2006 Ruling 2006-0208001R3 - Post-amble to paragraph 212(1)(b)

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: Are XXXXXXXXXX notes linked to the performance of 3 mutual funds subject to the post-amble under 212(1)(b)?

Position: No

Reasons: Issuer is not related to mutual funds nor are the profits of the mutual funds linked to the issuer.

XXXXXXXXXX 							2006-020800

XXXXXXXXXX, 2006

Dear XXXXXXXXXX:

Re: Advance Income Tax Ruling
XXXXXXXXXX ("A Co")
XXXXXXXXXX
XXXXXXXXXX

This is in reply to your letter of XXXXXXXXXX, and further to your e-mails of XXXXXXXXXX wherein you request an advance income tax ruling on behalf of the above-named corporation.

To the best of your knowledge and that of the taxpayer, none of the issues involved in this ruling contained herein is:

(i) dealt with in an earlier return of A Co or a related person;

(ii) being considered by any tax services office or taxation centre in connection with a previously filed tax return of A Co or a related person;

(iii) under objection by A Co or a related person;

(iv) the subject of a ruling previously issued by the Income Tax Rulings Directorate of the CRA to A Co or a related party; nor

(v) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired.

Unless otherwise stated, all references to a statute are to the Income Tax Act R.S.C. 1985 (5th Supp.), c.1, as amended, and all terms and conditions used herein that are defined in the Act have the meaning given in such definition unless otherwise indicated.

DEFINITIONS

In this letter, the following terms are defined as follows:

(a) "A Co" means XXXXXXXXXX;

(b) "Act" means the Income Tax Act (Canada) R.S.C. 1985 (5th Supp.), c.l, as amended to the date of this letter;

(c) "Asset Allocation Methodology" means a methodology for determining the XXXXXXXXXX of Units in the Reference Basket based on the notional value of the Reference Basket on a per Note basis as compared to the cost of a XXXXXXXXXX;

(d) "B Co" means XXXXXXXXXX;

(e) "Basket Appreciation" means the positive notional return of the Reference Basket from the date the Notes are issued to the Maturity Date. Basket Appreciation is the number obtained by dividing (a) Final Basket Value, by (b) 100, and subtracting the number 1 from such number;

(f) "Calculation Agent" means B Co or a third party appointed by B Co to act as calculation agent in respect of Notes;

(g) "Closing Date" means on or about XXXXXXXXXX;

(h) XXXXXXXXXX;

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

(j) "Distribution" means an actual distribution on a Series A Unit made by a Fund such that the net effect to holders of Series A Units of the Fund is that they receive cash or additional Series A Units of the Fund and "Distributions" means, collectively, all Distributions made by a Fund during the relevant period;

(k) "Distribution Amount" means, in respect of the calendar quarter ending XXXXXXXXXX and each calendar quarter thereafter prior to Maturity, the amount of the Distribution Component calculated by the Calculation Agent at the close of business on the last business day of the calendar quarter, XXXXXXXXXX;

(l) XXXXXXXXXX;

(m) XXXXXXXXXX;

(n) "Extraordinary Event" has the meaning referred to in 11 below;

(o) "Final Basket Value" means the value of the Reference Basket on the Maturity Date (calculated by the Calculation Agent), XXXXXXXXXX;

(p) "Final Valuation Date" means XXXXXXXXXX;

(q) "Funds" means, collectively, XXXXXXXXXX, each a mutual fund trust, as defined in subsection 132(6) of the Act, created under the laws of XXXXXXXXXX, and each is a "Fund", subject to any substitution of a Fund permitted under the information statement for the issuance of Notes;

(r) "Fund Portfolio" means from time to time the portfolio of Units in the Reference Basket;

(s) "Fund Portfolio Value" means, at a particular time, the quotient obtained by dividing (i) the value of Units in the Fund Portfolio at that time, less accrued but unpaid annual fund portfolio fees applicable to the Fund Portfolio at such time by (ii) the number of XXXXXXXXXX Notes outstanding at such time;

(t) "Initial Basket Value" means $XXXXXXXXXX;

(u) "Initial Fund Proportions" means, collectively, the initial relative proportions by value of the Units of each of the Funds in the Fund Portfolio, being XXXXXXXXXX;

(v) "Maturity Date" means XXXXXXXXXX;

(w) "Non-Resident" has the meaning assigned by subsection 248(1) of the Act;

(x) "Note" and "Notes" have the meanings referred to in 5 below;

(y) "Noteholder" has the meaning referred to in 4 below;

(z) XXXXXXXXXX;

(aa) "Principal Amount" has the meaning referred to in 5 below;

(bb) "Proposed Transactions" means the transactions referred to in 4 to 17 below;

(cc) "Quarterly Interest" has the meaning referred to in paragraph 6 below;

(dd) "Reference Basket" has the meaning referred to in 6 and 7 below;

(ee) "Series A Unit" means a Series A share or unit, as the case may be, of a Fund and "Series A Units" means, collectively, Series A Units of all of the Funds, subject to adjustments required to give effect to a permitted replacement of a Fund in circumstances of an Extraordinary Event;

(ff) "Taxable Canadian Corporation" has the meaning assigned by subsection 248(1) of the Act;

(gg) "Unit" means, from time to time, a notional share or unit, as the case may be, of a Fund included in the Reference Basket, the investment performance of which reflects the actual investment performance of a Series A Unit of the Fund that would otherwise occur if the management expense ratio of the Series A Units of the Fund was nil and XXXXXXXXXX% of the value weighted average of the distributions on the Series A Units of the Fund were reinvested during the relevant period and "Units" means, collectively, Units of all of the Funds in which a notional investment has been made, subject to adjustments required to give effect to a replacement fund, if any, in the circumstances of an Extraordinary Event;

(hh) "Variable Return" has the meaning referred to in 6 below; and

(ii) "XXXXXXXXXX" means the percentage (based on value) of assets in the Reference Basket notionally allocated to the Fund Portfolio.

FACTS

1. A Co is a Taxable Canadian Corporation XXXXXXXXXX. The XXXXXXXXXX Taxation Centre is responsible for managing and processing the tax returns filed by A Co. A Co's Business Number is XXXXXXXXXX.

2. B Co is an indirect wholly-owned subsidiary of A Co, a Taxable Canadian Corporation and XXXXXXXXXX.

3. Each of the Funds deals at arm's length with the A Co. None of A Co, or any party related to A Co ("A Co's Group") for purposes of the Act, has any control over the investment decisions of any of the Funds.

PROPOSED TRANSACTIONS

4. A Co proposes to issue a number of Notes, which may be acquired by one or more retail or institutional investors. The Notes may be issued both to Canadian residents and to non-residents of Canada.

5. The Notes will be denominated in Canadian dollars and each Note will have a principal amount of $XXXXXXXXXX (the "Principal Amount"). Each Note will be issued for an amount equal to the Principal Amount and the Principal Amount will be repayable on the Maturity Date. A holder of a Note (a "Noteholder") may not request repayment of the Principal Amount prior to the Maturity Date. A Co anticipates that the expected aggregate amount of the Notes to be issued will be between $XXXXXXXXXX and $XXXXXXXXXX.

6. In addition to receiving the Principal Amount at Maturity, Noteholders (a) will receive quarterly interest ("Quarterly Interest") as described in paragraph 10 below, and (b) may receive at maturity a return ("Variable Return") linked to the performance of a notional basket of assets (the "Reference Basket") described in 7. Unless there has been an Extraordinary Event, the Variable Return will be uncertain prior to Maturity. It is possible that there will be no Variable Return and Noteholders will only receive repayment of the Principal Amount at Maturity.

7. XXXXXXXXXX.

8. Variable Return, if any, will be determined by reference to the notional price performance of the Reference Basket. Variable Return is determined according to the following formula:

Variable Return = Principal Amount x the greater of (i) Basket Appreciation, and (ii) zero.

9. Subject to XXXXXXXXXX being fixed at XXXXXXXXXX% where there has been an Extraordinary Event (as discussed in 11), XXXXXXXXXX will vary during the term of the Notes (based on the Asset Allocation Methodology) and it will be possible to have a XXXXXXXXXX to Units from XXXXXXXXXX% to up to XXXXXXXXXX%. If the XXXXXXXXXX exceeds XXXXXXXXXX%, the Reference Basket will have notionally borrowed money to acquire additional Units. Noteholders will not have any liability for the notional leverage used in respect of such additional Units, but the value of such notional leverage (and any interest payable thereon) is subtracted for purposes of determining the value of the Reference Basket and Variable Return is reduced by notional interest payable in respect of such leverage. XXXXXXXXXX.

10. Within XXXXXXXXXX business days of the end of XXXXXXXXXX and each calendar quarter thereafter prior to Maturity, A Co will pay each Noteholder Quarterly Interest in an amount equal to the Distribution Amount at the end of the applicable calendar quarter. An amount determined by multiplying (i) the value of the Fund Portfolio by (ii) a rate equal to XXXXXXXXXX % of the value weighted average of the quarterly distribution rates of the Funds on their Units will be notionally reinvested in the Reference Basket.

11. In the case of an Extraordinary Event, including the winding-up, dissolution or liquidation of a Fund, the inability of A Co to hedge its obligations to pay amounts under the Notes, or it becoming unlawful to own any Unit, the Reference Basket will not include any notional investment in Units or XXXXXXXXXX and the Reference Basket will only consist of XXXXXXXXXX. If an Extraordinary Event occurs:

(a) the entire value of the Fund Portfolio calculated as of the date of the Extraordinary Event will be notionally reinvested in XXXXXXXXXX;

(b) no further interest payments will be made on Notes prior to Maturity;

(c) any positive return on Units following the Extraordinary Event will not increase the value of the Reference Basket; and

(d) Noteholders will receive the Principal Amount at Maturity, but not earlier.

12. Proceeds from the issuance of Notes XXXXXXXXXX will be used for A Co's general business purposes.

13. A Co anticipates that (a) it will hedge its obligations to pay amounts payable on Notes by entering into one or more derivative transactions with B Co, and (b) B Co will hedge its obligations to A Co under such derivative transactions by acquiring exposure to assets contained in the Reference Basket. However, none of A Co, B Co, nor any other member of A Co's Group, is under any obligation to hedge any obligations in respect of Notes.

14. The earnings and profits of A Co and members of A Co's Group are not, in any material way, determined by reference to Units, XXXXXXXXXX. Neither Quarterly Interest nor Variable Return is determined by reference to, or is a proxy for, the profits or earnings of A Co or any member of A Co's Group.

15. XXXXXXXXXX.

16. XXXXXXXXXX.

17. Disregarding the issue relating to the application of the post-amble to paragraph 212(l)(b) of the Act, that is the subject of this ruling request, the Notes will satisfy all requirements for the application of the withholding tax exemption in subparagraph 212(1)(b)(vii) of the Act.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the Proposed Transactions is to permit A Co to issue Notes, which represent a desirable investment opportunity to both resident and non-resident XXXXXXXXXX investors. The Proposed Transactions would permit A Co to expand its XXXXXXXXXX services abroad and compete with foreign issuers operating outside Canada. The issuance of Notes will also provide A Co with a source of funds for use in its XXXXXXXXXX business.

RULING GIVEN

Provided that the preceding statements constitute a complete and accurate disclosure of all of the relevant facts, the Proposed Transactions and the purpose of the Proposed Transactions, and provided that the Proposed Transactions are undertaken in the manner described above, we rule as follows:

The manner of determining Quarterly Interest and Variable Return, as described in 6, 7, 8, 9 and 10 above, will not cause, in and by itself, the post-amble of paragraph 212(l)(b) of the Act to apply to deem such amounts paid on a Note to a Non-Resident who deals at arm's length with A Co not to be interest described in subparagraph 212(l)(b)(vii) of the Act.

This ruling is given subject to the general limitations and qualifications set forth in Information Circular 70-6R5 dated May 17, 2002 issued by the CRA, and is binding provided the Proposed Transactions are completed by XXXXXXXXXX.

This ruling is based on the Act as it currently reads and does not take into account any future amendments, whether currently proposed or not to the Act.

Nothing in this letter should be construed as implying that the CRA has agreed to or accepted:

(i) the GST implications of any of the Proposed Transactions;

(ii) any other tax consequences of the Proposed Transactions or of related transactions or events that are not described herein.

Yours truly,

XXXXXXXXXX
For Director
Financial Sector and Exempt Entities Division
Income Tax Rulings Directorate
Legislative Policy and Regulatory Affairs Branch