2006 Ruling 2006-0210271R3 - Income Trust Transfer

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 paragraph (f) of the definition of the term "disposition" in subsection 248(1) applies to exempt the transfers from being disposition when 5 commercial trusts (CT) transfer their assets to a master commercial trust (MCT)? Before the proposed transactions, a mutual fund trust (the Fund) owns the units of the 5 CTs. As part of the proposed transactions, the Fund will form the MCT. The CTs will be dissolved following the transfer of their assets to the MCT

Position:

Provided that the conditions described in subparagraphs 248(1)(f)(i) to (vii) are satisfied at the time of the transfers, no disposition of assets will result from the transfers by the CTs to the MCT.

Reasons:

As a beneficiary of each CT, the Fund owns the beneficial interest in the assets of each CT. After the proposed transfers, the Fund will have the beneficial interest in the assets owned by the MCT. Therefore, the rights of the Fund, as a beneficiary of the MCT, are the same after the transfer as the rights that the Fund, as a beneficiary of each CT, has before the transfer.

XXXXXXXXXX 							2006-021027

XXXXXXXXXX, 2006

Dear Sir

Re:  Advance Income Tax Ruling
	XXXXXXXXXX  - Tax Number XXXXXXXXXX  (XXXXXXXXXX Tax Services Office, 	XXXXXXXXXX  Tax Centre)

This is in reply to your letter of XXXXXXXXXX in which you requested an advance income tax ruling on behalf of the taxpayers. We also acknowledge additional correspondence in respect of the ruling request.

We understand that to the best of your knowledge, and that of the taxpayers involved, none of the matters considered in this ruling request are:

a) dealt with in an earlier return of the taxpayer or a related person;

b) being considered by a tax services office or tax centre in connection with a previously filed tax return of the taxpayer or a related person;

c) under objection by one or any of the taxpayers or a related person;

d) before the courts or, if a judgment has been issued, the time limit for appeal to a higher court has expired; and

e) the subject of a ruling previously issued by this Directorate.

In this document, unless otherwise indicated, all statute references are to the Income Tax Act (R.S.C. 1985, 5th Supplement, c.1, as amended, the "Act").

DEFINITIONS

In this letter, unless otherwise expressly stated, the following terms have the meanings specified:

(a) "adjusted cost base" has the meaning assigned by section 54 of the Act;

(b) "A CT" means XXXXXXXXXX, an open ended investment trust resident in Canada governed by the laws of XXXXXXXXXX;

(c) "A GP" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

(d) "A LP" means XXXXXXXXXX, a partnership organized under the laws of the Province of XXXXXXXXXX;

(e) "B CT" means XXXXXXXXXX, an open ended investment trust resident in Canada governed by the laws of XXXXXXXXXX;

(f) "B GP" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

(g) "B LP" means XXXXXXXXXX, a partnership organized under the laws of the Province of XXXXXXXXXX;

(h) "BESI" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

(i) "Board of Trustees" means the board of trustees of the Fund which consists of XXXXXXXXXX individuals the majority of which are residents of Canada;

(j) "C CT" means XXXXXXXXXX, an open ended investment trust resident in Canada governed by the laws of XXXXXXXXXX;

(k) "C GP" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

(l) "C LP" means XXXXXXXXXX, a partnership organized under the laws of the Province of XXXXXXXXXX;

(m) "C (USA) Holdings Inc." means XXXXXXXXXX;

(n) "C (USA) LP" means XXXXXXXXXX;

(o) "C (USA) GP Inc." means XXXXXXXXXX;

(p) "Canadian partnership" has the meaning assigned by subsection 102(1) of the Act;

(q) "commercial debt obligation" has the meaning assigned by subsection 80(1) of the Act;

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

(s) "CT" means commercial trust;

(t) "CT Trustee" means XXXXXXXXXX, a company incorporated under the laws of XXXXXXXXXX and resident in Canada and a wholly owned subsidiary of the Fund;

(u) "CT Note" and "CT Notes" means singularly or collectively those demand, interest bearing promissory notes issued by the particular CT to the Fund;

(v) "D CT" means XXXXXXXXXX, an open ended investment trust resident in Canada governed by the laws of XXXXXXXXXX;

(w) "D GP" means XXXXXXXXXX, a corporation incorporated under the laws of XXXXXXXXXX;

(x) "D LP" means XXXXXXXXXX, a partnership organized under the laws of the Province of XXXXXXXXXX;

(y) "D XXXXXXXXXX Ltd" means XXXXXXXXXX;

(z) "D (USA) Inc." means XXXXXXXXXX;

(aa) "deferred income plans" means any of RRSPs, RESPs, RRIFs or DPSPs;

(bb) "DPSP" means deferred profit sharing plan as defined in subsections 147(1) and 248(1) of the Act;

(cc) "disposition" has the meaning assigned by subsection 248(1) of the Act;

(dd) "E CT" means XXXXXXXXXX, an open ended investment trust resident in Canada governed by the laws of XXXXXXXXXX which is also the GP of E LP;

(ee) "E Co" means XXXXXXXXXX, a company incorporated under the laws of the Province of XXXXXXXXXX;

(ff) "E LP" means XXXXXXXXXX a partnership organized under the laws of the Province of XXXXXXXXXX;

(gg) "Equity Unit" means an equity unit of E LP entitling the holder to add the income of E LP in excess of the Preferred Units' entitlement;

(hh) "E (USA) Inc" means XXXXXXXXXX;

(ii) "Exchange Co" means XXXXXXXXXX, a company incorporated under the laws of XXXXXXXXXX;

(jj) "Exchangeable Shares" means shares of E Co without nominal or par value which can be exchanged for Fund Units;

(kk) "forgiven amount" has the meaning assigned by subsections 80(1) and 80.01(1) of the Act;

(ll) "Fund" means the XXXXXXXXXX, an open-ended, limited purpose mutual fund unit trust established under the laws of the Province of XXXXXXXXXX on XXXXXXXXXX pursuant to the Fund Declaration of Trust. The Fund was created to invest in a diversified group of income producing businesses;

(mm) "Fund Declaration of Trust" means the Declaration of Trust dated XXXXXXXXXX;

(nn) "Fund Unit" means a trust unit of the Fund, each such unit representing an equal undivided beneficial interest therein;

(oo) "GP" and "GPs" means singularly one of, or collectively all of, E CT, A GP, B GP, C GP and / or D GP;

(pp) "LP Unit" means the limited partnership interest in a particular Partnership's capital, designated as an LP Unit, and issued as such, pursuant to the terms of the particular Partnership agreement;

(qq) "MCT" means Master Commercial Trust, a trust to be governed by the laws of XXXXXXXXXX as an open ended investment trust;

(rr) "mutual fund trust" has the meaning assigned by subsection 132(6) of the Act;

(ss) "Newco GP" means XXXXXXXXXX, a new company to be incorporated under the laws of the Province of XXXXXXXXXX;

(tt) "open-end unit trust" means a unit trust that qualifies as a unit trust under paragraph 108(2)(a) of the Act;

(uu) "Partnership" means any one of the five particular limited partnerships formed under the laws of the Province of XXXXXXXXXX between the particular GP, the particular CT and certain other parties;

(vv) "Preferred Unit" means a preferred unit of E LP entitling the holder to a preferred fixed annual rate of return of XXXXXXXXXX% of their issue price;

(ww) "principal amount" has the meaning assigned by subsection 248(1) of the Act;

(xx) "RESP" means registered education savings plan as defined in subsection 146.1(1) of the Act;

(yy) "RRIF" means registered retirement income fund as defined in subsection 146.3(1) of the Act;

(zz) "RRSP" means registered retirement savings plan as defined in subsection 146(1) of the Act;

(aaa) "resident" and "non-resident" of Canada mean, respectively, resident and non-resident of Canada for purposes of the Act;

(bbb) "Special Voting Unit" means a unit of the Fund which entitles a voting trustee to vote in meetings of Unitholders of the Fund on behalf of holders of Exchangeable Shares but does not carry any rights to distributions or any beneficial interest in the property of the Fund;

(ccc) "Trust Declaration of Trust" means the Declaration of Trust for each of the five particular CTs and provides that the CT Trustee is to hold in trust any and all property of each particular CT, and any income and gains therefrom, for the benefit of the Trust Unitholders of the particular CT;

(ddd) "Trust Unit" means a trust unit of the particular CT, each such unit representing an equal undivided beneficial interest therein;

(eee) Trust Unitholder" means a holder of CT Trust Units of the particular CT;

(fff) XXXXXXXXXX.

(ggg) "unit trust" has the meaning assigned by subsection 108(2)of the Act; and

(hhh) "Unitholder" means a holder of Fund Units;

(iii) "A Management", "B Management, "C Management", "D Management" and

"C (USA) Management" means respectively XXXXXXXXXX;

(jjj) "Voting Trustee" means XXXXXXXXXX;

FACTS

1. The Fund was formed under the laws of the Province of XXXXXXXXXX pursuant to the Fund Declaration of Trust dated XXXXXXXXXX. The head and registered office of the Fund is located at XXXXXXXXXX. The Fund has a XXXXXXXXXX taxation year-end. The Fund is resident in Canada. The Fund's trustees are XXXXXXXXXX individuals the majority of which are residents of Canada. The Fund's administrator is E Co.

2. Fund Units are listed for trading on the XXXXXXXXXX under the symbol XXXXXXXXXX and are qualified investments for deferred income plans. There were XXXXXXXXXX Fund Units issued and outstanding as at the close of business on XXXXXXXXXX of which XXXXXXXXXX% were owned or controlled by members of the Board of Trustees.

3. The Fund is an open-ended unit trust that qualifies as a "unit trust" pursuant to paragraph 108(2)(a) and a "mutual fund trust" within the meaning of subsection 132(6).

4. Under the Fund Declaration of Trust, the Fund may issue an unlimited number of Fund Units and Special Voting Units.

5. Each Fund Unit is transferable, entitles the holder to one vote, is redeemable at the demand of the holder, and represents an equal and undivided beneficial interest in the Fund.

6. The single outstanding Special Voting Unit is issued to the Voting Trustee and is voted according to the instructions of the holders of Exchangeable Shares on the basis of one vote for each Exchangeable Share outstanding and does not entitle the holder to any interest in the Fund's property.

7. The Fund is not maintained primarily for the benefit of non-resident persons or partnerships other than Canadian partnerships and, to the best of the knowledge of the administrator of the Fund, non-residents of Canada and partnerships other than Canadian partnerships are collectively beneficial owners of less than 49% of the Fund Units and of the Special Voting Units;

8. Under each Trust Declaration of Trust, the CT Trustee is the sole trustee of A CT, B CT, C CT, D CT and E CT.

9. The Fund is the sole Trust Unitholder of A CT, B CT, C CT, D CT and E CT.

10. The Fund is also the sole shareholder of CT Trustee, ExchangeCo, A GP, B GP, C GP and D GP.

11. The Fund owns all of the outstanding common shares of E Co. The Exchangeable Shares of E Co are held by a small group of arm's length shareholders.

12. B CT owns XXXXXXXXXX% of the B LP Units and A CT, C CT and D CT each own XXXXXXXXXX % of A LP Units, C LP Units and D LP Units respectively. E Co is also a limited partner and owns XXXXXXXXXX Equity Units and XXXXXXXXXX Preferred Units of E LP.

13. A Management, C Management and D Management each own XXXXXXXXXX % of the LP Units of A LP, C LP and D LP respectively. B Management owns XXXXXXXXXX% of B LP.

14. A GP, B GP, C GP and D GP act as GP of their respective LP and also own respectively a partnership interest of XXXXXXXXXX % in A LP, B LP, C LP and D LP. E CT is the GP of E LP and owns XXXXXXXXXX Equity Units of E LP.

15. E (USA) Inc. is a wholly-owned US subsidiary of E LP.

16. D XXXXXXXXXX Ltd. and D (USA) Inc. are respectively wholly-owned Canadian and US subsidiaries of D LP.

17. C (USA) Holdings Inc. is a wholly-owned subsidiary of C CT and owns XXXXXXXXXX% of the outstanding LP Units of C (USA) LP which is a US limited partnership carrying on business in the US.

18. C (USA) GP Inc. is a wholly-owned US subsidiary of C GP and is the GP of C (USA) LP.

19. As at XXXXXXXXXX, E CT, B CT, A CT, D CT and C CT are respectively indebted to the Fund in the amounts of $XXXXXXXXXX, $XXXXXXXXXX, $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX as evidenced by the CT Notes. These notes are commercial debt obligation and are due on demand with the following rates of interest, E CT Note - XXXXXXXXXX%, A CT Note - XXXXXXXXXX%, B CT Note - XXXXXXXXXX%, D and C CT Notes - XXXXXXXXXX%.

20. The accrued and unpaid interest on the CT Notes described in paragraph 19 above, as at XXXXXXXXXX, respectively amounts to $XXXXXXXXXX, $XXXXXXXXXX, $XXXXXXXXXX, $XXXXXXXXXX and $XXXXXXXXXX. The amounts of accrued and unpaid interest are (or were) deductible in computing the debtor's income under the Act.

21. As at XXXXXXXXXX, B CT has advanced $XXXXXXXXXX to B LP, $XXXXXXXXXX to BESI and $XXXXXXXXXX to E LP, C CT has advanced $XXXXXXXXXX to C GP and $XXXXXXXXXX to C LP and D CT has advanced $XXXXXXXXXX to E LP. B LP was also indebted to B CT in the amount of $XXXXXXXXXX in respect of accrued and unpaid interest. The amounts of accrued and unpaid interest are (or were) deductible in computing the debtor's income under the Act.

PROPOSED TRANSACTIONS

Unless otherwise specified, the proposed transactions (the "Proposed Transactions") will take place in the order described below:

22. The Fund will form a new private open-end CT to be the MCT and CT Trustee will be its sole trustee. The terms of the trust indenture of the MCT will not be different, in any significant manner, from the terms of the Trust Declaration of Trust of the five CTs.

23. The Fund will incorporate Newco GP subscribing for XXXXXXXXXX common shares for $XXXXXXXXXX.

24. The Fund will advance $XXXXXXXXXX to Newco GP which will be evidenced by a demand, interest bearing note.

25. Newco GP will subscribe for XXXXXXXXXX Equity Units ( or XXXXXXXXXX%) of E LP for $XXXXXXXXXX being the estimated fair market value of these units.

26. Pursuant to the partnership agreement, Newco GP will be named the GP in place of E CT following which E CT will continue to own Equity Units of E LP, as described in paragraph 14, and become a LP of E LP.

27. The Fund will purchase Trust Units from each CT having, in aggregate, a fair market value equal, for each CT respectively, to the principal amount of the existing CT Notes and accrued interest thereon owing to the Fund at that time. The purchase price of the Trust Units will be offset against the principal amount of each CT Note and of the accrued interest thereon and the CT Notes will be cancelled.

28. Immediately before the transfers described below in paragraphs 29 and 30, the MCT will not hold any property.

29. Each of A CT, B CT, C CT and D CT will transfer their respective LP Units of A LP, B LP, C LP and D LP to the MCT. C CT will also transfer its shares of C (USA) Holdings Inc. to the MCT. Finally, E CT will transfer its Equity Units to the MCT. These transfers will be made for no consideration from the MCT. The MCT will issue units to the Fund and their characteristics will be identical to the Trust Units. The Fund will be the MCT' sole beneficiary.

30. B CT, C CT and D CT will also transfer their respective advances and interest receivables from the various LPs and GP to MCT. B CT will also transfer its advance receivable from BESI to MCT. These transfers will be made for no consideration from the MCT.

31. After the transfers and assumption of liabilities as described above, A CT, B CT, C CT, D CT and E CT will not have any assets or liabilities and will be dissolved.

32. The MCT will not file a written election under subparagraph 248(1)(f)(v) on or before the filing-due date for its taxation year in which the transfer is made that the provisions of paragraph 248(1)(f) not apply.

PURPOSE OF THE PROPOSED TRANSACTIONS

The purpose of the proposed transactions is to simplify the ownership structure and to facilitate the banking arrangements so that one banking agreement and loan can be made to the MCT rather than having a series of loans and cross guarantees.

RULINGS REQUESTED

Provided the above statements of facts, proposed transactions and purpose thereof are accurate and constitute complete disclosure of all relevant facts and proposed transactions, our rulings are as follows:

A Provided that the fair market value of the Trust Units equals the principal amount of the CT Notes and of the accrued interest thereon, all as described above in paragraph 27,
(i) the set-off and cancellation of principal amounts will not, in and by themselves, result in a forgiven amount within the meaning of sections 80 and 80.01, and
(ii) the adjusted cost base of the Fund's Trust Units will be increased in an amount equal to the principal amount of the CT Notes and of the accrued interest thereon.

B. The transfer of the LP Units, the Equity Units, the shares of C (USA) Holdings Inc. and the advances receivable described in paragraph 30 above by the CTs to the MCT will not be considered a "disposition" by virtue of paragraph (f) of the definition of that term in subsection 248(1) of the Act.

C The MCT will be deemed, after the transfers described in paragraph 29 and 30 above, to be the same trust as, and a continuation of, each CT by virtue of subsection 248(25.1) and therefore the adjusted cost base of the LP Units owned by each CT before the transfer will be the adjusted cost base of the LP Units owned by the MCT after the transfer.

D The Fund's adjusted cost base in the units of the MCT will be equivalent to the Fund's cumulative adjusted cost base of the A CT, B CT, C CT, D CT and E CT Trust Units immediately before the transfer.

The rulings given herein are based solely on the facts, proposed transactions and purposes of the proposed transactions described 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 these rulings are based.

The above rulings are based on the Act in its present form and do not take into account any proposed amendments to the Act. Nothing in this ruling 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 described in the rulings given.

These rulings are given subject to the limitations and qualifications set forth in Information Circular 70-6R5 issued on May 17, 2002, and are binding on the Canada Revenue Agency provided that the Proposed Transactions are completed before XXXXXXXXXX.

As indicated in Information Circular 70-6R5, we do not rule on matters involving the determination of the fair market value of property, including the determination of the fair market value of the Trust Units.

Yours truly,

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