisions of the Investment Act (Germany). There are no real commercial or tax incentives under the applicable tax law of Germany for institutional investors that are not residents of Germany to invest in FUND XXXXXXXXXX.

6. Pursuant to the KAGG - and, as of XXXXXXXXXX, the Investment Act (Germany) - GERMANCO, a resident German investment corporation, acts on behalf of the Funds as their manager. XXXXXXXXXX ("XXXXXXXXXX Bank 1") acts as custodian of certain of FUND XXXXXXXXXX's assets and XXXXXXXXXX ("XXXXXXXXXX Bank 2") acts as custodian of certain of FUND XXXXXXXXXX's assets (XXXXXXXXXX Bank 1 and XXXXXXXXXX Bank 2 are hereinafter referred to collectively as "Custodians" and individually as "Custodian").

7. As at XXXXXXXXXX, the value of FUND XXXXXXXXXX's net investments was € XXXXXXXXXX, and XXXXXXXXXX% of FUND XXXXXXXXXX's investments consisted of liquid assets, which are invested so as to ensure that there is always sufficient liquidity available for future redemptions and to fund property acquisitions that are continually under active consideration by GERMANCO on behalf of FUND XXXXXXXXXX.

8. As at XXXXXXXXXX, the value of FUND XXXXXXXXXX's net investments was € XXXXXXXXXX, and XXXXXXXXXX% of FUND XXXXXXXXXX's investments consisted of liquid assets, which are invested so as to ensure that there is always sufficient liquidity available for future redemptions and to fund property acquisitions that are continually under active consideration by GERMANCO on behalf of the FUND XXXXXXXXXX.

9. The Funds are a commonly-used business version of a fiduziarische Treuhand. Under the KAGG and the Investment Act (Germany), German domestic asset pools like the Funds may be established and managed as public funds for the joint account and benefit of public investors by a capital investment company in conjunction with a custodian bank. The KAGG and the Investment Act (Germany) contain detailed provisions governing the duties and responsibilities of the capital investment company (Kapitalanlagegesellschaften) and the custodian bank (Depotbank) in relation to an investment fund. As well, the KAGG and the Investment Act (Germany) provide general rules for the operation of the investment fund (Sondervermögen) and special rules that apply to real property funds (Immobilien-Sondervermögen) like the Funds.

10. With respect to the Canadian tax treatment of the Funds, the salient provisions of the KAGG and the Investment Act (Germany) in relation to the duties and responsibilities of a capital investment company like GERMANCO, the duties and responsibilities of custodian banks like the Custodians, the constitution and operation of investment funds like the Funds are set out as below. While reference is only made to the provisions of the Investment Act (Germany), the KAGG contains identical provisions (albeit with different numbering).

Overview of Investment Act (Germany)

Capital Investment Company

11. Investment Company Obligations-A capital investment company is obliged to manage the fund for the collective account of investors with the diligence of a prudent businessman, to act, in the performance of its activities, in the sole interest of its investors and the integrity of the market, to perform its activities with due skill, care and diligence in the best interests of the fund which it manages and the integrity of the market, to try to avoid conflicts of interests and, if they cannot be avoided, to ensure that unavoidable conflicts are solved with due regard being paid to the interests of the investors and to assert claims of the investors against the custodian bank. (Sections 9 and 28(2))

12. Capital Requirements-A capital investment company is obliged to ensure that it meets minimum initial capital and additional fund/equity requirements and, for this purpose, investment asset pools that are managed by the investment company on behalf of third parties are not taken into consideration. (Section 11)

13. Branch Offices/Cross-Border Services-A capital investment company that intends to establish a branch in another Member State of the European Union or another Contracting State to the Agreement on the European Economic Area must notify the Federal Agency and comply with the relevant rules provided in the Investment Act. (Section 12)

Custodian Bank

14. Appointment of Custodian Bank-The capital investment company is obliged to entrust the safekeeping of investment asset pools with another credit institution as custodian bank that is authorised to engage in deposit business and safe custody business and meets minimum capital requirements. (Sections 20)

15. Custodian Bank Obligations-A custodian bank has extensive responsibilities in relation to the investment fund and is obliged to act independently from the capital investment company and exclusively in the interests of the investors, to comply with instructions of the capital investment company to the extent they are not in breach of statutory provisions and the relevant contractual terms and conditions, to issue and repurchase units, to hold all assets of the investment fund (other than real property) in blocked accounts that it maintains for the investment fund, to consent to the disposal or encumbrance of real property of the investment fund and to assert claims of investors against the capital investment company. (Sections 22, 24, 26 and 28.)

16. Issue/Repurchase of Units-The custodian bank is responsible for the issue and redemption of units of the investment fund. (Section 23).

17. Blocked Account-The custodian bank maintains a blocked account for the investment fund. In general, all cash amounts received in respect of the investment fund must be deposited by the custodian bank in the blocked account. This includes cash amounts received by the custodian bank on the issue of units of the investment fund, proceeds from the sale of the assets of the investment fund and other amounts derived from the assets of the investment fund. The repurchase price that is paid to investors for units of the investment fund is paid by the custodian bank from such blocked account. On the instructions of the capital investment company, the custodian bank pays out of the blocked account the purchase price for assets of the investment fund, including real property and the distribution of profit participations to the investors in respect of their units of the investment fund. (Sections 23, 24 and 25)

18. Safe Custody-The securities and certificates of deposit of the investment fund must be held by the custodian bank in a blocked securities custody account. In the case of holdings of real property and other assets which the custodian bank cannot hold in custody, the custodian bank is obliged to continually monitor such assets and the cash income derived therefrom, including ensuring that such cash income is deposited by the custodian bank in the blocked account that it maintains for the investment fund, and such real property or other assets of the investment fund cannot be sold or encumbered without the consent of the custodian bank. (Sections 24, 26 and 27)

Investment Fund

19. Fund Assets-The assets of the investment fund may be owned, as is the case for the Funds, by the capital investment company, or jointly owned by the investors and, where owned by the capital investment company, must be kept separate from its own assets and from the assets of any other investment fund that is managed by the investment company. The capital investment company is given the power in its own name to dispose of the assets of the investment fund in accordance with both the terms of the Investment Act (Germany) and the terms of the relevant contract with the investors. (Sections 31 and 32)

20. Limitation on Liabilities-The capital investment company has no power to incur liabilities or to make loans or issue guarantees in the name of the investors or to pledge or, with limited exceptions, to pledge or encumber the assets of the investment fund. The assets of the investment fund are not subject to any liabilities of the capital investment company, even those liabilities that arise from legal transactions that the capital investment company concludes for the collective account of the investors. Any agreements to the contrary have no effect. In general, claims against the capital investment company may not be set off against claims of a fund. (Section 31)

21. Units and Unit Certificates-Units in an investment fund are certified by unit certificates signed by the capital investment company and the custodian bank. Units may be issued in series with different rights regarding the use of income, management remuneration and other items. (Section 34)

22. Unit Value-The value of a unit is determined by the custodian bank, in cooperation with the capital investment company, by dividing the value of the investment fund by the number of issued units. The value of assets is to be determined by the custodian bank in accordance with the provisions of the Investment Act (Germany). (Section 36)

23. Repurchase Rights-An investor may request that the investor's interest in the investment fund be paid out of the investment fund against the redemption of the investor's units, subject to the terms of the relevant contract. (Section 37)

24. Loss of Management Right/Winding-up of Fund-If the right of the capital investment company to manage the investment fund terminates, whether at the request of the capital investment company or as the result of its insolvency, the custodian bank must either entrust, with the authorisation of the Federal Agency, another capital investment company with the management of the investment fund or wind-up the investment fund and distribute the proceeds to the investors. (Sections 38 and 39)

25. Sales Prospectus-The capital investment company may market units of an investment fund in accordance with a sales prospectus that sets out the information necessary for investors to make informed judgements about making an investment in the investment fund, including the kind and main attributes of the units, the proposed assets of the investment fund, the repurchase rights of the investors, the management fees to be paid to the capital investment company as well as other fees to be paid to the custodian bank and third parties, the rules for the determining the value of assets and the issue and repurchase price of units, tax treatment of investors and details of the business and other activities of the capital investment company and the custodian bank. (Section 42)

26. Contractual Terms-The contractual terms governing the legal relationship between the capital investment company and the investors in relation to the investment fund must be in writing, must comply with statutory requirements and must be authorised by the Federal Agency. The contract must deal with the principles according to which assets of the investment fund are to be acquired, whether the assets of the fund are to be owned by the capital investment company or jointly by the investors, the repurchase rights of the investors, the distribution entitlements of the investors in the ordinary course and on the winding-up of the investment fund. (Section 43)

Real Property Funds

27. General Rules - Sections 30 to 65 of the Investment Act (Germany) set out general rules applicable to all capital investment companies regarding the investments a capital investment company may acquire and the investment limits for different types of investment, the limitations on borrowings as well as rules regarding other transactions the capital investment company may enter into, for instance, securities lending and short sales.

28. Special Rules - The general rules set out in sections 46 to 65 apply to all funds, including real property funds that, like the Funds, invest in real property, unless the specific provisions of sections 66 to 82 of the Investment Act (Germany) apply. These specific rules apply only to the management of funds which invest their money in real estate.

29. Permissible Assets - A real property fund is limited to investments in permissible assets that are rental income property, business premises and premises for diversified use and, subject to certain limits, real property which is being developed for such use. Where the real property is located outside a Contracting State to the Agreement on the European Economic Area, it may only be acquired if certain conditions are met, including that (i) the contract with the investors permits an acquisition in such state, (ii) a reasonable distribution of the assets is ensured, (iii) these states guarantee the free transfer of the assets and do not restrict the movement of capital, and (iv) the performance of the rights and duties of the custodian bank is ensured. The capital investment company must also ensure that the currency risk to which the assets held for the account of the real estate fund are exposed to will be limited to a currency risk that does not exceed 30% of the value of the particular fund. (section 67)

30. Risk Diversification and Trusteeship - The value of a piece of real property may not exceed 15% of the value of the investment fund at the time of its acquisition. The assets of a real property fund may, due to German law principles, only be owned by the capital investment company. The requirement of the consent of the custodian bank to a disposition of the real property must be registered against the title of such property and, if this is impossible in the case of foreign real property, such restriction on disposal must be secured in another manner. (Section 67)

Marketing

31. Marketing Rules-Sections 121 to 142 set out special rules that apply to the marketing of investment funds.

32. Notification Duty-Unlike the units of certain other investment funds, the units of real property funds like the Funds may not be marketed by the capital investment company in another Member State of the European Union or in another Contracting State to the Agreement on the European Economic Area. (Section 128)

Overview of Investment Tax Act (Germany)

33. The basic German income tax treatment of the Funds is provided under the Investment Tax Act (Germany) and the Corporate Income Tax Act (Germany) (Korpenschaftsteuegesetz KStG). With respect to such tax treatment, there are two important points to note. First, in the relevant German tax legislation relating to the Funds it is clear that the Funds are treated as companies that are thereby made liable to comprehensive German corporate income tax and then, through specific relieving provisions, are effectively exempted from such tax. In this way, the Funds are exempted from such tax in a manner similar to that used under section 149 of the Act to exempt Canadian charities, not-for-profit organizations and other tax-exempt entities from Canadian income tax. Second, the Funds are effectively taxed in the same manner as a mutual fund trust under the Act. As such, the Funds provide no tax deferral for their German investors in that any net income of the Funds that is not distributed by the Funds to their investors is deemed to be distributed for German income tax purposes.

34. The Funds are treated as a corporation for German tax purposes by reason of a provision of the Corporate Income Tax Act (Germany). As such, the Funds are subject to unrestricted liability to corporation tax under that German statute and are required to calculate their income in accordance with the Income Tax Act (Germany) elaborated upon in the special rules set out in the Investment Tax Act (Germany). Subsection 1(1) of the Corporate Income Tax Act (Germany) provides as follows:

The following corporations, associations and estates have an unrestricted liability to corporation tax if they have an inland seat or place of management:

No. 5

Associations, foundations, trusts and other estates of private law.

35. In its application to the Funds, the foregoing provision is supplemented by subsection 11(1) of the Investment Tax Act (Germany) which provides that in the foregoing provision, domestic funds, like the Funds, "shall be deemed to constitute an estate". Notwithstanding the foregoing, the Investment Tax Act (Germany) provides further rules which specifically relieve domestic funds, like the Funds, from German corporate income tax. Under these relieving rules, German corporate income tax is not imposed on domestic funds, like the Funds, per se.

36. Instead, under these rules the Funds' investors are subject to income tax on amounts that are distributed or are deemed to be distributed to them by the Funds. Such distributions lose their source and are treated as investment income of the investors. Investors are not subject to income tax on distributed earnings to the extent such earnings include certain gains realised on the disposition of real property and income from a foreign source that is not subject to tax in Germany by virtue of an applicable tax treaty. Where distributed earnings include foreign source income that is subject to German taxation, investors are entitled to claim a foreign tax credit in respect of foreign tax paid. Alternatively, the investment fund may deduct the foreign taxes in calculating its earnings.

37. The Funds are required to withhold 30% of the amount distributed or deemed to be distributed in respect of an investor's tax liability (other than distributions that comprise German domestic earnings for which the withholding tax rate is 20%). Investors are required to include the gross amount distributed or deemed to be distributed in computing income. Withholding is not imposed on distributions to investors without a place of residence or a place of abode in Germany.

38. GERMANCO is required to provide detailed information regarding the amount and nature of its distributions each time a distribution is made by the Funds. This information must be published in the Federal Gazette along with the Funds' annual report and a certificate of a professional tax advisor confirming that the information has been determined in accordance with the rules of German tax law. If this information is not provided, investors are taxable on additional income. An investor will be taxable on the distributions plus 70% of the annual increase in the redemption value of their fund units (which will be a minimum of 6%).

Funds' Prospectus and Rules

39. A review of the Funds' prospectuses and the Funds' rules confirms that in nature and operation the Funds are substantively identical to a Canadian mutual fund trust.

FUND XXXXXXXXXX.

40. The Prospectus of FUND XXXXXXXXXX confirms that XXXXXXXXXX.

XXXXXXXXXX.

41. Further, the fiduciary role of GERMANCO in relation to the assets it acquires and holds for the account of FUND XXXXXXXXXX is succinctly described XXXXXXXXXX.

XXXXXXXXXX.

42. All liabilities and expenses in relation to FUND XXXXXXXXXX are liabilities and expenses for the joint account of the investors in FUND XXXXXXXXXX and not GERMANCO in its own capacity as a corporation. GERMANCO prepares an annual report for the investors in FUND XXXXXXXXXX (as described in more detail below). The Prospectus confirms XXXXXXXXXX:

XXXXXXXXXX.

43. Distributions to the investors in FUND XXXXXXXXXX are derived from the assets held by FUND XXXXXXXXXX:

XXXXXXXXXX.

44. The custodial role of the XXXXXXXXXX Bank 1 is described in the Prospectus:

XXXXXXXXXX.

45. The Prospectus clearly contemplates that FUND XXXXXXXXXX is the issuer of the units (or shares) in FUND XXXXXXXXXX and that such investments do not constitute an investment in the shares of GERMANCO. For example, XXXXXXXXXX

XXXXXXXXXX.

46. Further, the distinction between the assets held by GERMANCO for the account of FUND XXXXXXXXXX , and GERMANCO's own assets is confirmed XXXXXXXXXX:

XXXXXXXXXX.

47. With respect to the German tax regime applicable to FUND XXXXXXXXXX , the Prospectus provides XXXXXXXXXX:

XXXXXXXXXX.

48. XXXXXXXXXX.

49. The Prospectus also provides for the appointment of an appraisal committee to value the properties of FUND XXXXXXXXXX. Generally, the role of the appraisal committee is to ascertain the fair market value of each property of FUND XXXXXXXXXX in compliance with the Federal Valuation Directive (Wertermittlungsverordnung). In particular, the appraisal committee must value (a) the properties that GERMANCO or a real estate company is planning to acquire, (b) the properties belonging to a real estate company before the acquisition by GERMANCO on behalf of FUND XXXXXXXXXX of an interest in that real estate company, (c) at least every 12 months, all properties belonging to FUND XXXXXXXXXX or owned by a real estate company, and (d) properties that GERMANCO or a real estate company is planning to sell if the annual appraisal can no longer be regarded as current.

50. With respect to the permissible holdings of FUND XXXXXXXXXX, Article XXXXXXXXXX of the Special Contractual Terms and Conditions governing the relationship between FUND XXXXXXXXXX 's investors and GERMANCO, XXXXXXXXXX:

XXXXXXXXXX.

51. The Annex to the Special Contractual Terms and Conditions with respect to FUND XXXXXXXXXX provides XXXXXXXXXX.

52. Article XXXXXXXXXX of the Special Contractual Terms and Conditions provides XXXXXXXXXX.

53. In accordance with Article XXXXXXXXXX of the Special Contractual Terms and Conditions, for its services in relation to the management of FUND XXXXXXXXXX, GERMANCO receives a management fee of XXXXXXXXXX. In addition to the annual management fee, GERMANCO receives special fees XXXXXXXXXX . For its services, the Custodian receives an annual fee of XXXXXXXXXX. In addition to those fees, certain expenses incurred by GERMANCO are charged to FUND XXXXXXXXXX, such as: (a) ancillary expenses arising in connection with the acquisition, development, sale and encumbrance of real property (b) borrowing and management costs (administration, maintenance, operating and legal costs) arising in connection with the management of real property (c) costs arising in connection with the acquisition and sale of miscellaneous assets, (d) bank custody account charges, (e) costs of the appraisal committee; (f) costs of printing and distributing the business and half-yearly reports to the investors (g) audit costs, and (h) costs of publishing the basis of taxation and confirmation that the information for tax purposes has been determined in compliance with German tax legislation.

FUND XXXXXXXXXX

54. In all material respects, the prospectus of FUND XXXXXXXXXX contains the same terms and conditions as that of FUND XXXXXXXXXX summarized above. XXXXXXXXXX:

XXXXXXXXXX.

55. XXXXXXXXXX:

XXXXXXXXXX.

56. XXXXXXXXXX.

57. XXXXXXXXXX:

XXXXXXXXXX.

58. XXXXXXXXXX:

XXXXXXXXXX.

59. XXXXXXXXXX.

60. XXXXXXXXXX.

61. XXXXXXXXXX.

Proposed Transactions

62. At present, the real estate investments of the Funds include interests in commercial real estate properties in well-established locations and sites in Europe and, in the case of FUND XXXXXXXXXX, the United States. As part of the Funds' long-term strategy to diversify their real estate portfolio, the Funds intend to make substantial real estate investments in North America. To that end, GERMANCO, on behalf of the Funds, has been actively considering the acquisition of real estate properties in XXXXXXXXXX.

63. On XXXXXXXXXX, an Agreement of Purchase and Sale ("Purchase Agreement") was entered into between XXXXXXXXXX and XXXXXXXXXX as general partners for and on behalf of XXXXXXXXXX and XXXXXXXXXX and XXXXXXXXXX as general partners for and on behalf of XXXXXXXXXX (the "Vendors") and XXXXXXXXXX (the "Purchaser"), for the sale and acquisition of certain lands, buildings and chattels (as defined in the Purchase Agreement) located in XXXXXXXXXX and known as "XXXXXXXXXX" (the "XXXXXXXXXX Property").

64. Article XXXXXXXXXX of the Purchase Agreement provides for the payment of the purchase price of $XXXXXXXXXX for the XXXXXXXXXX Property as follows:

XXXXXXXXXX.

65. Section XXXXXXXXXX of the Purchase Agreement provides as follows:

XXXXXXXXXX.

The Purchaser intends to assign all of its rights and interest under the Purchase Agreement to the Funds or their designees, and, in that connection, the Funds propose to form a limited partnership (the "Partnership") under the laws of a Canadian province to acquire the XXXXXXXXXX Property.

66. The Funds will be the only limited partners of the Partnership. FUND XXXXXXXXXX will hold a XXXXXXXXXX% limited partnership interest and FUND XXXXXXXXXX will hold a XXXXXXXXXX% limited partnership interest. GERMANCO will establish a Canadian corporation and will subscribe for all of its common shares, to be held by GERMANCO for the account of FUND XXXXXXXXXX and FUND XXXXXXXXXX in a proportion of XXXXXXXXXX% and XXXXXXXXXX% respectively. The Canadian corporation will be the sole general partner of the Partnership and will hold a XXXXXXXXXX% partnership interest. In addition to their limited partnership interest, the Funds will hold debt issued by the Partnership.

67. The debt of the Partnership held by each Fund will be issued pursuant to the terms of a loan agreement made between GERMANCO on account of the Funds and the Partnership. Such debt in the case of each Fund will be evidenced by a promissory note issued on the same date, will be term debt with a maturity date of XXXXXXXXXX and will bear interest at XXXXXXXXXX% per annum, calculated and payable monthly commencing on XXXXXXXXXX.

68. The Funds will acquire and hold their investments in the equity and debt of the Partnership as long-term investments. XXXXXXXXXX.

69. The basic structure of the proposed investment by the Funds in the partnership interest in, and the debt of, the Partnership is illustrated in the following diagram.

XXXXXXXXXX.

70. As the limited partners of the Partnership are holding, together, a XXXXXXXXXX% limited partnership interest, the Funds will receive partnership distributions and for Canadian tax purposes be allocated their share of net partnership income. The Funds will also receive interest payments on the debt of the Partnership that is held by the Funds.

71. In connection with the proposed Canadian investments of the Funds in the partnership interests in, and the debt of, the Partnership, GERMANCO, on behalf of the Funds, will (i) advise the CRA of any change in the facts and circumstances of the Funds that differ from those described in this letter including, in particular, any change in the Funds' investors as a result of which less than XXXXXXXXXX% of the units held by investors in FUND XXXXXXXXXX or XXXXXXXXXX% of the units held by investors in FUND XXXXXXXXXX would be residents of Germany for purposes of the German Treaty; and (ii) file tax returns under Part I of the Act in respect of Partnership income and pay, in the manner and at the times provided in the Act, any Canadian tax or such other amounts, if any, that the Funds are obliged to pay under the Act on the basis that each Fund is an inter-vivos trust.

Purpose of the Proposed Transactions

As noted in paragraph 7 above, the purpose of the proposed transactions is to allow the Funds to diversify their real estate portfolios by making real estate investments in Canada.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, 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 Fund will be treated as an inter vivos trust that is not a personal trust for purposes of the Act in respect of the proposed investments in the partnership interests in, and debt of, the Partnership.

B. Each Fund will be treated as a resident of Germany for the purposes of Article 4 of the German Treaty, and its business profits from the Partnership will be taxable in Canada in accordance with article 7 of the German Treaty.

C. The partnership interests in the Partnership held by the Funds will be treated as taxable Canadian property of the Funds (and not the Fund investors) for purposes of the Act and immovable property of the Funds (and not the investors) for purposes of the German Treaty including, in particular, Articles 6 and 13 thereof, and any gains derived by the Funds from the alienation of such interests may be taxed in Canada as provided in paragraph 4(b) of Article 13 of the German Treaty.

D. Each Fund (and not the Fund investors) will be treated as the beneficial owner of the interest paid on the debt of the Partnership that is held by the Funds for purposes of Article 11 of the German Treaty.

Comments

Nothing in this Advance Income Tax Ruling should be construed as implying that we will not invoke the provisions of paragraphs 3 and 6 of Article 29 of the German Treaty if the percentage of German resident investors drops below the amounts mentioned in paragraphs 4, 5 and 71 above.

Nothing in this Advance Income Tax Ruling should be construed as implying that we are ruling on, or have considered, or discussed with you any tax consequences relating to the facts and proposed transactions described herein other than those specifically described in the rulings given above. Facts and proposed transactions in the documents submitted with your request not described above 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.

The Rulings are given subject to the limitations and qualifications set out in Information Circular 70-6R5.

Yours truly,

XXXXXXXXXX
Section Manager
for Division Director
International and Trusts Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch

ENDNOTES

1 The Investment Act (Germany) came into force on January 1, 2004. The provisions of the Investment Act that regulate the activities of an investment company are identical in all respect to those of the KAGG, except for differences in the section numbers of the relevant provisions. Investment companies are required to amend their fund agreements to refer to the provisions of the Investment Act by 2007. Until then, the KAGG is still applicable. With regards to GERMANCO, the amendments will come into force on XXXXXXXXXX .