2006 Ruling 2005-0149101R3 - Amending trust indenture and subdividing units

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) Will the amending of the unit trust's indenture result, for purposes of the Act, in (i) a disposition by the trust of its property, or (ii) a disposition by a beneficiary of a capital interest in the trust? (2) Will the subdivision of the trust units result, for purposes of the Act, in a disposition by a beneficiary of a capital interest in the trust? (3) Will the subdivision of the trust units result, for purposes of subsection 105(1) of the Act, in a benefit to unitholders of the trust?

Position: (1) No. (2) Generally, no. (3) Generally, no

Reasons: (1)(i) There is no resettlement of the trust; the amendments do not involve an addition to, or retraction of, existing powers under the trust indenture. (1)(ii) The amending of the trust indenture will not affect the beneficial rights, give rise to a right to proceeds or a payment in respect of the capital interests, or involve the redemption or cancellation of the capital interests. (2) The subdivision of trust units will only change the number of units used to describe each beneficiary's capital interest and not change any of the beneficial rights of those interests, except where the trust indenture's prohibition against the issuance of fractional units causes the cancellation of part of a beneficiary's capital interest. (3) Where the subdivision of units results in the cancellation of part of a beneficiary's capital interest, the trust is required to pay a cash amount determined by reference to the trading value of the trust's issued units.

XXXXXXXXXX 									2005-014910

Attention: XXXXXXXXXX

XXXXXXXXXX, 2006

Dear Sirs:

Re: XXXXXXXXXX
XXXXXXXXXX - Advance Income Tax Ruling Request

This is in reply to your letter of XXXXXXXXXX in which you request an advance income tax ruling in respect of the XXXXXXXXXX (together referred to as "the taxpayers"). We also acknowledge correspondence by e-mail of XXXXXXXXXX, by which we received a copy of the Proposed Trust Indenture.

To the best of your knowledge and that of the taxpayers, none of the issues involved in the ruling request is:

• in an earlier return of the taxpayers or a related person,
• being considered by a tax services office or taxation centre in connection with a previously filed tax return of the taxpayers or a related person,
• under objection by the taxpayers 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 the taxpayers or a related person.

You provided us with a copy of the following documents:

1. a diagram illustrating the organizational structure of the taxpayers;
2. a copy of the Fourth Amended and Restated Trust Indenture (dated XXXXXXXXXX);
3. a copy of the Existing Trust Indenture;
4. a copy of the Proposed Trust Indenture; and
5. the requisite authorizations and consents of the taxpayers.

The rulings given in this letter are based solely on the facts and proposed transactions described below. The documents submitted with your request do not form part of the facts and proposed transactions described below. References in this letter to the documents submitted with your request 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").

In this letter unless otherwise expressly stated:

"Affiliate" means, with respect to a person, any corporation or other person that, directly or indirectly, controls, is controlled by, or is under common control with such person, for which purpose

(i) "person" means a natural person, corporation, company, partnership, association or trust, and

(ii) "control" means, in the case of a corporation, the right to exercise more than 50% of the voting rights in the appointment of the directors of the corporation and, in the case of another person, the ability to determine material decisions of such other person;

"Company" means XXXXXXXXXX, the corporation formed upon the amalgamation on XXXXXXXXXX of XXXXXXXXXX;

"Convertible Securities Amendment" means the proposed amendments to the Existing Trust Indenture generally described in paragraph 9 of the description of facts below and in the form provided in Sections XXXXXXXXXX of the Proposed Trust Indenture;

"Exchangeable Security" means a unit, share or other security (including a debt security) issued by the Trust or an Affiliate of the Trust, which is convertible into, exchangeable for, or carries the right of the holder to purchase or otherwise acquire (or of the issuer of such security to cause the purchase or acquisition of)

(i) Trust Units(s), or

(ii) unit(s), share(s) or other security(ies) (including debt securities) issued by the Trust or an Affiliate of the Trust, which are convertible into, exchangeable for, or carry the right of the holder to purchase or otherwise acquire (or of the issuer of such security to cause the purchase or acquisition of) Trust Unit(s);

"Existing Trust Indenture" means the Fourth Amended and Restated Trust Indenture dated XXXXXXXXXX, which is to be supplemented and replaced, under the proposed transactions described in paragraph 14 below, with the Proposed Trust Indenture;

"Manager" means the Company acting pursuant to a management agreement with the Trust;

"Mutual fund trust" has the meaning provided in the Act;

"Proposed Trust Indenture" means the proposed Fifth Amended and Restated Trust Indenture with the proposed amendments (to XXXXXXXXXX) blacklined to the Existing Trust Indenture;

"Subdivision Amendments" means the proposed amendments to the Existing Trust Indenture generally described in paragraph 10 of the description of facts below and in the form provided in Sections XXXXXXXXXX of the Proposed Trust Indenture;

"Taxable Canadian corporation" has the meaning provided in the Act;

"Trust" means XXXXXXXXXX, the trust that is governed by the terms of the Existing Trust Indenture and that will, upon completion of the proposed transactions described in paragraph 14 below, be governed by the Proposed Trust Indenture;

"Trustee" means XXXXXXXXXX, the trustee of the Trust at the time of the proposed transactions described in paragraphs 13 to 15 below;

"Trust Units" means units of the Trust that describe the beneficial interests in the Trust;

"Unit trust" has the meaning provided in the Act; and

"Unitholders" means the holders of Trust Units.

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

Facts

1. The relevant Taxation Services Office for the Company is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX Taxation Centre. The relevant Taxation Services Office for the Trust is the XXXXXXXXXX Tax Services Office and the relevant Taxation Centre is the XXXXXXXXXX Centre.

2. The Trust is a Unit trust and a Mutual fund trust.

3. The Company is a taxable Canadian corporation formed and governed pursuant to the Business Corporations Act (XXXXXXXXXX). All of the issued and outstanding shares of the Company are owned by the Trust.

4. Each Trust Unit represents an equal, undivided beneficial interest in the Trust fund. All Trust Units outstanding from time to time are entitled to equal shares in any distributions by the Trust and, in the event of termination of the Trust, in the net assets of the Trust. All Trust Units rank among themselves equally and rateably without discrimination, preference or priority. The Trust Units are listed for trading on the XXXXXXXXXX and are widely held by the public.

5. The original trust indenture governing the Trust was made on XXXXXXXXXX. This indenture, as amended, was further amended and restated effective

XXXXXXXXXX in connection with the merger of XXXXXXXXXX. Further amendments were made on XXXXXXXXXX.

6. Section XXXXXXXXXX of the Existing Trust Indenture provides that Trust Units or rights to acquire Trust Units may be offered on terms and conditions and at such times as the Manager may determine.

7. The provisions of sections XXXXXXXXXX of the Existing Trust Indenture provide the authority to the Trustee to borrow money and issue all manner of debt instruments.

8. Section XXXXXXXXXX of the Existing Trust Indenture prohibits the issuance of fractional Trust Units, except pursuant to Section XXXXXXXXXX or as a consequence of a consolidation of Trust Units under Section XXXXXXXXXX.

9. At an annual and special meeting held on XXXXXXXXXX, Unitholders approved amendments (the "Convertible Securities Amendment") to be made to the governing trust indenture. At a subsequent annual and special meeting held on XXXXXXXXXX, Unitholders ratified the approval to make those amendments. Those amendments will provide for the issuance and offering by the Trust and by its Affiliates of other securities (in the Proposed Trust Indenture in the form of Exchangeable Securities) that would represent rights to acquire Trust Units.

10. The Manager proposes further amendments (the "Subdivision Amendments") to the Existing Trust Indenture that will give the Manager the specific authority (in the Proposed Trust Indenture as set out in Section XXXXXXXXXX to subdivide or consolidate the Units into a greater or lesser number of Units. The exercise of this authority would be on notice to, but without the consent or approval of, the Unitholders. The number of Trust Units into which the existing Trust Units will from time to time be subdivided or consolidated will depend on the market price of the Trust Units and advice received by the Company, all as determined by the Company's Board of Directors.

11. There will be no change in the total capital of the Trust as a consequence only of a consolidation or subdivision under the authority of Section XXXXXXXXXX of the Proposed Trust Indenture. Except as described in paragraph 12 of these facts, there will be no change in the rights of Unitholders or their percentage interests in the Trust. Except as described in paragraph 12 of these facts, no Unitholder will have a right to proceeds of disposition from a disposition of an interest in the Trust as a consequence only of a consolidation or subdivision under the authority of Section XXXXXXXXXX of the Proposed Trust Indenture.

12. The Subdivision Amendments will not amend the Existing Trust Indenture to allow for the issuance of fractional Trust Units. The part of a beneficial interest in the Trust represented by the fractional Trust Unit that would otherwise result, as a consequence only of a consolidation or subdivision under the authority of Section XXXXXXXXXX of the Proposed Trust Indenture, will be cancelled. The Subdivision Amendments will include the addition of Section XXXXXXXXXX of the Proposed Trust Indenture, the provisions of which will automatically apply to confirm cancellation of the part of a Unitholder's beneficial interest in the Trust represented by any fractional Trust Units that would otherwise result from such a subdivision or consolidation. The Unitholder of a cancelled part of a beneficial interest will be entitled to receive a cash amount. The cash amount will be determined by multiplying the relevant fraction by the closing trading price (or if there was no trading of the Trust Units, the average of the last bid and last ask prices) of the Trust Units, on the effective date of the subdivision or consolidation. The trading prices (bid and last ask prices) will be those from the principal stock exchange on which the Trust Units are listed on the effective date of the subdivision or consolidation. If the Trust Units are not listed on the effective date of the subdivision or consolidation, the Manager will reasonably determine the cash amount.

Proposed Transactions

13. In XXXXXXXXXX, at the same time as the Trust's annual general meeting, the Trust will call a special meeting of Unitholders to consider and, if deemed appropriate, pass a special resolution approving and authorizing the Subdivision Amendments.

14. The Trustee and the Manager will enter into the Proposed Trust Indenture, which will incorporate the Convertible Securities Amendment and, if approved and authorized, the Subdivision Amendments.

15. If the Subdivision Amendments are approved and authorized, the Manager will, relying on the authority granted by Section XXXXXXXXXX of the executed Proposed Trust Indenture, subdivide the Trust Units into a greater number of Trust Units, on a basis to be determined, anticipated to be approximately XXXXXXXXXX Trust Units for every existing Trust Unit, such that, following the subdivision, the trading price of the Trust Units is anticipated to be approximately in the range of $XXXXXXXXXX to $XXXXXXXXXX per Trust Unit.

Purpose of the Proposed Transactions

16. The purpose for making the Convertible Securities Amendments is to specifically provide for the issuance of securities, including debt securities, which may be convertible into or exchangeable for Trust Units. The Manager believes that the ability to issue such securities will provide greater flexibility in financing the capital requirements of the Trust and its subsidiaries and will thereby potentially enhance and improve Unitholder value.

17. The purpose for making the Subdivision Amendments is to increase the liquidity of Trust Units by reducing the market value of a board lot and thereby improving the efficiency of the market for Trust Units. The Manager believes that the result of implementing the Subdivision Amendments may be to increase market demand for Trust Units and thereby Unitholder value.

Rulings Given

Provided that the preceding statements constitute a complete and accurate disclosure of all the relevant facts, proposed transactions and purposes of the proposed transactions, and provided that the proposed transactions are completed in the manner described above, our rulings are as follows:

A. The implementation, described in paragraph 14 above, of the Convertible Securities Amendment and the Subdivision Amendments will not result in a resettlement of the Trust, a disposition of Trust Units by the Unitholders or a disposition of any property by the Trust.

B. If the subdivision, described in paragraph 15 above, of the Trust Units applies identically and on the same basis to all Trust Units, then - except to the extent, if any, by which part of a beneficial interest in the Trust is cancelled pursuant to Section XXXXXXXXXX of the Proposed Trust Indenture - that subdivision of the Trust Units will not result in a disposition of Trust Units by any Unitholders.

C. If the subdivision, described in paragraph 15 above, of the Trust Units applies identically and on the same basis to all Trust Units, then - except to the extent, if any, by which the amount of cash paid in lieu of a fractional interest pursuant to Section XXXXXXXXXX of the Proposed Trust Indenture exceeds the fair market value at the time of cancellation of the fractional interest - that subdivision of the Trust Units will not result in the receipt of a benefit by Unitholders for purposes of subsection 105(1) of the Act.

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 Canada Revenue Agency provided that the proposed transactions as described in paragraphs 13 to 15 above, are completed within 6 months of the date of this letter. These rulings are based on the law as it reads on the date of this letter and do not take into account any amendments, for which the date of Royal Assent is after the date of this letter, to the Act.

Additional Comments

Nothing in this letter should be construed as implying that we are ruling on, or have considered, or discussed with you any income tax consequences relating to the facts and proposed transactions described above, other than the income tax consequences specifically described in the above rulings. More particularly, no ruling is provided in this letter with respect to:

• The application of section 245 of the Act to the proposed transactions,
• The income tax implications arising from the amendments to the Fourth Amended and Restated Trust Indenture (dated XXXXXXXXXX), and
• The income tax implications arising from the issuance of an exchangeable security.

Yours truly,

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